Nation-First Economics

GLOBALISATION IS DEAD. We now live in an era of nation-first. But does politics-first at the cost of economics have to be a natural corollary? Has economics been buried along with internationalism? The relationship between politics and economics is symbiotic. When politics abandons (sensible) economics, the outcomes are almost always negative. That was traditionally what differentiated emerging economies and advanced economies. Trump has put the US economy on a perilous path. But India can still come out unscathed, if politics gets its economics right.

Trump’s wide-ranging tariffs have no economic logic. The US has been the biggest beneficiary of an open trading system. What might have made some sense is to target those countries which did not play by the rules of the multilateral trading system, like China. To impose tariffs on every nation is an excess.

The manner in which the reciprocal tariff has been calculated is extraordinary—a country’s trade deficit with the US divided by that country’s exports to the US divided by half for a ‘discounted’ rate. Leave aside the absurdity of the method, an attempt to cut down trade deficits across the board defies basic economics. Comparative advantage is the one principle of economics which works in the real world. The US cannot produce everything at home without compromising on efficiency. It can easily afford deficits with the dollar as reserve currency of the world. America first needs a strong economy. A battered economy is unfit for purpose even if trade deficits are somehow eliminated in the process.

Even if one assumes that the US manages to build inefficient domestic manufacturing behind these tariff walls, that process will take time, years in fact. Meanwhile, US consumers will bear the brunt of higher prices on all goods. It will reduce consumer welfare, consumer spending and potentially send the US economy into a recession.

If any evidence is needed of why such indiscriminate and high tariffs are bad, the world needs to look at India’s experience. Between 1947 and 1991, behind high tariff walls, India built up an industrial base which was uncompetitive, producing low-quality goods at high prices and insufficient quantities. After 1991, tariffs were reduced for several years until they began to rise again after 2014. Just as the tariffs before 1991 did not create a globally competitive manufacturing, the tariffs now (even though they are much more moderate) are unlikely to yield positive results.

The competitiveness of manufacturing is determined by several factors. Easy and cheap availability of land; flexible labour laws; abundant and affordable capital; reasonable cost of power; low cost of logistics; and, timely grant of permissions. Imposing a tariff is much easier for a government than getting all these reforms implemented. The political economy of these reforms is much more complex. That is perhaps why tariffs were raised after 2014 to provide some respite to Indian manufacturing in the absence of these important reforms. But tariffs cannot be a substitute.

Many countries will respond to Trump’s tariffs by imposing their own retaliatory tariffs. India should do the opposite. It should cut tariffs. At the same time, the government should press ahead with a round of aggressive market reforms. Some are low-hanging fruits. It is not difficult to smoothen and shorten the time taken for clearances. It can all be digitised. Similarly, with most land records digitised, transactions related to land can also be done online, removing middlemen. The government can also consider selling tracts of land it already owns for the purpose of factories. At least 100 sick public sector companies are sitting on land assets without using them productively. Railways and the armed forces also own plenty of unused land.

Deregulation can be fast-tracked and compliances made fewer and easier. Privatisation can be revived. There is plenty of scope to cut interest rates and make borrowing more attractive.

The dominant politics of the world is falling out of love with free markets. India never loved them in the first place. Now is the time to swim against the tide. If not love, even a gentle embrace would do. In India’s case, by delivering growth, it would be putting nation-first.

Donald Trumpgeopoliticsglobal economytrade tariff