On This, Trump Is Right. India Needs Economic Nationalism

Published: November 23, 2016 13:41 IST
The biggest upset win of this year - Donald Trump's victory in the US General Election - was on the back of the white working class in the key states in the American Rust Belt. These states - Michigan, Pennsylvania, Ohio and Wisconsin in particular - that once supplied the arsenal of the West in its fight against the Nazis, upturned the American political map by breaking away from the Democrats and voting for Donald Trump. So even though Trump lost the popular vote, he won a comfortable Electoral College victory that led him to the White House.

But why did the working communities support him? As Michael Moore aptly noted before the election, when Trump threatened factory owners with punitive tariffs should they offshore their production facilities, the workers saw a real ally in him. The reigning consensus of free trade and globalisation had served them badly. Instead of the magical post-industrial service-based economy that America's coastal elites promised these working communities, well-paying manufacturing jobs disappeared, their country witnessed unprecedented peace-time trade deficits and the corporate elite became too obsessed with short-term profit margins to worry about upgrading factories. 

Trump's promise of protectionism and of taming America's globalist industrialists and financiers was a breath of fresh air for a community that had been repeatedly told that globalisation and its discontents were inevitable. 

We don't know whether Trump with his baffling incoherence and his ridiculously thin skin, shall be able to resuscitate life into America's diminishing industrial base. 

But should India, which has been struggling to build a hefty industrial base in the first place, take a leaf from Trump's playbook on economic nationalism? In other words, should India explicitly embark on a policy to nurture domestic industry via protection from ruthless foreign competition, assistance in exports or acquisition of technology and other preferential policies?  

India's current growth story leaves much for wanting. As is very well known, manufacturing as percentage of our GDP at approximately 16% is unnaturally low when compared to other emerging economies like China or Malaysia. India has neither a sizeable global lead in labour-intensive sectors like textiles nor any base in sectors that belong to the future like electronic components. 

The performance of the Index of Industrial Production (IIP) has been decidedly mediocre over the past year. Exports, the most important sign of a competitive manufacturing sector, in 2016 are going to be less than in 2014. Indeed, our total export value of 2015 - approximately USD 260 billion - was surpassed by the Chinese in the year 2000 itself. Today, the Chinese export upwards of USD 2.2 trillion annually.

The existing government's attempts at promoting manufacturing have mostly been limited to the neoliberal economic framework that focuses on the need for ever-greater deregulation and liberalisation. Thus we have seen branding campaigns like "Make in India", devotion to ever freer movement of capital through FDI reforms and an unlearnt focus in improving the Ease of Doing Business. 

The results are "Make in India" exhibits that have led to MoUs that remain unfulfilled, foreign direct investment that forms a miniscule part of overall investment in the economy, and a constant disappointment in making any major dent in Ease of Doing Business rankings. 

It is clear that this government's policy-choices have not led to a fundamental change in India's economic trajectory. We continue to - as we have for the past 27 years - put up a mediocre performance in manufacturing, and grow on the basis of bulging domestic consumption and services.

Can economic nationalism be the answer? Can active government support through temporary protection, subsidies and other interventionist measures be the key for building a manufacturing ecosystem that rivals China?

Absolutely. The fact is that economic nationalism has been the begetter of spectacular industrial stories - whether the case be Germany, Japan or the United States itself. For instance, the United States employed tariffs till at least the First World War to power its domestic industry. Alexander Hamilton, the first American Secretary of the Treasury, explicitly called for tariffs as means to cushion American "manufactures" from British competition. Trump's supporters have often used this precedent to argue for his protectionism.

Yet nowhere has economic nationalism been more evident in promoting development than in East Asia. China and Japan have a well-documented history of putting informal but insurmountable import barriers to foreign competition and preferential policies for their local industry. The Japanese car market remains to this day quite protectionist - rarely allowing foreign carmakers a consolidated market share of more than 8%. And similarly, the steel glut in the world that is likely to put a death nail on British manufacturing is a product of ruthless subsidisation by China of its domestic steel industry. 

The strategy for East Asian economies has largely been to pay lip service to ideals of globalisation and free trade that form the bedrock of editorials in the Financial Times and The Economist newspapers, and perhaps every financial outlet in India, but mercilessly promote their own domestic champions through hidden subsidies via currency manipulation, mercantilist trade strategy and selective implementation of red tape. When Trump says that the Chinese don't play fair at trade - he is broadly right.

Such policies work because more than better compliance and regulation, industry demands technology, supplier-base, scale and demand. This takes time to develop - during which the government ought to guard against adverse effects of excessive foreign competition and provide it all the help it can. 

One good example of such an approach applied in the Indian context is the very limited success the Modi government has seen in promoting the assembly of smartphones in India over the past one and half years. Almost two-thirds of all smartphones sold in India today are '"manufactured locally" - but with more than 90% of their value imported. The key reason is because of the duty exemption provided to local manufacturers in 2015 for importing electronic components. This way, the duty structure renders the finished imported product more expensive than the one assembled in-house, tilting the playing field purposefully towards domestic suppliers in the process. 

In the era of unnatural dominance by East Asian countries in electronics and other high-end manufacturing segments, the Indian government (overtly or tacitly) needs to stand behind its manufacturers without hesitation and realise that they need the extra push. No manufacturing ecosystem historically has arisen without outright support by its government, and India can't be any different.

(Akshat Khandelwal is a writer and an entrepreneur based in Delhi. He can be reached at 124.akshat@gmail.com)

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