BEYOND THE FREE TRADE IDEALISM
25, Apr 2019
Prelims level : Nil Mains level : Nil
Why in News?
- An ambitious ‘Employment and Incomes Policy’ must be the top priority for the next government
- The U.S. has begun trade skirmishes with India.
- It objects to India increasing import duties on electronic goods and wants India to reduce duties on U.S.-made motorcycles. Meanwhile the World Trade Organisation seems to be in the intensive care unit. It is time to apply fundamental principles to reshape a trade regime that is fair to all.
On free trade
- Dani Rodrik has estimated that for every unit of overall increase in global income, six or seven units of incomes will have to be shuffled around within.
- Moreover, according to this theory, people should not start producing what others are already producing, because they will produce less efficiently until they learn to do it well. According to this theory of free trade, Indians should not have bothered to learn how to produce trucks, buses and two-wheelers when the country became independent. They should have continued to import them from American, European and Japanese companies.
- Free trade purists say that easy import of products from other countries increases consumer welfare. Consumers everywhere welcome a lowering of import barriers because it brings products into their shops they could only dream of before
- Therefore, resistance to free trade does not come from consumers.
- It generally comes from companies which cannot compete: companies in less developed countries which are not able to compete until their country’s infrastructure is improved and they have acquired sufficient capabilities, or even from companies in developed countries when producers in developing countries overtake them.
- However, to benefit from easy imports, citizens need incomes to buy the products and services available. Therefore, they need jobs that will provide them adequate incomes.
- Any government responsible for the welfare of its citizens has to be concerned about the growth of jobs in the country. Domestic producers can provide jobs.
- Therefore, a developing country needs a good ‘industrial policy’ to
- accelerate the growth of domestic production, by building on its
- competitive advantages; and by developing those capabilities, it can compete with producers in countries that ‘developed’ earlier.
- India liberalised imports in the 1990s and Indian consumers have benefited greatly since then from the variety of products available to them from around the world.
- The manufacturing sector in India and China had comparable capabilities in 1990.
- By 2009, China’s was 10 times larger than India’s, and its capital goods production sector was 50 times larger. Not only was the Indian market being flooded with Chinese hand- tools and toys, China was also selling high-tech electrical and telecommunication equipment to India (and around the world too).
- Some people in government recommended the need for an ‘industrial policy’ to stimulate
- the growth of domestic production
- However, many Indian economists, along with others from the World Bank and the U.S., pushed back
- If Indian industry was not growing, it was because India had not ‘reformed’ enough: India should reduce trade barriers further and government should get further out of the way of industry,
The Next step
- By 2019, it has become clear that India’s policy-makers must find a way for economic growth to produce more income-generating opportunities for Indian citizens.
- Employment and incomes are the most pressing issues for Indian citizens according to all pre-election surveys of what citizens expect from the next government
- Therefore, an ambitious ‘Employment and Incomes Policy’ must be the highest priority for the next government.
- The scope of ‘industry’ must be broadened to include all sectors that can build on India’s competitive advantages.
- For example, the tourism and hospitality industry, taking advantage of India’s remarkable diversity of cultures and natural beauty, has the potential to support millions of small enterprises in all parts of the country
- There are lessons India can learn from its own history. With the government’s insistence in the pre-liberalisation era , India’s automobile sector was able to provide Indian consumers with good products. Indian auto-component producers and commercial vehicle producers export to the world’s most competitive markets.
- The WTO’s governance needs to be overhauled to promote the welfare of citizens in all countries, especially poorer ones, rather than lowering barriers to exports of companies in rich countries in the guise of free trade idealism
- A robust ‘Incomes and Employment Policy’, supported by an imaginative Industrial Policy, must guide India’s trade policy.