Tariffs won’t hurt us much. Let’s persist with the export push

Illusions and Delusions

Though Donald Trump’s pyrotechnics are rattling the global markets, it needs remembering that tariffs and quotas had always been used to regulate trade in the pre-globalisation, post-WW2 period which lasted up to the early 1990s. That era still witnessed strong trade and growth momentum. Japan and South Korea both experienced huge gains. Furthermore, while the globalisation era did benefit the emerging markets, it was not ‘cost-free’ for many sections of society in the developed world. Trump has thus used a pre-globalisation instrument with high-decibel execution to maximise the perceptional impact amongst his supporters. However, as the new tariff levies have seemingly been announced for almost the entire list of the US’ trading partners, it is possible that no major exporting country will be differentially advantaged, making the US consumer the primary loser and the US Treasury a beneficiary.

A significant point to be noted is that although the US is our largest export market, its relative share is not excessively high. We can also draw solace from a NITI Aayog study on our trade experience after our bilateral FTA accords. India has, so far, signed 14 accords, one most recently with Australia. The study on the previous 13 accords found that post-liberalisation, the Indian experience with these trade accords had been somewhat mixed. The growth rate of India’s exports to RTA partners was more or less similar to the trend growth to non-trade partners, both averaging about 13% y-o-y in the post-liberalisation years. It concluded that our exports were not price-sensitive but income-sensitive. Also, even though the trade accords were negotiated with extreme care, our companies could not penetrate deep into partner markets, unlike the ASEAN, South Korea, and Japan corporates.

Given all these facts, if we could not benefit from trade accords, we are also not likely to majorly suffer from tariffs unless we are uniquely targeted. Also, it is unlikely that our growth trajectory will be materially different unless the US economy enters into a depression, or unless Trump also casts his eyes on services or capital flows. These are, however, all unknown futures. We need to instead focus on our present situation which is quite worrisome even without Trump’s actions. We not only languish in global exporter rankings despite focussed government support but, in a sense, have been strategically weakened in the globalisation era. Our imports from China have shown steady growth (but not our exports) despite governmental efforts to curb the same, post the Galwan border crisis. This was not accidental; it is an outcome of the recent surge in industrial capacities within China. Meanwhile, our industrial class has been extremely cagey about investing in technological manufacturing in this same last decade or so, despite an array of tax cuts and PLI schemes on offer. Our mutual industrial strength gap has thus widened.

However, the NITI Aayog study carries a clue to create solutions that could moderate this deficiency. It found that our exports to Sri Lanka jumped sharply post-accord, growing much faster than import growth, even as our trade deficit with ASEAN, South Korea, and Japan widened post-RTAs as our imports grew faster than our exports. A feature that distinguishes South Asia from Japan, South Korea or the ASEAN region is that the latter have historically adopted the US/EU quality standards as their primary guidelines, which are quite unlike our ‘India-specific’ standards. This alignment of standards has facilitated an export focus.

India has large internal markets and so, our entrepreneurs mostly focus inwards, prefer to keep project costs low, and export only if surplus capacity is available. Thus, our quality standards are milder and more affordable. What is often forgotten is that unlike in earlier eras, China has deliberately created large excess capacities in virtually every field of manufacturing to generate ‘increasing returns to scale’. So now, our lower-quality standards also carry a hidden cost of allowing China to dump not only excess production but also EU/US rejects to our lower quality-tolerant ‘value-for-money market’ at exceedingly tempting prices.

Resultantly, a larger number of our entrepreneurs are now import specialists, simultaneously benefiting from the generic corporate tax reductions, without needing to risk planning a technological venture. India requires an attitudinal change in its entrepreneurial class. We need to reward export orientation and differentiate between low value-added and high value-added production. A restructuring of corporate taxation based on this differentiation may make it easier to posit attitudinal change towards technological manufacturing and promote the adoption of global quality standards. This tax reform, accompanied by the decentralisation of executive powers and responsibility for growth targets, could create a more optimistic scenario, characterised by increased technological investment and all its attendant societal benefits.