Make in India to make India stronger: Trade policies, strategy must align

Donald Trump’s trade tantrums to Make America Great Again have upset the global trade regime. His principal target is China. Some countries are scrambling to strike deals with the US. India’s negotiators must be guided by a long-term strategy to build depth in the country’s own industrial capabilities, which have lagged far behind China’s. The history of industrial growth in Japan and China offers useful lessons. They are in much stronger positions to negotiate trade deals with the US than India. The US needs their manufacturers, and they prop up the US economy by investing their huge trade surpluses in US Treasuries.

 

Japan and China built their strong manufacturing industries strategically. Free trade, based on the theory of competitive advantage, benefits everyone in the long run. If every country were to produce only what it can produce better than everyone else, and buy from others what they can produce more efficiently, all should benefit from access to the best and cheapest products in the world.

 

The problem with this theoretical view is that competitive advantages are not static — except in the case of commodities. Industrialisation is a process of enterprises learning capabilities they did not have before. Trade management is a game of preserving competitive advantage. Every country that has industrialised effectively — including the US in the 19th century — protected its industries while growing its industrial capabilities. Industrially advanced countries protect their monopolies over intellectual property. They prevent the capability development of enterprises in developing countries by raising the bogey of “protectionist” government policies.

 

Going from less free to more free trade involves reducing import duties in steps. In any developing economy, assemblers of finished products — the simplest form of manufacturing — are more numerous than producers of components, who in turn outnumber producers of machinery. Assemblers, who sell final products directly to the public, have greater brand visibility and popular support than producers of machinery at the back of the production process.

 

When consumption in an economy grows, assemblers grow faster. They plead for more import of components to continue supplying products at lower costs to consumers. Component producers, in turn, plead for freedom to import machines to reduce their own costs of production. This inverted import strategy —favouring importers and assemblers over domestic capital goods makers — gradually weakens a country’s industrial capability, with long-term consequences for industrial competitiveness. India abandoned industrial policies prematurely in the 1990s.  In contrast, China’s capital goods sector has become many times larger than India’s, and China’s exports of high-tech manufactured products are now 48 times greater!

 

Japan built its industries strategically after the Second World War. Industrial and trade policies were coordinated by MITI (the Ministry of International Trade and Industry), in collaboration with Japan’s industry builders.  By 1990, Japan had become the factory of the world for a range of manufactured products — from automobiles and electronic products to precision machinery. 

 

China, not even in the picture then, became an even larger factory for the world by 2010, by strategically navigating the new rules-based World Trade Organization (WTO) and the Trade-Related Aspects of Intellectual Property Rights (TRIPS) trade regime that replaced the development-oriented General Agreement on Tariffs and Trade (GATT) in 1995.

 

“Free” trade is never truly “fair” trade. The most powerful countries set the rules and change them when those rules do not suit them any longer. After WTO, industrial policies were forbidden because they “protect” domestic industries. TRIPS protected US and Western companies’ intellectual property, with which they control value creation in global supply chains. The US says China has cheated and “stolen” intellectual property. The truth is Chinese industries learned how to produce what they could not before, and to do it just as well as US industries.

 

India is at a crossroads: Should it comply with Western trade pressures or build its industrial strengths? India can be a huge market, attracting foreign and domestic investors, provided incomes increase in the country, with more people employed in jobs with potential for improving their skills. Economies develop through a process of learning new capabilities. A country’s domestic enterprises must learn to do what they could not before. Workers within those enterprises must learn new skills. India needs a fundamental shift in how it views the labour market. Workers are not just resources for production in a “flexible labour market” to be used and discarded when no longer required. They can be a country’s “appreciating assets”— as Japanese workers became — by learning new skills on the job, and enabling enterprises to innovate and compete at higher levels of technology.

The author’s book Reimagining India’s Economy: The Road to a More Equitable Society will  be published  by Speaking Tiger in May