Jaitley’s Import Tariffs Are A China Tax: Less About Protection, More About Self-Defence

The budget’s reversal of the long-term trend towards lower tariffs on imports has been widely criticised by most economists as a hark back to the days of import substitution and controls.

While they are certainly right in terms of economic theory, which states that open markets and lower tariffs spur faster growth, the reality is that the world is turning protectionist, and without some ability to retaliate, you lose all your ability to fight multi-laterally or bilaterally for a fairer trade regime.

Among the major items which will now face higher tariffs are smartphones and parts, including smart watches, automobile parts, footwear, furniture and their parts, toys and games, perfumes and toiletries and fruit and vegetable juices.

At first glance, it is clear that these are items whose manufacture locally can create higher incomes and jobs, in agriculture, animal husbandry and electronics, among other sectors. At the very least, the duties could spur the creation of jobs in the assembly of these items in India.

On the negative side, it is also true that sales in these sectors could be impacted in the short run, and so the jury will be out on whether the tariff increases have been beneficial overall or negative for the economy.

The best way to look at these proposals is, however, geopolitical. The changes in tariffs will impact trade with many countries, but the major impact will probably be on China, with whom India runs a massive trade deficit.

In calendar year 2016, India’s trade deficit with China was $46.5 billion; in the first half of 2017-18, the trade deficit was $37.5 billion; if the trend had continued on till March 2018, the deficit could have doubled to $75 billion. Put another way, the money China is making by exporting to India is more than enough to finance all its infrastructure plans in Pakistan (the China-Pakistan Economic Corridor, which is passing through Indian territory in Pakistan-occupied Kashmir). We are paying them to invest in our enemies.

And let’s not forget the main thing. China is not your teddy bear neighbour interested in giving us a fair deal on anything, whether it is on the border dispute or in terms of trade. With its non-tariff barriers and authoritarian political establishment intact, no free-trading country has succeeded too well in China. China is all ‘take’ and no ‘give’ in its political and economic relationships. It used the opening up of world trade on generous terms to itself and became a factory to the world, using the opportunity to create jobs at home and destroy them abroad. It allows no immigrant inside China, and practically no major technology major has succeeded in penetrating this market in services. Uber quit with its tail between its legs. Amazon has lost to local rivals. Google and Facebook are also-rans to local search and social media companies. Little wonder, all these players now think India is the place to compensate for their China losses.

The tariff changes should thus be seen as India’s China tax and a response to its aggression on our borders and indulgence in predatory trading practices. The changes must be seen along with another change in the income tax regime, where digital entities will be taxed based on their large user bases or businesses in India. Currently, companies like Google, Netflix and Facebook pay almost no local taxes since digital businesses can be conducted with minimal permanent presence in India.

In a world where countries impose non-tariff barriers to trade in goods and services (the United States’ restrictions on H-1B visas constitute an unfair restriction on the movement of natural persons in connection with their business), India has responded with formal tariff barriers, but in the long-run, it too must opt to create non-tariff barriers from which to renegotiate fairer trade deals.

For example, Google and Facebook can be allowed to do their business only if all the data they capture from India is stored in India and administered under Indian jurisdiction. This can be justified in terms of privacy protection and preventing foreign governments from accessing domestic Indian data. Chinese companies should be mandated to certify and guarantee – complete with visits by Indian cyber-security staff to their establishments in China – to verify that their servers comply with Indian regulations; we could also propose that all chips and parts used in their smartphones should conform to some indicated standard of security or performance. The European Union (EU) should be told that the free trade agreement will happen only if there is freedom for Indians to move and work in software projects in the EU.

The world is entering a stage where protection and bilaterialism in trade will dominate multilateral governance. Till this trend reverses, and the rules are made fairer, India must have the ammo to deny others access to the Indian market.

Trying to run an easy import regime when the rest of the world is slamming the doors shut is no different from unilateral disarmament – a bit of Nehruvian naivete we can do without.

The only doubt one can have about the proposal to raise import tariffs is this: does the government have a comprehensive plan to renegotiate the terms of trade and strengthen Indian companies for the day when tariffs have to come down again, or is this is just a short-term quick fix?