International trade is not a zero-sum game

Synopsis: Trade protectionism is increasing in India. It may harm India’s trade relations with other countries.


During the recent G-20 ministerial meeting in Italy, Commerce Minister Piyush Goyal stated that India is deepening trade ties with several countries.

India is indeed negotiating free trade agreements (FTAs) with several countries. However, rising trade protectionism in India could hinder this progress.

Is India’s trade protectionism rising?

There are many examples of increasing trade protectionism in India.

Firstly, as per Arvind Panagariya, India’s average tariff has increased by almost 25 per cent to 11.1 per cent in 2020-21, from 8.9 per cent in 2010-11. This policy is against the political consensus on tariff liberalization that India followed since 1991. It was also admitted by Former finance minister Arun Jaitley in his 2018 budget speech that India is making a “calibrated departure” from the policy of cutting tariff rates.

Secondly, India is the highest initiator of anti-dumping measures, even compared to US, EU and China. These measures are aimed at shielding domestic industry from import competition.

Third, India recently amended Section 11(2)(f) of the Customs Act of 1962. This amendment empowers the government to ban the import or export of any good if it is necessary to prevent injury to the economy. Earlier, this provision was applicable for just gold and silver. This amendment is inconsistent with consistent with India’s WTO obligations.

WTO rules on the import ban

WTO allows countries to impose restrictions on imports in case of injury to domestic industry, not to the “economy”. However, it is subject to certain conditions. — for example, if there is a sudden, significant and sharp increase in imports that is causing serious injury to the domestic industry. India already has laws to impose these trade remedial measures.

Additionally, countries can also impose restrictions on trade on account of balance of payment difficulties and national security purposes. However, section 11(2)(f) of the Customs Act does not talk about any of these grounds to restrict trade, thus is unnecessary.

Fourth, Finance Minister Nirmala Sitharaman in her budget speech of 2020 claimed that FTA benefits are harming the domestic industry. Subsequently, India amended the rules of origin requirement under the Customs Act. Rules of origin determine whether a product is originated in an FTA or a non-FTA country. The products from FTA countries attract preferential tariff rates, while non-FTA attract the most favored nation rate. The burden of compliance is imposed on importers, which discourages imports.

Lastly, the Prime Minister appealed to the public to be “vocal for local” (giving preference to domestically made goods). It has created an atmosphere against imports.

India’s experience with trade protectionism in the decades before 1991 was disastrous. Thus, lessons should be taken from history to not repeat the same mistake.

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