Don’t fear neo-protectionism

A wave of protectionism is evident in the USA . Indiana state has just cancelled a $ 15 million software contract awarded to Tata Constancy Services and shifted it to a local company to keep jobs in the state.

Curbs on outsourcing and visas for Indians are being considered in 9 other states. Washington has just imposed quotas on Chinese textile exports, and has yet to rescind high steel tariffs imposed last year (and subsequently declared illegal by the WTO).

The USA continues to subsidise its farmers, depressing the price of commodities for Third World exporters, and this has held up the proposed Free Trade Area of the Americas .

Is neo-protectionism a serious threat for India ? I suspect not. Most of it is of surprisingly modest dimensions. The USA is gearing up for its next Presidential election, and a key issue is employment.

The country has lost 2.7 million jobs since Bush came to power. All Democratic candidates are blaming the President and mouthing protectionist remedies. Bush in turn is protecting his flanks.

But do not interpret this as a fundamental change in American attitudes to trade. The election will pass, the job crisis is fading, and the rhetoric will change.

Critics of globalisation are indignant today. How, they ask, can the USA lecture us on our high trade barriers and yet resort to its own trade barriers when convenient? I can only say that the hypocrisy of the USA matches that of its critics (who want the US market to be open but ours to be closed).

Do not regard the USA , or any European country, as a paragon of free trade. Every country has lobbies for both free trade and protection. Both lobbies win several battles, but the free trade lobby has won a clear majority of them since World War II.

In consequence world trade has become much freer, helped by eight rounds of tariff cuts under GATT/WTO.

But let nobody think that this makes the US a confirmed free trader. In democracies, there will always be politicians and parties wanting to promote the welfare of their particular constituencies (farmers, industrial workers, software workers).

They are unconcerned with the gains of free trade that promote the public good, and will happily sacrifice that for the personal benefit of their constituents. Forget the notion that democracy is about promoting the public interest.

In fact it promotes the private interests of different groups represented by different politicians, resulting in messy compromises.

Consider the Indiana state cancellation of the TCS contract. The cancellation may not stand up in law. Even if it does, and the job goes to an Indiana company, that same company will almost certainly outsource the job anyway, maybe to another Indian company.

But even if the entire contract is lost, it is worth only $15 million. Since other American states and entities are under similar pressure, let us multiply the figure by ten to get $150 million.

Even an export loss of that magnitude will be barely one per cent of our software exports, which should touch $13 billion this year. Yes, there is indeed a new wave of protectionism in the USA , but its magnitude is rather small.

The raising of US steel tariffs has angered many European and East Asian exporters. But Indian exporters have been exempted from key categories.

So even the most egregious example of recent US protectionism has affected us only marginally. Our steel exports are booming as never before.

Consider the latest quotas on Chinese exports of bras, bathrobes and knitwear. The total of Chinese textile exports affected is a mere $648 million out of a total of over $25 billion of Chinese textile sales to the USA .

Not a single bra is stitched in the USA any more, so the quota on bras will help only Latin American rivals, and there cannot be any sustained political pressure behind this.

An astonishing 97 per cent of all garments worn by Americans are imported. So you can see that the occasional victory won by protectionists does not amount to much.

The USA has pledged under WTO to abolish all textile quotas in 2005, something that should greatly help Indian exports. Expect protectionist protests to cause some delays or exceptions, and shrug them aside.

Already a team of buyers from Wal-Mart, the chain store which has become biggest company in the world, is here looking to buy $7-10 billion of goods per year from Indian companies.

That is the best evidence that neo-protectionism does not represent a new US trend. If Wal-Mart does not take it seriously, nor should we. Let us not get panicked into thinking that the days of free trade are over and we should reverse out own trade liberalisation.

What do you think?