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Trump's Indian followers should know better

Country cannot afford to retreat again behind tariff barriers

| India
India will be wise to increase steel consumption by ramping up infrastructure and homes rather than limiting imports.   © Reuters

India was not lucky enough to wrangle one of the coveted national exemptions to U.S. President Donald Trump's tariffs on imported steel and aluminum. But rather than rant about the raising of barriers to their shipments, a number of India's metal moguls and other industrialists are pushing for New Delhi to take Trump's lead and raise their nation's own import tariffs.

If the U.S., previously the standard bearer of free trade, is raising its barriers, why shouldn't India follow suit? After all, raising duties would check imports, reduce the country's trade deficits and promote domestic manufacturing as envisaged in "Make in India," the flagship industrial initiative of Prime Minister Narendra Modi.

Yet despite these benefits, this would be a disastrous path for India to take. The country's own experiences with protectionism are perfect examples of the damage that import restrictions can cause. New Delhi must realize that the country's future depends on the economy opening further, not reversing course.

In the run-up to crucial state elections later this year and a national election in 2019, the Modi government is under pressure to revive private-sector investment and create jobs.

There is a line of thinking in the ruling Bharatiya Janata Party that by restricting imports, India can push domestic manufacturing and provide employment opportunities for its youth. In this year's national budget, Minister of Finance Arun Jaitley raised import duties on mobile phones and components as well as parts for televisions in what he termed as a "calibrated departure" from two decades of lowering tariffs.

"This measure will promote the creation of more jobs in the country" and support Make in India, he said.

Many business tycoons took this move as a signal that India would return to the old days of protectionism. The recent sweeping tariff announcements by the U.S. and China have reinforced this perception.

"China has surplus production of about 15% which it is using to disrupt the steel industry [the] world over by dumping cheap quality steel," tweeted Sajjan Jindal, chairman and managing director of JSW Steel, one of India's biggest producers of the metal, on March 9. "What Trump has done is something our policymakers should also replicate. In fact, steel should be excluded from all [free trade agreements]."

Sajjan accused South Korea and Japan of dumping in another tweet, saying that both export half of their annual steel production. "We have to safeguard domestic manufacturers come what may," he said. "Trump-like decisions are required irrespective of what the vote bank demands. [The] bigger national picture is important."

Whether or not higher tariffs would benefit JSW, they would create an inefficient industrial structure and further isolate India from regional and global supply chains, hurt downstream industries and penalize customers. They could also trigger retaliatory actions from trade partners.

So far, New Delhi has not shown a strong desire to adopt a protectionist agenda, but given the close relationship between big business, bureaucrats and politicians, further hikes in import duties may creep in. If any country should know the perils of protectionism, it is India. Policymakers should remember the economic damage caused by decades of import restrictions that covered everything from food to high technology.

The lack of competition entrenched business and bureaucratic interests which held back growth and kept millions of Indians mired in poverty. This painful legacy still persists.

Reaching back into the past now would be even more damaging than before because industrial production today takes place across multiple locations. Any increase in tariff and non-tariff barriers would further isolate India from participation in regional and global supply chains.

Raising import taxes ultimately makes exports more expensive, a lesson that India learned the hard way in the four decades to 1990 when all manufacturing was controlled by the central government.

Such protective measures led Indian companies to focus inwardly and become complacent about cost and quality. As a result, exporting became difficult. Domestic consumers, too, lost in the process, from a lack of choice, poor product quality and higher prices, characteristics of a captive market.

Moreover, duty increases on basic materials such as steel and aluminum also discourage value-adding, job-creating downstream industries such as the manufacture of automobiles, consumer appliances and construction. Last September, the government imposed a 18.9% import duty on certain categories of Chinese stainless steel, leading to a domestic price surge. The government warned local steelmakers to keep prices below 40,000 rupees ($615) a ton to avoid hurting downstream industries.

Retaliatory action by other governments against Indian tariffs will harm the country's economic growth. The domestic market is not large enough to allow Indian businesses to realize economies of scale or to absorb 1 million new job seekers a month. India can't really afford to mimic Trump's trade policies even if local businesses want it to.

This is not, however, to argue that import duty hikes would not provide some respite to Indian businesses struggling with inefficient logistics, difficult border and customs procedures and poor regulations that jack up the cost of doing business, discourage value-added production and drive away entrepreneurs. But such respite would be temporary and ultimately do more harm than good.

Instead, India should look to multilateral trade bodies such as the World Trade Organization in seeking better market access and fighting unfair trade competition from countries such as China and the U.S. India must join hands with similarly affected countries to challenge Trump's tariff hikes.

In the meantime, India should expedite crucial trade pacts, in particular, those with the Eurasian Economic Union, the EU and Latin American trade bloc Mercosur to establish alternative export destinations. It can also consider ramping up domestic consumption of steel and aluminum to develop infrastructure projects and build affordable homes. The one thing it must not do is to fall into the protectionist trap.

Ritesh Kumar Singh is a corporate economist in Mumbai and a former assistant director of the Finance Commission of India.

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