India's Protectionist Path Risks U.S. Trade Clash
February 19 2020 - 11:00AM
Dow Jones News
By Greg Ip
You may have missed it amid headlines of the U.S. trade war with
China, but a low-intensity trade conflict with Asia's other
emerging giant is also smoldering. It began a year ago when the
U.S. stripped India of special low-tariff status over claims it
discriminated against American companies. India responded by
implementing tariffs it had previously threatened over U.S. steel
duties.
President Trump travels to India next week where he may reach
some sort of truce with Prime Minister Narendra Modi. But the
underlying conflict will likely persist, because it is driven by
forces similar to those behind the trade war with China.
In essence, Mr. Modi seeks to replicate the formula that made
China the world's No. 2 economy by welcoming foreign investment
while protecting more of the domestic market for Indian companies.
India doesn't pose the same economic or geopolitical threat China
does, but it is currently on a collision course with Mr. Trump, who
is determined to punish any country that he thinks is taking
advantage of the U.S.
India's protectionist streak goes way back. Its first prime
minister, Jawaharlal Nehru, leader of the Indian National Congress
party, saw socialism and import-substitution as key to the
country's development and self-sufficiency. A foreign-exchange
crisis in the early 1990s led to a wave of liberalization under
both Congress and a coalition led by the Hindu nationalist
Bharatiya Janata Party (BJP) that touched off a period of rapid
growth in the 2000s. Yet extensive regulations, licenses, state
control of banks and other key industries, and capricious
policy-making continued to hamper entrepreneurship and
investment.
Mr. Modi promised to change that when he led the BJP back to
power in 2014 on a platform of "minimum government, maximum
governance." He used his remarks to the World Economic Forum in
Davos, Switzerland, in 2018 to defend globalization against "the
forces of protectionism."
At home, Mr. Modi introduced important changes such as a
streamlined bankruptcy code and a simplified national-sales
tax.
But when it came to the outside world, India under Mr. Modi
re-embraced protectionism. In its 2018 budget and again this year,
the Modi government raised tariffs on numerous products. India's
average applied "most favored nation" tariff rose to 17% in 2018,
one of the highest in the World Trade Organization.
In its report on the foreign-trade barriers last year, the U.S.
Trade Representative complained Mr. Modi's Make-in-India program
and Foreign Trade Policy, plus a pre-existing National
Manufacturing Policy, imposed local content and technology transfer
requirements for defense, electronics, medical, information
communications and clean energy products. New and proposed rules
would require personal data on Indian customers, data generated in
India by cloud computing providers and certain communications
gateways be physically located in India. Global Trade Alert, a
Swiss-based trade watchdog group, estimated more than half of
Indian imports are now affected by at least three harmful measures
introduced since 2008.
The Modi government has also been a reluctant participant in
multilateral trade pacts. It dragged out negotiations on a WTO
agreement to ease custom barriers to imports in 2016, and last fall
pulled out of the Regional Comprehensive Economic Partnership, an
Asian trade bloc, out of fear of an influx of imports from China.
Offsetting that, it has sought more bilateral trade deals.
Mr. Modi should never have been seen as a Western-style
liberalizer. Unlike other right-wing parties that are instinctively
pro-business and pro-globalization, the BJP wants to protect its
core supporters of small businesses and traders from open
competition with big companies, Indian economics journalist
Swaminathan Aiyar said in a commentary for the Cato Institute in
2018. "The BJP aims to create national champions in both the public
and private sectors, providing them with government support against
foreign rivals," he wrote.
Its current protectionist embrace differs from prior vintages
when the goal was to make India self-sufficient. Instead, Mr. Aiyar
wrote, Mr. Modi seeks to secure a place for Indian manufacturers in
global supply chains.
Mr. Modi has opened up to foreign investment on the expectation
it would help build domestic manufacturing capability, much as
China did. "The Chinese model has a very powerful resonance in
India," said Arvind Subramanian, a former economic adviser to the
Modi government and now lecturer at Harvard University. The view
is, "They've built domestic champions, so why can't we do the
same?"
But Mr. Modi faces obstacles China didn't. First, India's
regulations, for example on hiring, firing and acquiring land, are
much more onerous for large than small companies. "It's very
difficult to become big and acquire scale," Mr. Subramanian said.
"If you can't do that you can never become a manufacturing and
exporting powerhouse." In a recent article, Mr. Subramanian and a
co-author show that Indian manufacturing peaked at a much lower
share of gross domestic product than in China, a symptom of
"premature deindustrialization."
Second, China's rise sparked a global backlash against free
trade that militates against any country repeating its formula.
While U.S. policy makers don't see India as a strategic threat like
China, Mr. Modi's embrace of more strident Hindu nationalism, which
has sparked protests by the country's Muslim minority, has undercut
some of that goodwill.
Mr. Trump claims to personally like Mr. Modi. That won't spare
India from a trade war with the U.S. any more than Mr. Trump's
affection for Chinese President Xi Jinping spared China.
Write to Greg Ip at greg.ip@wsj.com
(END) Dow Jones Newswires
February 19, 2020 10:45 ET (15:45 GMT)
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