Post Covid-19, we can expect increasing clamour for protectionism across the world as the global value chains (GVC) collapse, partly because of prolonged disruptions and partly due to a dent in trust in the value chain originating in China. Japan has already announced a package for pulling out its manufacturing activities from China, and the US is likely to follow suit. That would give a death blow to the GVC, and lay the foundation for a more inward-looking trade regime.

In India, we can expect the demand for protection across major sectors through various tariff and non-tariff barriers, and the government will be under tremendous pressure to succumb to such demands. Some of the demands for protection may be genuine and legitimate in the face of global imbalance in capacities. But many such demands will be aimed at creating monopolies or duopolies or in response to temporary increase in import volumes.

While most manufacturing sectors across the globe came to a halt as governments enforced lockdowns, there are reports that China is stock-piling inventory to reach out to global industrial consumers once the shutdowns are lifted.

Increase in imports

With their supply chain and labour force completely disrupted, Indian industries will look for raw materials and intermediates to be able to restart operations, post Covid. This will lead to increased imports. At the same time, the producers of basic building blocks and intermediates as well as finished products will clamour for protection on the face of heightened fear of large-scale imports.

The China factor will be played out in full force to drive the demand for protection. Shrinking global market will also be a critical factor.

This conflicting demand for basic raw materials and intermediates on the one hand and demand for protection against imports on the other, will pose a very difficult policy challenge for the policymakers.

There is no denying the fact that we need to ramp up our own capacities to avoid situations like the one faced by the Indian pharmaceutical industry, almost completely dependent upon API supplies from China. But it has to be borne in mind that the capacities are not built overnight, and the consuming industry will need the inputs now, at competitive prices. Therefore, there is a need to maintain the line of supply without significant price and volume distortion. Chinese inventories will be required in many countries, and it is unlikely that they will be targeted against any particular country.

Further, it must be borne in mind that if the withdrawals from China is a reality, a new world trading order is a clear possibility, and that will be an opportunity for India for scaling up its capacities, both for its domestic consumption and exports. As of now, India accounts for only about 2.3 per cent of world merchandise trade, and there is a long way to reach the $5-trillion economy dream.

Domestic manufacturing

India’s anti-dumping, anti-subsidy and safeguard measures in the past reveal that a very large proportion of the products which enjoy protection under these trade remedy laws are the basic raw materials and building blocks for a large segment of downstream industry. In some sectors, the entire value chain attracts duty, thereby completely pricing out the finished good producers both for the domestic and international markets. Instead of improving its efficiency and competitiveness, the industry would often clamour for protection, even in a monopolistic or duopolistic situations.

Downstream producers, largely in MSME sector, use these goods as their input for further processing. This sector contributes about 37 per cent to India’s GDP while accounting for 45 per cent of the total manufacturing output and 40 per cent of the exports. It is the largest employer after agriculture. By increasing the cost of the basic inputs through prohibitive duties, the downstream industries are put in a serious disadvantage and they are priced out both in domestic and export markets.

It will be injurious for the domestic manufacturers if long term measures such as AD/CVD are imposed in response to a temporary spike in imports as a result of supply disruptions in the last few months. These imports, which are in response to rebalancing of temporary demand supply situation, may not require long-term protection under AD/CVD laws. Response to such demands need to be carefully calibrated as demand for protection by one segment of the industry will affect the genuine need for inputs by the other segment.

Trade remedy measures are distributive in nature and act as safeguards against unfair trade or injurious imports, and are meant to create a level playing field. But they can also be highly distortive and damaging for the domestic economy and global trade if indiscriminately used.

Therefore, in the overall economy’s interest, the response of the government should be well thought out and nuanced rather than succumbing to the rhetoric for protection in the changed global economic scenario.

The writer is a former Indian Trade Service officer