Uprooting the Global Economic Order: Trump, India, and the Industrialisation Dilemma

On April 2, 2018, when U.S. President Donald Trump announced the controversial “Liberation Day” tariffs, the global economic landscape shifted dramatically. This policy aimed to reignite American manufacturing while addressing chronic trade deficits. It introduced a baseline 10% tariff on all imports, with additional country-specific tariffs making the situation more rigid for nations reliant on U.S. trade. India found itself facing a staggering 27% tariff rate, which escalated to 50% by August of the same year after accusations emerged regarding India’s purchases of Russian crude oil amidst the Russia-Ukraine conflict.

Union Commerce Minister Piyush Goyal expressed optimism about a potential trade deal that could alleviate these tariffs for Indian businesses. However, economist Ha-Joon Chang challenges this perspective in an insightful interview with Frontline. He argues that the promise of a deal may not suffice for India’s long-term economic aspirations.

The Complicated Narrative of Free Trade

Chang, an influential economist at the School of Oriental and African Studies in London, emphasizes that trade is crucial for developing countries. While he acknowledges the necessity of engaging in international trade to import advanced technologies and generate hard currency, he strongly cautions against the unrestrained embrace of free trade. Historical context plays a pivotal role in his arguments.

He cites South Korea as an example. In the early 1960s, both South Korea and India were at similar levels of economic development, but South Korea emerged as a powerhouse in high-tech industries by employing strategic protectionism. The South Korean government imposed high tariffs and established bans on foreign car imports to nurture local industry, an approach Chang describes as essential for “infant industry protection.” He posits that India’s previous protectionist measures, which were not aimed at fostering competition, ultimately failed to develop a robust industrial base.

The Missteps of Indian Protectionism

Before liberalization in the 1990s, India practiced strong protectionist policies that failed to catalyze growth. Instead of allowing budding industries to evolve and improve through competition, protectionist policies kept them stagnant. For instance, the Indian car industry was long dominated by outdated models, highlighting a lack of ambition for technological advancement. Protections should aim not only to shield infant industries but to allow them to eventually thrive in a competitive global market.

Industrialization: A Missed Opportunity

Despite a decade-long aspiration to industrialize, India has tragically missed numerous waves of manufacturing diversification, especially in the wake of rising production costs in China. Chang observes a worrying trend, noting that while many developing countries encountered “premature deindustrialization,” India never even achieved meaningful industrialization in the first place. The manufacturing sector’s share of GDP has stagnated, fluctuating between 12% to 18% over the last few decades.

The issue, according to Chang, lies with India’s political economy: a business elite focused more on financial returns rather than the long-term investments required for serious industrial growth. He argues that a shift toward prioritizing sustainable industrial practices is vital for India’s future.

The Case for Infrastructure and Domestic Demand

One strong point Chang reiterates is the need for investment—not just any investment, but strategic investment in infrastructure, skills, and technology. India’s levels of research and development are dismally low compared to OECD standards, impacting its capacity for industrial growth.

Chang suggests that India must rely on domestic demand to stimulate industrialization. With a large population, it needs to produce not only for export but also to satisfy internal needs. This includes basic consumer goods and infrastructure developments necessary for everyday life. Furthermore, he states, leveraging existing capacities in pharmaceuticals and investing in green energy could transform industrial prospects in India.

Navigating Tariff Uncertainties

The onset of tariffs under Trump added a layer of complexity to India’s industrialization dreams. Initially, policymakers hoped to leverage tariff arbitrage, but as trust eroded, strategies had to adapt. Chang posits that while these tariffs are formidable, they are not eternal, especially as political dynamics in the U.S. shift with time. The evolving landscape offers India a chance to rethink its industrial strategies.

Alternatives to Service-oriented Growth

India’s past focus on service-oriented growth is being reconsidered amidst rising automation and AI integration into industries. Economists like Raghuram Rajan argue that solutions fall within the realm of services rather than traditional manufacturing. Chang vehemently opposes this view, declaring that manufacturing remains vital for any country’s economic success. This sector is not only foundational for technological advancements but also vital in determining long-term employment rates.

The Role of Government in Industrial Policy

Governments play a crucial role in capital allocation, especially during times of heightened financialization. Chang advocates for state intervention in directing capital toward productive capacity rather than short-term financial gains. The challenge lies in convincing the financial sector to adopt a longer-term perspective on investments, which could foster sustainable industrial growth.

The Future: Craving Inclusivity

To have a shot at meaningful industrialization, Chang insists that India needs to create a more inclusive economic model. The disparity in wealth distribution—where a miniscule elite holds a significant share of resources—creates socio-economic tensions detrimental to any country’s long-term stability. True growth necessitates a shared development trajectory that addresses the essential needs of its citizens.

Chang argues for a model that includes land reforms and safeguarding small enterprises against larger corporations, which would eventually experience broader economic growth through industrial development.

In this intricate landscape of tariffs, globalization, and economic policy, India’s path is not solely hindered by external pressures but also by internal misalignments. The opportunity for a pragmatic blend of protectionism and active trade engagement presents itself—one that could finally push India toward a genuine industrial awakening.