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A reversal of roles

May 12, 2004

When the US Trade Representative, Robert Zoellick, said that there were "can do and won't do" countries at the failed Cancun trade negotiations, he was making a thinly veiled attack on India's trade policy.

In the US, India is often seen as protectionist and a reluctant and gradual convert to globalisation. Indeed, the Indian representative at the World Trade Organisation has often been labelled the "Mr No" of international trade.

But seven months after Cancun, a review of recent trade policy in the two countries provides an interesting comparison. India has continued to liberalise while the US has turned protectionist.

In the mini-budget, peak import duties on non-agricultural goods were reduced to 20 per cent from 25 per cent. Peak tariffs have now fallen from 150 per cent in 1991-92 to the current 20 per cent.

It is often forgotten that these tariffs are lower than the 37 per cent that India has committed to under the WTO; this indicates a commitment to unilateral trade liberalisation.

India's drive towards openness is also illustrated by its signing framework agreements for free trade with Singapore, Thailand, Asean and Saarc.

Though these agreements are shallow, political battles must have been fought to get them through. While this opening up increases competitiveness, it has also come with some pain. Tariff cuts have contributed to a budget deficit approaching 10 per cent of GDP partially due to the loss in tariff revenue (this loss represented almost 2 per cent of GDP by 2002).

In addition to deficits, as Shankar Acharya pointed out in his Business Standard article of January 30, 2004, industries such as engineering and capital goods have suffered negative protection as competing foreign products have lower duties than imported inputs such as steel used by domestic manufacturers.

Other industries like generic drug manufacturers have struggled to cope with new intellectual property laws. All this is not to deny that our tariffs are still high by global standards, yet the direction of our trade policy and the progress that has been made in spite of our pluralistic society are indisputable.

In contrast, US trade policy since Cancun has turned protectionist. One example was the US reluctance to remove import tariffs on steel. This story goes back to March 2002 when the US imposed tariffs of up to 30 per cent.

This "safeguard" was ostensibly to shield the US steel industry so as to allow it time to restructure. In reality it was a response to demands from the powerful steel lobby for protection and resulted in a punitive tax on US manufacturers who import steel.

In spite of a WTO ruling in July 2003 that these "safeguards" were illegal and confirmation by the WTO appellate body in November 2003, the Bush administration refused to remove the tariffs. It was only in December 2003, when the EU threatened to impose retaliatory tariffs on $2.2 billion of US imports, that the US caved in.

Recent US legislation against outsourcing is a second example of inward-looking policies. According to Nasscom, India has created 353,500 jobs in the software export and BPO sectors from 2000 to 2004.

The US represents a portion of this, and even the total number is a fraction of the 2 million jobs lost in the US since January 2001. If US has lost jobs in its recent recession, it is due to weak domestic demand, not outsourcing.

While firms such as Forrester Research have fuelled American fears by predicting that over 3 million jobs will go offshore by 2015, can we really say what the world will look like 11 years from now?

Even if this prediction is true, it represents a loss of 200,000 to 300,000 jobs a year in the US -- well below the 2.5 million jobs lost in 1999, when the US economy was booming.

The US economy is the most dynamic job creating economy the world has seen and the impact of outsourcing is marginal. The size of the Indian software industry as measured by revenues illustrates this.

The Indian software export and BPO sectors generated revenue of $12 billion in FY2004. Compare this with the total US trade deficit of $490 billion in 2003 and its trade deficit with China alone of $125 billion!

In spite of this small impact on the US economy, there is now legislation that prevents companies from getting government contracts if work is sent offshore. This goes against everything free traders preach.

The fact that this is in the services sector that developed countries have been anxious to liberalise further highlights the reversal in US policies.

Many smaller towns in the US have been "hollowed out" by manufacturing jobs moving to China and Mexico. The US has done a poor job of managing this dislocation and there are many families who have either had no income for a long time or whose income has suffered a large decline.

Their fear is directed towards Mexico due to Nafta, China for manufacturing, and now India for outsourcing of services. The argument for free trade does not deny the fact that there are winners and losers from trade.

However, the thesis for free trade is a utilitarian one and says that societies as a whole will be better off as resources get allocated optimally; over time, everyone will be better off.

Since the US has been one of the strongest and most vocal proponents of this view, it would be consistent for it to deal with the negative consequences of trade rather than resort to protectionism.

The events since Cancun show the different paths the two nations have taken when faced with elections. While the Bush administration may believe in free trade, it is turning protectionist in response to the public outcry against globalisation. The minor free trade agreements it has recently signed do little to change this direction.

Similarly, the NDA government (and its Congress predecessor) have aggressively liberalised the economy but have had to work within the constraints of coalition governments and popular sentiment.

Given the events since Cancun, it would be appropriate for the US to rethink its views on India's trade policy and acknowledge the progress India has made in a democratic setting. India on its part needs to devise politically feasible ways to improve US-India trade.

By doing so the current environment of mistrust would be replaced by more constructive dialogue between two democratic governments essentially committed to free trade.

The author is an investment banker, currently at the John F Kennedy School of Government at Harvard University

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