India’s Trdae impoverished in 19th Century

India’s Trdae impoverished   in  19th Century                                 GS  paper-2 ;GS paper-3

This article is based on  “India’s bane is its non-competitiveness”, which was published in The Hindu BusinessLine on 11/12/2019. It highlights the significance of trade and discusses the challenges and missed opportunities for Indian trade.

Traders, throughout history, have sought new markets and been natural globalisers. Spices from India were so valuable in Europe that the voyage of Christopher Columbus to find a shorter sea route to India was financed. The East India Company, too, was formed for trade.

Journey and Impact of Trade

Colonialism and Industrial Revolution

  • The benefits of free trade and production based oncomparative advantage became key tenets of economic theory, leading to colonisation as a later consequence.
  • Impact of Industrial Revolution:With the advent of the Industrial Revolution, competitive advantage in industrial production was created through technology and innovation. The first movers and leaders sought global markets and gained disproportionately through trade.

Impact on the East

  • India’s impoverishmentbegan in the 19th Century, with the beginning of the industrial revolution in England and the colonisation of India by the East India Company.
  • As industrialisation matured in England, poverty in India became extreme,with the large-scale destruction of artisanal jobs, especially in textiles, with thriving cities like Dhaka experiencing depopulation.

    • This was captured in the economic writings of Indians at the end of the 19thand the early 20th century, and provided the intellectual underpinning of Swadeshi and Khadi in the freedom struggle.
  • In the 20thcentury, as Japan industrialised, it followed the example of England and began to colonise its neighbouring areas — Korea and western China — creating a larger captive market for its industrial goods.

Ushering in of Free Trade

  • Later, after World War-II,the US — as the leader of the West and the pre-eminent global industrial and intellectual power— promoted free trade.
  • This culminated in the WTO agreement in 1994,thereby ending the era where countries, after decolonisation, were trying to industrialise with infant industry protection, which had been used successfully in the past.

What is Free Trade?

Free trade is a policy to eliminate discrimination against imports and exports. Buyers and sellers from different economies may voluntarily trade without a government applying tariffs, quotas, subsidies or prohibitions on goods and services.

Politically, a free-trade policy may be the absence of any trade policies, so a government doesn't need to take specific action to promote free trade. This hands-off stance is referred to as "laissez-faire trade" or trade liberalization.

However, governments with free-trade agreements do not necessarily abandon all control of import and export taxation. In modern international trade, few free trade agreements (FTAs) result in completely free trade.

Current Situation with FTAs

§  President Donald Trump pulled the US out of the 12-country Trans-Pacific Partnership (TPP), but the remaining 11 signatories have implemented the bulk of the agreement on their own while leaving the door open for the US to rejoin in the future. More countries have shown an interest in joining, suggesting that the TPP could eventually extend well beyond what was originally envisioned. [Perhaps it will expand in the lines of a new GATT system]

§  The updated North American Free Trade Agreement—now to be called the United States-Mexico-Canada Agreement —is largely based on the TPP template, which already included Canada and Mexico, along with some noteworthy additions.

§  The European Union (EU) is implementing FTAs with Canada, Singapore, Vietnam and Japan, and pursuing deals with Australia, Mexico, New Zealand, the Association of Southeast Asian Nations, Mercosur (Mercosur, officially Southern Common Market is a South American trade bloc) and others.

§  The Pacific Alliance continues to expand trade and other partnerships in Latin America.

§  The Regional Comprehensive Economic Partnership (RCEP) is proceeding apace in the Asia-Pacific region. And the African Union has made more progress toward implementing the Continental Free Trade Agreement (CFTA).

Future of FTAs

§  By surrendering its global leadership role, the US has lost the trust of its closest allies and partners and handed a gift to its adversaries.

§  In this scenario, the EU or China might supplant the US as the global rule-maker, or there will be no rule-maker, and the international order will be governed by drift (i.e without a leader). Other countries might well imitate the US by pursuing unilateral action and upholding their international obligations only when it suits them. (the US was infamous for using trade to pursue geopolitical ambitions)

§  It is too early to say which scenario will play out. But one thing is clear: Nationalism, populism, nativism, and protectionism are on the rise.

§  Economic insecurities, as well as a growing sense of lost sovereignty, have contributed to an unprecedented degree of political polarization, and not just in the US.

§  From European countries beset by growth in support for fringe parties to emerging economies mired in corruption, governments everywhere seem to be more inwardly focused and less capable than ever of demonstrating bold leadership—and precisely when it is most needed to address the disruptive effects of rapid technological and economic change.

§  Doing well by doing good can’t be just a tagline. It must be a guiding business philosophy, backed by the recognition that the private sector needs a healthy political and economic environment to thrive and must take action to secure it.

§  In recent decades, public trust in government, the press, corporations, and other leading institutions has declined sharply. If business leaders continue to ignore the health of their operating environment—or assume that fixing it is someone else’s problem—they are risking even more deglobalization, uncertainty, and instability in the years ahead.

India and FTAs

§  FTAs have led to increased imports and exports, although the former has been greater.

§  India’s trade deficit with ASEAN, Korea, and Japan has widened post-FTAs

§  According to Economic Survey 2016-17, FTAs have had a bigger impact on metals on the importing side and textiles on the exporting side. A 10% percent reduction in FTA tariffs for metals increases imports by 1.4 %

§  India’s exports are much more responsive to income changes as compared to price changes and thus a tariff reduction/elimination does not boost exports significantly.


