Trade wars and India's long-term economic and technology strategy

The world economy is experiencing trade disruption on an unprecedented scale. Risk perceptions on this count have always been heavily discounted in favour of globalisation and orthodoxies that drive economic decisions. The opportunities of diversification (beyond narrow specialisations) have generated optimism for a relatively long period of time, reflected in the fact that simple average tariffs applied by members of the World Trade Organization (WTO) on a most-favoured nation (MFN) basis have fallen below 10 per cent. Unilateral tariff liberalisation by many developing countries after the WTO came into being has been, however, met with distorting subsidies, non-tariff barriers, and onerous standards in developed countries, with widening technology gaps. This the WTO could not address, causing a crisis of its legitimacy. The existence of massive distortions effectively implied that international trade remained an arena of perpetual conflict and the recent episode of unilateral action by the largest economy has rendered all previous consensus null and void; eliminated trust and negotiation capital at the WTO; and has shaken economic globalisation at its base. Hence, India needs a long-term strategy.

 

As reported by the WTO, between 1995 and 2023, world trade (goods and commercial services) registered strong growth, averaging 5.8 per cent per year, resulting in almost a fivefold increase. As is well known, growth in world trade outpaced growth in global gross domestic product (GDP), which increased by an average of 4.4 per cent per year over the same period. The global trade-to-GDP ratio showed a significant upward trend, rising from 20 per cent in 1995 to 31 per cent in 2022, before falling to 29 per cent in 2023 because trade in goods declined in value.

 

However, taking other parameters of globalisation into account, the same period saw less favourable trends when it came to leveraging global finance, investment flows, or technology transfer by developing countries. These are most crucial complementary forces of trade integration and developing countries could rarely build capacities or innovate. In this context, we may note that technological opportunities are greatly enhanced through technological learning. Research and development (R&D) and learning are sometimes both sides of the same coin. Therefore, leaving aside old hesitations, the government’s role in widening technological opportunities that are aligned with the country’s needs must be enhanced manifold, with a focus on investment and demand creation, and a rational use of incentives. In international trade, it is always said that it’s the firms that engage in business with one another and not with countries. Therefore, technological capabilities, ie know-how or R&D at the level of firms — small and big, manufacturing or services — need to improve.

 

India is among the fastest-growing exporters of hi-tech goods. However, India’s import of hi-tech products is heavily sourced from China and exports are overwhelmingly linked to the United States. The significant trade deficit in the hi-tech sectors can be overcome only through dynamic industrial policy aimed at technological deepening. As reported by the World Intellectual Property Organization, in terms of world trade in hi-tech goods, till recently, medical technologies, electric vehicles, nuclear energy, and planes/spacecraft were booming sectors and these are the ones where India has significant promise. Mobilising adequate capital for this would be important, given the fact that capital intensity would facilitate innovation, which, in turn, would increase the marginal productivity of capital and positively influence long-term growth as suggested by celebrated economists Philippe Aghion and Peter Howitt.

 

Learning curves in technology have been an asset for the pharmaceutical sector in India, which was reflected in the aggressiveness shown by the industry in Covid response and vaccine development, to the extent of mastering advanced-technology platforms. The sector, however, remains highly sensitive to intellectual property right pressures emanating from other geographies. India, within a short period of time, thanks to proactive intervention and incentives by the government, has become a major smartphone exporter in the world (with over a 70 per cent share captured just by one variant — iPhones) and is fast domesticating the value chain. An innovation push for the sector may come from strategic policies on parts and components aligned with future needs because products like smartphones may not be inelastic to price signals, allowing for multiple varieties catering to the needs of developing countries. Technological deepening and innovation capabilities would help in sustaining domestic value addition in components for the electronics sector. The automobile sector in India has been a classic example of technology transfer and high spillovers among micro, small, and medium enterprises. There are other technology-intensive sectors, including in manufacturing, that are driven by the availability of skills as reflected in the mushrooming of global capability centres in India. The learning curve, however, cannot be left to find its way in the private sector alone despite recent successes. The public sector needs to co-create knowledge with the private sector for deeper resilience in society and to avoid excessive dependence on overseas sources of technology. This would also help us arrest some of the iniquitous outcomes of the model of technology development and trade pursued elsewhere.

The author is associate professor, Research and Information System for Developing Countries, New Delhi. The view are personal