Question

The global economic environment is muddled by increasing trade protectionism and slowing down of global output. It poses both challenges and opportunities for the Indian economy. Comment.

Answer 1

Approach:

• Give a brief introduction about protectionism and slowing down of global output
• Write about both challenges and opportunities for the Indian economy
• Provide Conclusion based on arguments provided

In the context of world trade, protectionism is the economic policy of restraining trade between countries through methods such as tariffs and not-tariff barriers, restrictive quotas, and a variety of other government regulations. WTO rules allow countries to use methods of protectionism but in a limited manner and in specific cases. In recent times, there is a rising tide of protectionism across the world, with possibilities of even a trade war. The protectionist measures are indicative of a slide form globalisation and free trade. Protectionism is now going to be a major threat facing the world trade and development, especially for emerging economies.

Increasing Trade Protectionism and Slowing down of Global Output:
The World Economic Outlook (WEO) in its April 2019 issue has projected growth in world output at 3.3 % in 2019, down from 3.6 % in 2018. Due to:
(i) Heightened US-China trade tensions
(ii) Advanced countries persist with their accommodative monetary policy stance leading to escalated portfolio investment into emerging market economies making their currencies stronger and imports cheaper.
(iii) Crude oil prices increase

The World Trade Organisation(WTO) -World trade growth has slowed down to 3 per cent in 2018, much below the growth rate of 4.6 per cent in 2017, following the introduction of new and retaliatory tariff measures, heightened US-China trade tensions weaker global economic growth and volatility in financial markets.

Challenges for the Indian economy

• Stressful trade relations- a shift to protectionism would further strengthen trade imbalances especially for developing and underdeveloped countries.
• The dispute has upset global financial markets including stocks, currencies and the global trade of commodities. In the long term, this can lead to financial market instability leading to corporate vulnerability as global trade and growth decline. For India, already burdened with the twin balance sheet problem, this will add to its woes.
• Protectionism measure can impact India’s export growth momentum and lead to an increased trade deficit. India’s exports shrank for the first time in nine months in June as global trade tension hit shipments and the country braced for the impact of the US withdrawing some benefits.
• One major concern is the risk that trade tensions could spiral into currency wars, making the dollar-denominated debt more difficult to service.
• The curbs on H1B visa and scrapping of the Australian "457" programme will adversely affect the Indian IT sector, which sends thousands of working professionals to these nations.
• The US has withdrawn trade benefits for India under its Generalized System of Preferences; imposed tariffs on steel and aluminium and filed several cases against India at the World Trade Organization (WTO)
• Protectionist policies lead to a slow erosion of the global rules-based trading system which requires signing bilateral FTAs with individual countries/trade blocs.

Opportunities for the Indian economy

• The United Nations said in a report that India is among the few economies that stand to benefit from the trade tensions between the world's top two economies i.e. USA and China.
• The US manufacturers are setting up their bases in India, in addition to already existent bases in China. This will provide them with an alternative source for export of their products to deal with such trade wars like situations. For India, this will be beneficial as it would create more jobs for us.
• With this increased tariffs on Chinese products by the US, the Indian producers will get an opportunity to fill this generated gap and penetrate into the US market. This will increase their trade and profit.
• With both US and China embroiled in a trade war and uncertainty regarding Brexit, India becomes the sole major emerging market economy which has skilled cheap labour, required infrastructure and positive demographic dividend for attracting investment which is fleeing these markets due to lack of market-stability.
• Opportunities to increase exports of textile, agriculture, leather products and also diversify market reach focusing on African countries.
• Developing nations can be induced to form multilateral associations among themselves, India can take lead in this regard.

The head of the WTO has said that global free trade is facing its worst crisis due to the protectionist nature of this US-China trade war. For India, to take advantage of this Global Trade War, we need structural and economic reforms focusing on improving ease of doing business, skill development, improving supply chains, lower logistics costs and trade facilitation, diversify export basket, the comprehensive overlook at import tariffs, investment policy.