Dr Bharat Jhunjhunwala
United States President Donald Trump has imposed additional import duties on solar panels and washing machines to protect American manufactures. He proposes to impose similar import duties on steel and aluminium. These import duties will have little impact on India directly because India’s exports account for only 2 percent of US’ imports of steel and aluminium. However, these will trigger an all-round increase in import duties. The import duty on steel will lead to higher price of steel in the US economy. American producers of, say, kitchen utensils will have to pay more for the steel they use as raw material. This will lead to higher price of utensils produced in the US. Soon, Trump will also have to impose high import duties on utensils to protect American utensil makers from cheap steel utensils made in China. The point is that one cannot adopt protectionism in parts. It is like air pollution. You cannot restrict polluted air to one part of the city. It will spread on its own. Similarly, high import duties on one item will necessarily spill over to other items. Thus, seen together with other protectionist measures such as curbing H1B visas, these import duties signal the birth of a new world of protectionism.
This signals a massive reversal. The US was the strongest supporter of globalization in the nineties. At that time, US technology companies were leading the global economy. Microsoft had introduced the revolutionary software Windows in 1993. US companies like International Business Machines (IBM) and Hewett Packard (HP)were able to export hi-tech computer goods with ease because there was no competition from other countries. Similarly, Monsanto could sell its genetically modified cotton seeds in India.Free trade was beneficial for the US economy because it enabled Microsoft and Monsanto to sell their goods at high prices across the world. Free trade also made available cheap imported goods to the US consumers. It led to fierce competition among the suppliers and reduced the prices of goods imported into the US. For example, competition between India and Bangladesh in the manufacture of garments has led to lower prices for US consumers. Free trade at that time was profitable for American companies and beneficial for American consumers. The US was also not worried about its manufacturing industries like automobiles shifting to Mexico or India because good numbers of jobs were being created by Microsoft, IBM, HP and Monsanto.
The last decade has led to a dramatic erosion of the technological edge of the US. Revolutionary new products like the Windows software are far and few in coming. Indian companies have developed skills in making GM seeds and other products that were being supplied by the US previously. US companies like IBM, HP and Monsanto do not have a free run in India anymore. Free trade still provides cheap Indian clothes to American consumers but not jobs. Previously American companies could export their goods at high prices. The jobs lost in the shift of manufacturing from the US to India were being made up in the hi-tech sectors. Not any longer. The jobs that are today getting lost in manufacturing are not being made up in hi-tech sectors because of the slow pace of technological innovations. The loss of manufacturing is today to an increase in unemployment. Thus, there is unrest in the US. American people can see cheap India garments in the shopping windows but they have no jobs and incomes to buy them. President Trump rightly understands this concern hence he has adopted protectionism. He knows that the development of new hi-tech technologies is not in his hands. He cannot recreate the golden era of nineties where Microsoft and Monsanto could export goods at exorbitant prices and create jobs. The only thing he can do is to reduce imports so that more manufacturing takes place and jobs are created in the US. Thus he has imposed high import duties on solar panels and washing machines, is due to impose high import duties on steel and aluminium, and is likely to follow these with an across-the-board increase in import duties.
Trump recognizes that these import duties will lead to higher cost of goods for the American people. There is a tradeoff involved here. Low import duties lead to loss of jobs and availability of cheap goods. High import duties leads to the creation of jobs and increase in the price of goods. He has chosen jobs over cheap goods-I think rightly. Jobs first.
With this background, we can examine whether we must also adopt Trump’s protectionist policy. I have been an opponent of globalization since the nineties. My argument has been that instead of inviting FDI and trying to access frontline technologies though Multinational Corporations, we should encourage more domestic investment and help Indian companies to access frontline technologies. Instead of importing cheap goods from China, we should reduce the costs of infrastructure and corruption for Indian companies and help them produce those same goods at a competitive price. Instead of trying to export our natural resources like water packed in grains and minerals like bauxite embedded in utensils, we should focus on increased sale of grains and utensils to Indian people and increase their standard of living. I said this when FDI was coming, and exports were easy because free trade was holding sway. I feel that my prognosis has proven correct. Our average growth rate in the two decades of globalization is nothing to bloat about. We are still technological laggards. We have not been able to create jobs and the demographic dividend is slowly but surely becoming a demographic disaster. Our farmers continue to suffer.
I repeat the same arguments today with greater vehemence. Today, the Multinational Corporations are heading back to the US. FDI is not likely to pick up. Our exports will surely face more difficulty as Trump’s protectionist policies dig in deeper. Thus, if globalization has not delivered in the last two decades, it is much likely to deliver in the coming decade.
We need to change gears. Instead of running after FDI, we should focus on encouraging our businessmen to invest in India rather than flee abroad. Our problem is not lack of capital. We have plenty of it. Our businessmen are investing huge sums abroad. They can also afford to buy frontline technologies if they get protection from cheap imports. Instead of exporting our water and minerals for consumption of foreign nationals, we must use these for increased consumption of our own people. The protectionism set in motion by Trump is a blessing in disguise. It will force the Indian Government to look inwards and secure welfare of our people instead of promoting the interests of Multinational Corporations.
(The author is formerly Professor of Economics at IIM Bengaluru)