How emerging economies can prosper in a protectionist world?

• This article is based on Raghuram Rajan’s article on challenges and opportunities for emerging economies, particularly India, in a protectionist world.

Key Challenges

• Global Trade Tensions: Rising protectionism and automation are reshaping the global economic landscape.
• Export-Led Growth: Traditional growth models, like China’s, face hurdles due to protectionist barriers in developed countries.

Factors Driving Protectionism

1. Economic Nationalism:
   • Loss of manufacturing jobs leads to policies favoring domestic production (e.g., U.S. Inflation Reduction Act).
2. Geopolitical Rivalries:
   • U.S.-China tensions result in economic decoupling and self-reliance in critical industries.
3. Supply Chain Vulnerabilities:
   • COVID-19 exposed over-dependence on global supply chains, prompting localization efforts.
4. Rising Inequality:
   • Economic inequality fuels populism, leading to protectionist demands (e.g., Brexit).
5. Environmental Concerns:
   • Policies like the EU’s Carbon Border Adjustment Mechanism impose tariffs for sustainability.
6. Technological Dominance:
   • Restrictions on data flows and digital goods (e.g., India’s data localization rules).
7. Agricultural Protection:
   • Subsidies and tariffs protect domestic agriculture from global competition.
8. Inflation and Instability:
   • Governments impose restrictions to control domestic prices during inflationary pressures.
9. Weak Multilateral Institutions:
   • Declining trust in institutions like the WTO leads to unilateral protectionist measures.
10. Domestic Political Pressures:
    • Short-term political motives often drive protectionist policies.

Issues for India

• Export Competitiveness: Tariffs limit India’s market access, impacting sectors like textiles.
• Supply Chain Disruption: U.S.-China tensions affect India’s electronics industry.
• Impact on MSMEs: Protectionist barriers threaten MSME exports and employment.
• Inflationary Pressures: Import barriers increase costs for essential goods.
• FDI Inflows: Rising global tariffs deter foreign investment.
• Resource Diversion: Focus on trade disputes diverts attention from new trade relationships.

Atmanirbhar Bharat: Protectionism or Not?

Arguments Supporting Protectionism:

• Increased tariffs on goods.
• Production-Linked Incentive (PLI) scheme promoting domestic manufacturing.
• Withdrawal from Free Trade Agreements (FTAs).

Counterarguments:

• Aim for global competitiveness, not just protection.
• Focus on strategic resilience, especially in critical sectors.
• Active pursuit of select FTAs to balance domestic focus and integration.

Measures for India

1. Strategic Trade Partnerships: Negotiate FTAs for reciprocal benefits.
2. Selective Liberalization: Identify sectors for liberalization while protecting critical industries.
3. Building Resilient Supply Chains: Diversify imports and foster domestic production.
4. Enhancing Multilateral Engagement: Reform WTO to address trade disputes.
5. Strengthening Domestic Infrastructure: Invest in logistics and innovation.
6. Sector-Specific Safeguards: Implement targeted measures for vulnerable sectors.
7. Leveraging Digital Trade: Capitalize on strengths in digital services.
8. Prioritizing Skilling: Focus on workforce adaptability for emerging industries.
9. Export-Oriented Ecosystems: Create zones for export-focused industries.
10. Climate-Conscious Policies: Align trade with sustainability to mitigate backlash.

The rise of protectionism presents challenges but also opportunities for India to strategically balance self-reliance with global competitiveness. Initiatives like Atmanirbhar Bharat aim to navigate these complexities effectively.

Practice Question for Mains Answer Writing

In the context of rising protectionism worldwide, critically analyze the implications for India’s economic growth and its strategy of Atmanirbhar Bharat. Discuss potential measures India can adopt to balance protectionism with globalization.