Beggar Thy Neighbor: Protectionism in 21st century
(Based on Research (CCS Project) by Ms. Saumya Nagpal & Mr. Sushanth MP)
The world saw increasing protection as a fallout of the Great Depression of the 1930s. However, after a while country realized that protection may be good for domestic country, as other countries retaliate everyone becomes worse. Thus, in order to move towards a more liberal world, countries got together and signed GATT (General Agreement on Tariffs and Trade).
However, GATT proved insufficient as it did not include agriculture and developing countries started becoming self-sufficient in agriculture and wanted to export. GATT also did not include the service sector whose share was increasing in GDP of countries.
Thus as an outcome of Uruguay round of multilateral negotiations, WTO was born. Over the past 20 years, WTO’s membership has grown to 164 countries. An important feature of WTO is its Dispute Settlement Body (DSB).
Both GATT and WTO functioned on three common principles:
1. Reciprocity: This is implied during all negotiations.
2. Most Favoured Nation (MFN): If a country extends a favorable treatment to one member country, it has to extend the same treatment to all member countries of WTO.
3. National Treatment: Once the goods cross borders of the country, it will be given treatment at par with domestic goods.
Dispute Settlement mechanism of WTO has achieved many successes, but at the same time proved to be insufficient on several occasions. The compliance rate has been around 83%. Off late, many of trade-related disputes are not in fact being taken to DSB. This reflects a reduction in the trust placed in the Dispute Settlement Mechanism of WTO.
Recent Trends in Protectionism
Trade barriers can include both tariff barriers and non-tariff barriers. Though member countries at large adhered to the limits of tariff barriers, they have increased resorting to non-tariff barriers. As per GTA Database, when adjusted for reporting lags, the number of harmful trade policy interventions has increased by 64% between 2008 and 2018.
Non-tariff measures (NTM) can be classified under the following categories:
1. Sanitary & phytosanitary Measures: related to hygiene, microbes, hormones, etc. related to agricultural products
2. Technical Barriers to Trade (TBT): These take the form of strict regulations on conformity to technical specifications and standards.
3. Pre-shipment inspection & other formalities: Formalities that may disallow shipments from being docked at particular ports of transit, or customs requirements/restrictions which may be limited to certain ports.
4. Contingent Trade-protective measures Anti-dumping, countervailing duties, etc. which are intended to counteract expected adverse impacts of imports.
5. Non-automatic licensing, quotas, prohibitions & quantity control: These are measures that are used to control the quantity of goods being imported
6. Price-control measures: Usually, in the form of support or minimum import prices, they may also take the form of seasonal duties.
7. Export-related measures: Usually applied to objects of cultural heritage, they may also be extended to include local varieties of produce etc.
Downstream & Secondary Effects of Protectionism
When an upstream industry is given protection, they can charge a higher price in the domestic market. As a result, the cost for downstream entities increase. This makes their product uncompetitive in both domestic and international markets. To overcome this problem, downstream entities also demand protective measures, leading to ‘cascading protection’. The end result is that domestic goods become uncompetitive in the international market. An example of this was seen recently when Donald Trump imposed steel and aluminum tariffs in March 2018. In January 2020, the scope of these tariffs was increased to include several downstream products such as bumpers and steel nails.
Protectionism and India
Indian steel is protected by an import duty of 10% on long steel products and 12% on flat steel products. The tariff wall is justified on the ground that China offers a lot of concessions to its steel industry. The industry demanded further protection in the wake of Sino-US trade war fearing the dumping of steel by China into India. However, the Steel Users Federation of India opposed it. In the end, additional tariff walls were not granted.
The Data Protection Bill 2019 has several provisions which might make compliance difficult for small business and increase the chances of retaliation by other member countries of WTO. The Bill calls for local storage of data. Data can be transferred out of country under special conditions, however, even then, a copy of the data needs to be stored domestically. There are also concerns related to privacy and the government’s access to personal data. Retaliation by other countries will hamper India’s digital trade.
In dairy sector, India has adopted a protectionist approach for many decades. Now, India is the world’s largest producer of milk. Per capita consumption of milk has increased from 100 gm per day in the 1970s to 400 gm per day today. It seems that protectionism has been beneficial to India. However, India needs investment in big processing facilities to be competitive enough to export globally.
Agriculture has been a very contentious issue. At the Uruguay Round, India had bound its tariffs at 100% for primary agricultural products.44 However, in reality, we impose some of the highest agricultural tariffs in the world, ranging from 100% to 300%. The justification is self-reliance and affordability by the poorest. However, affordability by the poorest does not seem to be a good enough reason as cheap high-quality imports will increase food affordability. Government is however private sector investment in agriculture to make it more competitive.
India levies a 11.6% tariff on medicine imports against a WTO average of 2.1%. This is a cause of concern as it reduces the affordability of medicines by the poorest.
Way Forward
The recent push for ‘Atmanirbhar Bharat’ has been preceded by several steps towards increasing trade barriers by the government of India in the last 2–3 years. This, in a way, reminds one of Nehruvian protectionism. Protectionism breeds inefficiency and un-competitiveness and hence is not suitable to build an export powerhouse. As per Aravind Subramanian, “Self-sufficient exporting powerhouse is an oxymoron”. India needs to increase competitiveness by reducing the costs outside the plant in terms of logistics and other infrastructure. There is also a need to carefully analyze the global value chains (GVC) and find areas where India has a competitive advantage. It should also focus on the development of ‘lead firms’ which have a large number of backward and forward linkages. India thus needs structural reforms to build competitiveness in the long run. Protection can only help for a short while but is harmful in the long run.
Complete report: https://drive.google.com/file/d/1BwWN0Xos9gH1R0gk4_MILpBBjIP4jvBW/view?usp=sharing
(Summarized by Mr. Adil Azeem)
