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[Burning Issue] Protectionism, Globalization and COVID-19 Pandemic

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The COVID-19 pandemic has caused widespread economic uncertainty globally, and coupled with the US-China trade war, has caused countries to adopt protectionist measures. While the regulations introduced by India, the US, the UK, and the European Union have taken different forms, the underlying concern is uniform – save homegrown companies, especially in strategic sectors, from being acquired by state-backed investors from other countries.

In this article, we will try to understand the world trade order in the Covid-19 pandemic and in what ways it has impacted globalization, and how the world has reacted to it in the form of protectionism to save the crumbling domestic industry.  

Let us first understand the basic terms so that we can understand the topic in detail.

What is meant by Globalization?

  • It refers to the economic, social and political integration of nations. It entails the spread of products, technology, information and jobs across national borders and cultures.
  • It is the process of international integration arising from the interchange of world views, products, ideas and other aspects of culture.
  • In economic terms, it describes an interdependence of nations around the globe, fostered through free trade.

What are the factors aiding globalization?

1) Technology: It has reduced the speed of communication manifolds. The integration of technology in India has transformed jobs that required specialized skills and lacked decision-making skills to extensively-defined jobs with higher accountability that require new skills.

2) LPG Reforms: The 1991 reforms in India have led to greater economic liberalization which has, in turn, increased India’s interaction with the rest of the world.

3) Faster Transportation: Improved transport, making global travel easier.

4) Rise of WTO: The formation of WTO in 1994 led to a reduction in tariffs and non-tariff barriers across the world. It also led to the increase in the free trade agreements among various countries.

5) Improved mobility of capital: In the past few decades, there has been a general reduction in capital barriers. This has increased the ability for firms to receive finance and the global interconnectedness of financial markets.

6) Rise of MNCs: Multinational corporations operating in different geographies have led to a diffusion of best practices. MNCs source resources from around the globe and sells their products in global markets leading to greater local interaction.

Where globalization helps to bring global financial markets close to each other and increases their interaction, protectionism aims to protect domestic industries from dumping and other trade-distorting practices by other countries.

What is Protectionism?

  • Protectionism is the practice of following protectionist trade policies.
  • A protectionist trade policy allows the government of a country to promote domestic producers, and thereby boost the domestic production of goods and services by imposing tariffs or otherwise limiting foreign goods and services in the marketplace.
  • Protectionist policies also allow the government to protect developing domestic industries from established foreign competitors.

Types of Protectionism

Protectionist policies come in different forms, including:

1. Tariffs

  • The taxes or duties imposed on imports are known as tariffs. Tariffs increase the price of imported goods in the domestic market, which, consequently, reduces the demand for them.

2. Quotas

  • Quotas are restrictions on the volume of imports for a particular good or service over a period of time. Quotas are known as a “non-tariff trade barrier.”
  • A constraint on the supply causes an increase in the prices of imported goods, reducing the demand in the domestic market.

3. Subsidies

  • Subsidies are negative taxes or tax credits that are given to domestic producers by the government. They create a discrepancy between the price faced by consumers and the price faced by producers.

4. Standardization

  • The government of a country may require all foreign products to adhere to certain guidelines. For instance, the UK Government may demand that all imported shoes include a certain proportion of leather.
  • Standardization measures tend to reduce foreign products in the market.

5. Anti-dumping duty

  • Dumping is the process of selling goods far below market value to drive out competition. India is the highest initiator of anti-dumping measures aimed at shielding domestic industry from import competition.
  • According to the WTO, from 2015 to 2019, India initiated 233 anti-dumping investigations, which is a sharp increase from 82 initiations between 2011 and 2014.

6. Rules of Origin

  • India amended the Rules of Origin requirement under the Customs Act. India has imposed onerous burdens on importers to ensure compliance with the rules of origin requirement.
  • The intent appears to be to dissuade importers from importing goods from India’s Free Trade Agreement (FTA) partners.

Why do countries adopt Protectionism?

