Can Global Trade Survive Protectionist Onslaught in the Western World

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TOPIC:

General Studies 2

• Effect of policies and politics of developed and developing countries on India’s interests

General Studies 3

• Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

The IMF chief has cautioned that the rise in protectionism in developed countries could trigger capital outflows and hurt demand resulting in deterioration in corporate balance sheets in countries such as China, India and South Africa.

Emerging Market Economies have become more resilient but the rise of an abrupt tightening of financial controlling and increased protectionism now pose new challenges for policy makers.

Protectionism

The situation is going back to the pre-globalisation period with a view that it will be helpful to all but it will only hurt the world economies and people welfare.

When fair and balance economy is expected, the services are supposed to be most competitive- be it labour services or commodities etc. But if the economy is closed and kept it to oneself, then it can be disadvantageous. This is what needs to be understood andbrought into forefront.

Why the change of heart by the one who propagated it?

The inward movement by USA and EU who were the architects of liberal economic world, is surprising. Just few years ago, it was considered that globalisation that had taken-off was irreversible and suddenly now there is a reverse.

The stress in the developed economies which were proponents of free trade had been building up over time. The workers of the manufacturing industry were finding themselves at the receiving end of the change in the global supply chain. Almost every presidential candidate in the last 5 elections in USA has recognised it during their campaigns but once elected, they did not pay much heed to what was promised.

The current president of USA is following up in what he believed in and issues which he had raised during the campaign. Thus, he has now started to put things into actions some of the things he had promised. For eg. H1B visa issue.

The reactions in USA is due on distribution of consequences of globalisation. For eg. When Indians buy ipad/i-phone, 70% of value accrues to Apple Company in USA which does not manufacture anything in USA and remaining 30% goes to China, Malayasia, Taiwan etc. where manufacturing is done. Also, the 70% going to USA goes to limited class of people who are involved in marketing, financing and intellectual capital. Thus, the people losing out were the workers in the manufacturing industry there. That’s why US GDP is not affected that much by it, but distribution of GDP within USA has led to populist upsurge.

Protectionism is on rise whereas multilateralism is what is extremely important as it promotes free, fair, rule based trade that is supposed to be in interest of global economic growth. However, industry believes that the protectionist measures can be short term as though they are politically appealing, the practical aspect will face lot of resistance. The economy has to be competitive enough to sustain and with higher prices from manufacturing onwards, the large scalability of product may not be feasible.

Technology promoting reverse globalisation?

Two Reebok factories have shifted back to USA, artificial intelligence is now replacing the factory floor workers. This means that the labour factor may not be an important factor for locating industries. This kind of technological development which is progressing fast is reversing the globalisation process which was moving at a fast pace in 1980s and 1990s.

The code of globalisation was disaggregation of products- i.e. creating a global value chain. Apple did manufacturing outside USA because it was cheaper. This is getting slowly into reverse in the sense that with automation etc. advantages of outsourcing in terms of cost is coming down.

Effect on India?

Negative:India is going to be hurt by USA policies on services. For eg. The rules on H1B visas which are being contemplated say that it will be particularly strict for H1B visas of companies where a large proportion of workers are H1B as well as where large proportion of workers work outside the company but not on companies inside USA. So, if google wants to hire an Indian engineer, it will be easy for it than for the Indian companies like Infosys or TCS to take an Indian engineer there.

Positive:India might face difficulties in initial run but in long term, it might not as India is not heavily dependent on US market for manufactured exports as China is. It is highly desirable that much of India’s manufacturing growth should be based on domestic demand. India will have to be realistic about overall growth rate. India had growth rate of 8-9% when exports were growing at 19-20%. But today when India’s export growth rate is just 9-10%, India needs to project its growth rate around 7-8% with the increased domestic demand which has huge potential for eg:affordable housing, expansion of FMCGs into rural areas, huge needs in education and health services etc. Thus, in medium  and longer run, India will start focusing more on domestic demand growth.

Effect of technology:Free trade is about competitive cost advantages which relates to the factors of production. If technology enables traditional economy which is not at an advantageous position wrtFoP earlier but can acquire the advantage because of the technology development, then it could afford to stay out of globalisation and grow.

Robotics and automation, artificial intelligence are now being placed in the cloud by IT companies and can be accessed from anywhere in the world. This means that location is not going to be an advantage. So unless India’s IT software industry which was a service provider till now embraces technology of this kind, it might feel the harsh heat of technological upgradation.

Thus to minimise the effect of protectionism, India will have to embrace the highest quality technology which is the requirement of digital economy.

In short: India has always focused on domestic demand as it is a small player internationally. India has been integrating with global economy in recent years in mostly IT fronts. If looked at service profile, India is still a net importer of services when looked through entire spectrum. Thus, India is neither a factory to the world nor a service center to world.

In terms of capital inflow, India is not highly dependent on the global economy. The globalisation was a trend which was at pace and India had to be a part of it to be integrated with world. Now when the globalisation is showing reverse trend, India will not suffer much as it was just half way through to gain the benefits of globalisation.

Conclusion

India should refrain from replying aggressively to the USA process of starting protectionism. An Indian minister said about starting to reviewing the royalty payment made to American firms. America has a huge merchandise market of worth 15-16 trillion dollar. India will be able to get into this market by using technology through manufacturing sector where technology upgradation is bit slower than in IT.

Thus, India should learn to use the technology rather than becoming its victim. Also, it should not underestimate its own bargaining strengths. If India wants its IT professionals in USA then USA also wants easier access to India’s finance and insurance market.

Ultimately, there is no better option or substitute for free and fair trade. Protectionism is not an answer. Right now its time for wait and watch.

Connecting the dots:

• What do you understand by protectionism? What will be its impact on Indian economy and business? Critically examine.