Trade policy: Protectionism on the rise

Subject: Economy

Section: Capital market

Context: Government mandates licensing for laptop, tablet imports.

Key Points.

Government is set to impose a licensing requirement for imports of laptops, tablets and personal computers with immediate effect, a move that could hit hard the likes of Apple, Dell and Samsung and force them to boost local manufacturing.
Current regulations in India allow companies to import laptops freely, but the new rule mandates a special licence for these products similar to restrictions India imposed in 2020 for inbound TV shipments.

What is the motive behind this move:

While the justification hints about national security concerns, the more plausible reason could be that the Centre’s revised production linked incentive (PLI) scheme for IT hardware was failing to find traction.
Additionally the policy is to address the substitution of certain goods that are imported heavily.

What is the WTO norm on licensing and tariffs:

WTO allows licensing subject to fair and equitable application and administration, and to prevent procedures that have restrictive or distortive effects on imports.
Countries can implement custom tariffs as long as they are within WTO-mandated “bound rates”.

India’s tariff scenario:

Prior to the large-scale hikes, India’s peak customs duty — the highest of the normal tariff rates — on non-agriculture products had been coming down steeply from 150% in 1991-92 to to 10% in 2007-08.
This has seen a progressive reversal since 2016. India’s Trade Policy Review at the World Trade Organisation (WTO) in 2021 made a clear note of this trend.
In some cases where customs duty hikes are close to or have effectively crossed the WTO-mandated “bound rates”.

Impact of high customs/tariffs:

The direct result of high tariffs is trade diversion. This means switching from a less-costly source to a more-costly source.
The hike in import duties also render India’s exports uncompetitive too, given that a significant portion of exports are import-intensive.
Trade barriers end up promoting the inefficiencies of domestic manufacturing, at the cost of hurting consumers.

India’s Import Substitution Policy

The substitution industrial policy of India was an economic strategy adopted by India after the independence period. This policy aimed to promote domestic industrialization and reduce reliance on imports by encouraging the production of goods domestically that were previously imported from other countries.
The government imposed high tariffs and restrictions on certain imports to protect domestic industries and promote local production. This was the policy of import substitution.
Key features of the substitution industrial policy of India include:
- Import Substitution
- Licensing and Regulation
- Focus on key priority sectors
- Import Control and Exchange Rate Management
The substitution industrial policy had some success in promoting industrialization and building a base for economic growth in India.
However, it also faced challenges, including inefficiencies in protected industries, bureaucratic hurdles, and limited exposure to international competition.
In the 1990s, India shifted its economic policies towards liberalization and globalization, moving away from the import substitution approach to embrace market-oriented reforms and increased integration into the global economy.

Bound Rates

These are the customs duty rates that a country commits to all other members under the Most Favoured Nation (MFN) principle, and breaching these rates could effectively put a country at risk of being branded as “protectionist” as per WTO norms that prohibit discrimination by the use of tariffs by its 164 members.
WTO requires member countries to notify bound tariffs on products as per the commitments resulting from negotiations. Country-wise bound tariff commitments are listed in the documents called the Schedule of Commitments and are an integral part of the WTO Agreement.