China’s Success vis-a-vis India

China v/s India

  • In 1991 — the year of Indian economic reforms and opening up of the country to globalisation — the per capita incomes of India and China were the same. Technological capacitieswere at similar levels.
  • China is today the factory of the world. It has eliminated poverty. Its GDP and per capita incomes are five times that of India.China chose to craft its own pragmatic path to success.
  • China became a member of the WTO only in 2000,and that too with difficulty. But this did not slow China’s phenomenal rise.

China’s Rise and its Impact

  • In response to China’s rise, an apprehensive US has now got the G20 to change the formulation in their joint statements from ‘free trade’ to ‘fair trade’.
  • Trump’s unambiguous‘America first’ policy and his trade hostilities with China have strong appeal with many Americans.
  • Having conquered global markets, China is now the proponent of free tradeand globalisation at World Economic Forum. The OBOR and the RCEP are being promoted by China, which is on its way to becoming a superpower.

What is OBOR ?

§  One Belt One Road (OBOR) is an ambitious project that focuses on connectivity and cooperation among multiple countries spread across the continents of Asia, Africa and Europe. OBOR spans about 78 countries.

§  Initially announced in the year 2013, the project involves building networks of roadways, railways, maritime ports, power grids, oil and gas pipelines and associated infrastructure projects.

§  The project covers two parts.

o   Silk Road Economic Belt: It is land-based and is expected to connect China with Central Asia, Eastern Europe and Western Europe.

o   21st Century Maritime Silk Road: It is sea-based and is expected to connect China’s southern coast to the Mediterranean, Africa, South-East Asia and Central Asia.

What is RCEP?

§  The Regional Comprehensive Economic Partnership (RCEP) is a trade deal that was being negotiated between 16 countries.

§  They include the 10 Association of Southeast Asian Nations (ASEAN) members (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) and the six countries with which the bloc has free trade agreements (FTAs) — India, Australia, China, Korea, Japan, and New Zealand.

§  The RCEP is billed to be the “largest” regional trading agreement. The countries involved account for almost half of the world’s population, contribute over a quarter of world exports, and makeup around 30% of the global Gross Domestic Product.

Reasons for India's Withdrawal

Unfavourable Balance of Trade

§  Though trade has increased post-FTA with South Korea, ASEAN countries and Japan, imports have risen faster than exports from India.

§  According to a paper published by NITI Aayog, India has a bilateral trade deficit with most of the member countries of RCEP.

Dumping of Chinese Goods

§  India has already signed FTAs with all the countries of RCEP except China.

§  This is the major concern for India, as after signing RCEP cheaper products from China would have flooded the Indian market.

Non-acceptance of Auto-trigger Mechanism

§  In order to deal with the imminent rise in imports, India had been seeking an auto-trigger mechanism.

§  Auto-trigger Mechanism would have allowed India to raise tariffs on products in instances where imports cross a certain threshold.

§  However, other countries in the RCEP were against this proposal.



India’s Apprehensions in New Trade Regime

  • India’s lost opportunities:India lost out to China mainly due to absence of reforms and missing out on the manufacturing stage, hopping directly to the service sector for its growth and employment.

    • This (over) reliance of India on service sector proved costly as it impacted its capacity building in manufacturing and absorbed only the skilled and educated labour, leaving behind a vast population.
    • This also impacted India’s prowess in global exports and trade, especially in perspective of ‘America First’ policy and protectionism of the US.
  • RCEP anxiety:In the run-up to the RDCP negotiations, India hardly saw any benefits from joining the RCEP.

    • The experience of India’s FTAs with Asian countrieshas shown that the Indian industry has not experienced the anticipated gains as it did not undertake the reforms needed to improve competitiveness.
    • By that implication, joining the RCEP would pose a problem.But it would then compel India to undertake requisite reforms and become competitive.
  • Losing to China:The real loss in this period, however, has been through the growing trade with China.

    • Growing imports of consumer goods, thermal power plants — and now solar panels and exports of primary products like iron ore and cotton — constitute India’s trade with China.
    • All that is imported was being made and can be made in India.
  • Impact of Free Trade:Globally, there is stagnant demand in the West, excess, competitive manufacturing capacity in China and huge growing demand in India.

    • The logic of free trade is for India’s growing demand to be met by China’s excess capacity and India’s inefficient, non-competitive capacities to close down without the need for the creation of new capacity.
    • Joining the RCEP would only accelerate the process. This may be a major factor in the structural nature of the present severe economic downturn.

Way Forward

  • India needs to take a hard look at its choices. Creating global competitiveness and doing all that it takes to do so, including abandoning conventional ways of thinking, cannot be delayed.
  • Better-functioning factor markets and reducing costs for businesses are overdue.
  • Smarter, creative policies for developing and nurturing the nation’s industrial and technological capacities need to be crafted.
  • Economic nationalism and greater ambition is the need of the hour.


Jinesh IAS Academy Mains Question

India needs to reform its domestic economic policies, to make its trade more competitive, instead of missing out on opportunities of regional trade blocks. Comment. (250 words)


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