  • National security: The argument pertains to the risk of dependency upon other nations for economic sustainability. It is argued that in case of war, economic dependency can restrict one’s options. Also, the other country can affect other country’s economy in a negative way.
  • Infant industry: It is argued that protectionist policies are required to protect industries in their initial stages. As if the market is kept open, global established companies can capture the market. This can lead to the end of domestic players in the new industry.
  • Dumping: Many countries dump their goods (sell them at lower price than their cost of production or their cost in the local market) in other countries.
    • The objective of dumping is to increase market share in a foreign market by driving out competition and thereby create a monopoly.
  • Saving jobs: It is argued that buying more domestically will drive up national production, and that this increased production will in turn result in a healthier domestic job market.
  • Outsourcing: it is common practice for companies to identify countries having cheaper labor and easier systems of governance and outsource their job work. This leads to loss of jobs in domestic industries.
  • Intellectual Property Protection: Patents, in a domestic system, protect the innovators. On a global scale, however, it is quite common for developing nations to copy new technologies via reverse engineering.

Arguments against Protectionism

  • Trade Agreements: India has benefited immensely from international trade agreements. As per the Commerce Ministry data, India has entered into Free Trade Agreements (FTA) with about 54 individual countries.
    • They provide tariff concessions thereby giving opportunities for exports of products including those related to small and medium enterprises (SMEs).
  • Against WTO Regulations: India has been a member of WTO since its inception. WTO’s regulations prohibit imposing restrictions on imports from other countries.
    • They can be imposed only for certain purposes like balance of payment difficulties, national security etc. Such barriers cannot be imposed to protect domestic industry from healthy competition.
  • Inflationary in Nature: Protectionist policies by restricting imports, can lead to rising prices in the domestic market. Thus, hurting the interest of the consumers directly.
  • Uncompetitive Domestic Industries: By protecting the local industries, they have no incentive to innovate or spend resources on research and development (R&D) of new products.

Increasing protectionism by India

  • Increase in average tariffs: The simple average of India’s tariffs that stood at 8.9 per cent in 2010-11 has increased by almost 25 per cent to 11.1 per cent in 2020-21.
    • These increases in tariff rates have reversed the political consensus on tariff liberalization that India followed since 1991.
  • Initiator of anti-dumping measures: India is the highest initiator of anti-dumping measures aimed at shielding domestic industry from import competition.
    • According to the WTO, from 2015 to 2019, India initiated 233 anti-dumping investigations, which is a sharp increase from 82 initiations between 2011 and 2014 (June).
  • Expanding the scope of Article 11(2)(f): India recently amended Section 11(2)(f) of the Customs Act of 1962, giving the government the power to ban the import or export of any good if it is necessary to prevent injury to the economy.
    • Expanding the scope of Article 11(2)(f) to cover any good is inconsistent with India’s WTO obligations.
    • While, WTO allows countries to impose restrictions on imports in case of injury to domestic industry, not to the “economy”.
  • Restrictive rules of origin: Undue claims of FTA benefits pose a threat to the domestic industry. Subsequently, India amended the rules of origin requirement under the Customs Act.
    • Rules of origin determine the national source of a product.
    • This helps in deciding whether to apply a preferential tariff rate (if the product originates from India’s FTA partner country) or to apply the most favored nation rate (if the product originates from a non-FTA country).
    • The intent appears to be to dissuade importers from importing goods from India’s FTA partners.
  • Impact of vocal for local: The clarion call given by PM Modi to be “vocal for local” is creating an ecosystem where imports are looked at with disdain, upsetting competitive opportunities and trading partners.

Protectionist measures in the wake of Covid-19 pandemic by India

India has introduced protectionist measures in two ways.

1) Launch of the “Atmanirbhar Bharat” policy which translates to “self-reliant India”, to promote local industry and reach self-sufficiency in the near future.

2) Restriction on foreign direct investments in Indian companies from border sharing countries now requires prior approval of the Indian government.

  • Applicable for: direct investments, as well as investments which are beneficially held by entities or citizens of neighboring countries.
  • Aimed at: regulating investments from China and may also cover investments from entities based in Hong Kong and Taiwan.

Self-Reliance through Artmnirbhar Bharat and impacts

As the majority of the businesses worldwide face disruptions and economic fallout after the COVID-19 pandemic, India will have the opportunity to build an economy that is more resilient, diversified, and attractive to global manufacturers and services. India with its large population has a big potential to become the manufacturing hub of the world.

