Today when the trade deficit with China has reached an unbearable level of $85 billion, which is also affecting our industry and employment, we need to make efforts aimed at reducing this deficit. First, when in the 2018-19 budget, it was decided to increase the import duty on electronics and telecom products from 10% to 20% under the ‘Make in India’ policy of Prime Minister Modi, and then in the same year, it was decided to increase the import duty on textiles and apparel and then on other non-essential imports from 10% to 20%. As a result, the trade deficit with China in the year 2018-19 was reduced to only $53.6 billion, whereas it was $63 billion in 2017-18. This was not the first time, we got the benefit of higher tariffs. The automobile sector, which contributes nearly 50 percent to the total manufacturing in the country, could grow only due to high tariffs. In India, automobile products attract a tariff of 100 percent for cars worth more than USD 40 thousand and 60 percent for cars worth less than USD 40 thousand. Today, India is a global leader in automobiles, especially cars and many Indian and foreign companies are manufacturing cars and other automobiles in the country and also exporting them huge quantities; and more than 45 lakh vehicles were exported from India in 2023-24.

Historically, if we see, in India average weighted tariff was nearly 24 percent in the year 2004, prior to UPA taking over the reign of power. But tariffs were reduced dramatically, and average weighted tariff was reduced to hardly 6 percent 6 percent by the year 2006. This caused havoc to our manufacturing and increased our dependence on imports manifold. The important point here is that advocates of lower tariffs believe in Ricardo and other classical economists who argued for free trade to maximize the welfare of the people. But we need to understand that extremely low tariffs impede the creation of manufacturing capacity; and thus increase our dependence on imports, further reducing the possibilities of increasing domestic production. As a result, a vicious circle of ever-increasing dependence on imports is created.

We, must also understand that, as per Ricardo, theory of free trade works under the assumptions of full mobility of products, total immobility of factors of production and stationary state economy; none of which is fulfilled in present day world. Advantage of free trade, is only when others also follow free and fair trade, but if some country is breaking rules by dumping; or are raising tariffs walls, other country/ countries can’t continue with the stance of free trade. Today, many countries including USA are raising tariffs walls, in the name of protecting their industries; as a result, our country can’t remain open as before. If we see, there has been an unprecedented hike in import from different parts of the world; especially China. Major component for this hike in imports, is huge imports of intermediate products, especially from China, for domestic industry. A part of the produce made by these imported intermediates is exported; however, a major portion of the same is absorbed in the domestic market. Interestingly, since 2020 when Aatmanirbhar Bharat policy was announced by the government of India, import of these intermediate products have increased manifold. Notably in this Aatmanirbhar Bharat policy, several sectors have been identified. Production is supposed to be encouraged in these sectors. These include active pharmaceutical ingredients (APIs), electronics, telecommunications, toys, solar equipment, semiconductors, textiles, chemicals, etc. For encouraging production in these sectors, a special production linked incentives (PLIs) scheme has been rolled out in which the government has earmarked more than three lakh crores of rupees. But despite PLI scheme; and efforts towards Aatmanirbhar Bharat, we don’t see much reduction in imports of intermediates. We also find a significant amount of domestic investment occurring in these sectors, however dumping by China has affected the success of PLI schemes. Moreover, user industries of these intermediates have been clamoring for further reduction in the import duties on these intermediate products to keep their production going, in the name of efficiency and global competitiveness. But if we continue to reduce tariffs on these intermediate products, we may continue to depend on Chinese imports.

On the other hand, those who are investing in chemical, APIs, electronics, telecom components industries, want protection from Chinese dumping and other unethical practices, by raising tariffs. Investors’ main apprehension is that, if Chinese dumping is not stopped, their industry will face closure once again. Therefore, we can say that in view of the huge support given by government in the form of PLI, these industries need great degree of protection from Chinese dumping. On January 20, 2024, Donald Trump, will be sworn in as President of the United States for the second time. His persistent warnings of imposing tariffs on various countries may provoke retaliatory tariffs from other nations. As we are aware, US has the advantage, that it can impose country specific tariffs, which other countries can’t. While retaliating against US tariffs hike, countries will have to raise tariffs against all their trade partners. In such a case, those partners will also be forced to increase import duty; so India cannot remain untouched by this import duty competition. Further, the argument of cheap imports to benefit consumers is a short-lived phenomenon; as with increased dependence on Chinese imports, would lead to exploitation by Chinese. For example, in case of APIs, as country’s dependence on Chinese API was increased, China started exploiting Indian companies by increasing the prices of APIs manifold. If we so decide to raise tariffs on our trade partners, a major problem may arise, due to existence of FTAs with many countries, under which we are committed to allow majority imports at zero or very low tariff. In such a case, China or other countries on whom tariffs have been imposed, may try to route their exports through these countries, with whom we have FTAs. We will have to extremely vigilant and impose strict rules of origin restrictions.