We must let industrial policy guide India’s approach to trade

The fairy tale of free market globalization, in which money, goods and knowledge flow freely around the world unhindered by national borders, which has been transformed into economic science over the past 40 years, has been exposed for what it was. In this story, national governments ceded their powers of governance to international bodies that set the rules of the game. In this story of globalization, the size of the global pie grew as expected. However, the power play behind the numbers has also been revealed.

Game patterns are set, as they always are, by those in power. According to the principle of cumulative causation, which is a natural law of societal governance, those who have more wealth, knowledge and power than others can accumulate even more because they have the power to set the rules. Thus, inequalities will increase both within nations and between them, as they have done. The winners who benefit the most from the game urge others to continue. Until they start to lose, that is, when they leave the field with the ball.

The game of free trade and money flows was already coming to an end when the United States saw its economic power slipping in favor of China, which it claimed was winning by cheating. Global supply chains of manufactured goods have been broken by constraints during the global lockdown. The global trade game was stopped by the United States, in order to sanction Russia for the war in Ukraine. These sanctions have disrupted global fuel and food flows. Citizens of the poorest countries in the South and East of the world are suffering the most from a new power struggle in the West.

The authors of the “free trade” fairy tale are mostly naïve economists who believe that politics and power struggles, both global and national, can be removed from their economic models. A power struggle also took place within the economic discipline between trade and industry economists: an ideological war that free trade economists were winning until now. “Industrial policy,” which had been banned by Washington Consensus economics, is now back on the scene. It had never gone away, says Dani Rodrik, president of the International Economic Association and author of Straight Talk on Trade: Ideas for a Sane World Economy. ‘Friend shoring’ is just another name for the game.

The free trade economists’ version of good trade policy is one-way: reducing tariffs to zero. They measure the success of trade policies by the volume of international trade in a country’s economy. In their playbook, government policies aimed at increasing domestic production and making competition between domestic producers (and with foreign producers) fairer, by adjusting tariffs and correcting reverse duties, etc., are referred to as of “protectionists” – a very bad word. When some leaders of the United Progressive Alliance government realized in 2010 that India’s manufacturing sector and employment were not growing fast enough, they realized the need for policies to foster growth of the domestic manufacturing industry. policies had to be camouflaged as ‘innovation’ or ‘manufacturing’ policies.

Industrial policy is now back in the open. It had never gone away, even in the United States, says Rodrik. The US government has historically supported the growth of its defense and technology industries with large subsidies and preferential treatment. He sanctioned Chinese tech companies when they grew too big and competitive for US comfort. And, with the CHIPS Act, the United States will subsidize domestic chip production. The new paradigm of economic policies, which the current disruptions in the global economy are forcing all countries to adopt, can be called “productivism”, says Rodrik. It is a more positive term than protectionism. India needs “productive” economic policies for manufacturing (and not just labor intensive) for the defense of its national sovereignty and the resilience of its economic growth.

China and India, the world’s two largest “emerging” economies, entered the mainstream of world trade at about the same time around 1990, with economies of similar size. In 2010, when the need for a manufacturing policy for India was realized, China’s economy was already six times larger than India’s, its manufacturing sector 12 times larger, and its manufacturing goods sector equipment (and machine tools) 50 times greater. The “depth” of Indian manufacturing was as much, if not more, than that of China in 1990. Indian producers of electrical equipment, commercial vehicles, machine tools, etc. were equally or more competent than Chinese companies. They had developed capabilities through technology transferred legally from foreign companies under “staged manufacturing schemes” guided by India’s industrial policies. However, these staged manufacturing programs were explicitly banned under the World Trade Organization (WTO) regime after 1990. India complied with its new global rules.

China has managed industry and trade in its own way. He has often been accused of stealing technology. Yet China has received ten times more foreign direct investment than India, with more Western (and Japanese) companies investing there. The Chinese learned quickly and deepened their industry. Trade between China and India has increased: it exceeds 125 billion dollars. But while India exports $28 billion, it imports $97 billion, including a lot of electronics, electrical equipment and machine tools. The asymmetrical composition of trade between India and China reveals the vulnerability of the Indian economy vis-à-vis a strategic competitor.

The economic paradigm that free trade is the only way is gone. The myth of equitable governance of the global economy by institutions controlled by Western powers has been exposed. As the size of global supply chains has grown, important technologies are controlled by only a few countries, which have the power to set the rules of the game and impose their own social and environmental standards to protect their own farmers and producers.

The paradigms of economics are changing in many ways. India needs to deepen its economy, not just increase its size. Therefore, India’s trade policies should be guided by a sound industrial policy, rather than an industrial controlling trade policy, which has been the paradigm of policy-making since the liberalization of the Indian economy in the 1990s. “Productivism” is the new game of the global economy. Atmanirbhar should be the way for India to strengthen its competitive advantages.

Arun Maira is a former member of the Planning Commission

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