  • Identify Core Sectors: Indian companies need to re-look at their supply chain and start building domestic capacity for essential products to reduce dependence on China.
    • There is a need to identify and enlist core sectors in which India can become self-reliant and design a strategy to replace too much reliance on China for the imports, particularly Pharma APIs.
    • Shifting the supply chains from China may also offer FDI opportunities.
    • Such industries where we have to become more independent and where there is too much monopoly for example- APIs, support needs to be provided in the form of limited, sector-specific, and focused protection.
  • Increasing Automation: With COVID-19 every industry will become less labor dependant and more automated. Labor-intensive sectors will take a hit.
    • Therefore there’ll be a need to produce more and more skilled labour force that could handle basic machines.
  • Liquidity crunch: Businesses have started facing massive working capital/cash flow issues due to lockdown and they will continue even post that because of reduced demand. MSME and startups are the worst hits.
    • The liquidity needs of companies need to be addressed to help them remain solvent. Though the government has started taking steps via SIDBI to help MSMEs, we still need to do more.
  • High taxes and competitiveness: The issue of higher taxes, credit risks, and liquidity crunch will be some of the glaring issues that need to be resolved in a time-bound manner.
    • The new policy to offer a reduced corporate tax rate of 15% to new manufacturing facilities set up after October 1, 2019, should attract people to set up manufacturing in India.
    • Cheaper credits and lesser taxation need to be provided to ensure the level playing field for manufacturers in India.
    • India needs more open trade and investment policies to drive competitiveness

Measures adopted by other countries

Measures in the US

  • The Foreign Investment Risk Review Modernization Act came into force in the US.
  • It empowers the Committee on Foreign Investment in the United States (CFIUS) to address national security concerns regarding foreign exploitation of certain investment structures.
  • Acquisition of minority interests in certain specified sectors, such as telecom, power, oil and gas, defense and finance, also have to be notified to the CFIUS.

Measures in the European Union

  • Similarly, the European Union has also encouraged member states to adopt screening mechanisms for foreign investments which are likely to affect security or public order.
  • To determine whether an investment is likely to affect security or public order, member states must consider whether the investment:
    • has an impact on critical infrastructure (such as water, energy, transport, health and communications);
    • has an impact on critical technologies (such as artificial intelligence, cybersecurity, defence and energy storage);
    • results in access to sensitive information, including, personal data; etc.
  • Currently, among other members of the European Union, France, Italy, Germany and Spain have adopted national mechanisms to screen foreign investments.

Measures in the UK

  • The National Security and Investment Bill has been introduced in the UK Parliament, which seeks to empower the Secretary of State to investigate certain acquisitions risking national security.

Way forward

India is not alone in imposing measures to protect national interests from opportunist acquisitions. However, the implications for India, as a developing economy, maybe far-reaching as compared to the developed countries.

1) Important to recognize FDI

  • As the Indian economy recovers from the pandemic, it is important to recognize that foreign investment, including investment from neighboring countries.
  • It represents a key mechanism for supporting domestic industries and rebuilding India’s economic capacity. After all, India received almost INR6.1 billion in direct equity inflows from China and Hong Kong in 2020.

2) Protecting national interests and attracting foreign investment

  • Over the past two decades, India has gradually continued on the path of liberalization and opened up more sections of its market to foreign investment.
  • Consequently, India has reaped the benefits of globalization, including, an increase in employment opportunities and exports, development of infrastructure and technological capabilities, and availability of a better quality of goods and services.
  • It is important for India to strike a balance between protecting national interests and attracting foreign investment and to continue to be a part of the global economy.

3) Inclusive Approach

  • Addressing the needs of the most vulnerable countries – measures, for example in relation to export restrictions and creation of regional stockpiles, could include specific exemptions or assistance to address the needs of the poorest countries.

4) De-bureaucratisation

  • India needs to put in place such policies that improve its competitiveness, de-bureaucratize some sectors such as agriculture, and make labor laws less complicated.
  • A holistic and easily accessible ecosystem, from the procuring of raw materials to the outlet of finished products, must be made available.

5) Alternative global alliance

  • The sudden call for a video-conference by Indian Prime Minister, with SAARC leaders to chalk out a common strategy to fight COVID-19, sets an example to the world.
  • India needs to now move beyond regional alliances and look forward to a cooperative alliance between like-minded countries in terms of trade such as the USA, EU, and Japan, to figure out an alternative to break the hegemony of China in the global supply chain.
  • India needs to expand its cooperation programs into a global effort by engaging in the multilateral development of solutions to global policy challenges and share lessons and experiences to progressively strengthen public systems and state institutions worldwide.

6) Promote R&D and capacity building

  • There’s a need to prioritize building capacity and policy framework to become cost-competitive and quality competitive.

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