Competitive Protectionism: India needs to increase international engagement, not reduce it

July 28, 2020 6:40 AM

India needs to increase international engagement, not reduce it.

With an America-led world as our only option to access capital, technology and markets, India must make use of its status as a frontier state against China. (Reuters image)

In the face of the pandemic, national responses to supply disruptions have been revealing. The restrictions on the export of food and medicines, bidding wars for protective and testing equipment and priority claims on future vaccines showed how primitive national instincts remain.

A general increase in irascibility in international relations since the Covid outbreak in China has added a geopolitical dimension to global supply chains and investments. Me-first and them-vs-us sentiments are now dominant. Just like the rest, we too have joined the self-sufficiency movement. Some nations are pursuing self-sufficiency without much care about the consequences. Governments seem to be trying to soothe the anxieties by offering self-sufficiency as a defence. Protectionism is no longer a dirty word, and it has been sanctified as national security.

Industrial and trade policies are being tweaked to reflect the sense of national injury. Tariff wars had already frayed the rule-based global business structure, and now bans are becoming the preferred quick fixes. America has now shut down China’s consulate in Houston, citing unfair trade practices and theft of American technology among the reasons. China has promised to retaliate. The contagion could spread. India too is using bans to punish enemies. It has banned a host of Chinese online apps claiming that those posed a threat to the country’s national security. The banned apps include a social media app popular among youngsters. Now, America and a few other countries are also considering a ban on this app. China’s great firewall can be expected to be raised even higher. The stage is set for global companies to hide their origin and create separate units for doing business in each country. The cost of fragmentation and inefficiency is not a consideration at the moment. Ultimately, consumers and taxpayers will foot the bill and they are not going to be very happy when these bills arrive.

Normally business-minded countries are at the forefront of the movement for self-sufficiency. Japan is offering cash incentives to its companies to relocate to Japan from China. The French government wants Europe to regain industrial sovereignty and practice an ‘open strategic autonomy’. America appears willing to go to the extent of buying European telecom equipment makers and subsidizing local semiconductor companies to prevent reliance on China or anybody else who shares technology with China.

These former champions of open borders and free trade have also raised barriers against foreign investors to protect local ownership of firms. Germany, Italy, France, Spain and Japan quickly revised their FDI rules when stock markets crashed after Covid outbreak. The Europeans have made it clear that they do not want their strategic assets and technologies falling into foreign hands. Japan cited national security concerns to amend it Foreign Exchange and Foreign Trade Act to prevent possible interference by foreign state actors. We have done our bit to exert more control on foreign holdings in Indian companies. While our new, improved self-reliance ideology is rooted in supply chain and geopolitical anxieties, the country still cannot afford to cut its nose to spite its face. In a world of competitive self-reliance where each country wants only to sell and not buy, everybody will end up poorer. Given our huge millennial population, the country has to eke out every bit of economic growth it can.

In the emerging bi-polar world, it seems our options are limited. With an America-led world as our only option to access capital, technology and markets, India must make use of its status as a frontier state against China for the best deals it can get. Additionally, we could leverage the size of our market to negotiate access.

Ultimately, India’s self-reliance has to be about self-resilience. We should increase international engagement instead of reducing it and vest our national interests in our brains and not brawn. India must talk to everyone to make its economy tick.

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