Economics:
Case Study 28
SUBMITTED BY: SUBMITTED TO:
MIHIR SINGH
MR. DIGVIJAY SINGH
1120202174 KATOCH
BBA LLB ASSISTANT PROFESSOR OF
3rd SEMESTER MANAGEMENT
HIMACHAL PRADESH
NATIONAL LAW
UNIVERSITY, SHIMLA.
Q1. A well-functioning economy is dynamic—employment shifts between sectors to
reallocate workers (and other resources) to their highest-value uses. How can we use this
statement to reduce tariffs in specific sectors of Indian economy and why?
Ans: India has gone through a significant trade reform process in the recent few decades.
Import tariffs were lowered, and trade restrictions were lifted. According to studies, the
structure of India's comparative advantage of sectors has changed dramatically throughout
this time. The technological component of trade has increasingly migrated away from low-
tech sectors and toward medium-tech ones. Furthermore, the profile of trade specialisation
has shifted to include some of the world's most dynamic sectors. More precisely, industries
with the lowest import tariffs have seen the greatest increases in intra-trade specialisation on
average. This is in line with the belief that trade liberalisation increases industry rivalry and
increases the average productivity of enterprises in the sector. The increase in trade
specialisation has been stronger in industries with a medium to high technology component,
as well as in the world's fastest-growing industries. Trade liberalisation policies can be
contentious, as it is frequently assumed that exposing native enterprises to global competition
will put them at a disadvantage. While individual businesses may have suffered as a result of
liberalisation policies, numerous studies on the subject suggest that these measures have
helped industries improve their international competitiveness. This is substantial evidence in
favour of India's trade liberalisation policies, which have been in place since the early 1990s.
Changes in domestic and international demand are one of the driving causes for structural
transformation. Individuals with relatively modest incomes spend a considerable portion of
their income on food. This share tends to fall as income rises, yet demand for manufactured
goods rises.
Similarly, when income rises, demand for manufactured goods grows at a slower rate,
whereas demand for services grows quickly. Changes in demand will affect the economy's
labour productivity through affecting sectoral employment and production shares.
Furthermore, trade influences the specialisation patterns of countries as well as the rate of
modernization and structural change within industries. Countries that operate under an open
trade policy are more likely to specialise in the production of goods for which they have a
comparative advantage and import commodities that are more expensive to manufacture
domestically. Foreign investment is projected to flow into the country as a result of increased
trade openness. This is especially important in the early stages of development. Looking back
in time, as India reduced import levies on products, the local economy and production grew,
as evidenced by the period, and the number of exports expanded as a result of access to
superior technologies and lower-cost products from other nations.
This occurred because, prior to the liberalisation, the only option for corporations to obtain
raw materials was from small businesses. Because there was no external supply, the local
businesses competed in a monopolistic manner. As a result, no changes were made to the
manufacturing process of the items, and the products remained of low quality and high cost.
On a global scale, there were a plethora of superior options than the out-of-date India
products. Because other items employed the same pricey and low-quality raw materials
supplied by these industries, the end product was the same, and they suffered the same fate on
the international market. As a result, a vicious cycle of low-cost, low-quality items and slow
economic progress emerged.
As a result, a few corporations became monopolies in their respective fields. Certain
corporations obtained monopoly status in their areas as a result of geological, legal, or
economic constraints. Because of their financial standing, these corporations had access to
world-class technology, and new companies were discouraged from competing against them.
Consumers have gained access to a considerably wider range of commodities, and businesses
have been able to import world-class inputs and become more competitive as a result of trade
openness. International competition also aids the diffusion of innovation and encourages the
pursuit of productivity, placing downward pressure on monopoly rents.
A country's level of economic openness can have a significant impact on its pattern of
specialisation and industrialization. According to Heckscher-Ohlin theory, if countries are
open to trade, they should specialise in the production of items in which they have a
comparative advantage. Trade liberalisation in labour-rich countries (such as India) would
tend to shift output away from capital-intensive import substitutes and toward labour-
intensive exportable goods. Because of the increased demand for labour, inequality among
people in those nations in terms of money and spending power is predicted to fall, but
inequality in countries with ample capital is expected to expand. Foreign direct investment
liberalisation can help reduce inequality in capital-importing countries, although this is
dependent in part on the degree of skill bias in the technology used by foreign-invested
enterprises.
The average income of the individuals who reside in a country rises as the economy of that
country grows. As previously said, as a country develops, its people's principal expenditure
goes from food (low-income bracket), to manufactured goods (middle class), and finally to
services (high class society). The asset allocation and labour concentration from farming on
fields to manufacturing in factories to service providers evolves as the demand for different
products and services shifts.
Q2. In the context of Indian economy, should we increase protectionism in certain industries
to boost domestic industries? What are the drawbacks?
Ans. In my opinion, no, India should not increase protectionism in certain industries to
boost economic industries.
Protectionism is a term used to describe government policies that limit foreign commerce in
order to benefit domestic businesses. Protectionist policies are typically intended to boost
domestic economic activity, but they can also be enacted to address safety or quality
problems. Rising protectionism can have a variety of effects on economic activity. Higher
import tariffs raise trade expenses, which can affect both the quantity and price of goods
traded globally. This is often referred to as the transmission commerce channel. This effect
can be amplified by the existence of complicated global industry supply chains. Higher trade
expenses might also have an impact on financial flows and lending conditions. For example,
if increasing uncertainty about future trade policy causes financial stress and a broad
reconsideration of risk premia, this may happen. The impact of a trade disagreement on
economic activity relies on a variety of factors, including whether trading partners retaliate
and whether the issue remains limited to a small number of nations rather than escalating into
a full-fledged trade war.
India recently unveiled a raft of protectionist measures aimed at lowering imports and
reducing the country's increasing trade deficit. However, according to current study, this is
the incorrect diagnosis. Experts stated that India's trade deficit is more a result of stalling
exports than too many imports in response to the Indian government's recent move. They
investigate how all of the protectionism measures mentioned in trade-related announcements
in the 2020 budget will affect India's standing in global trade using historical trade data.
According to data, merchandise exports increased by 8% in the last decade, compared to
17.33% in the previous decade. The second part of this decade saw even slower growth (1.4
percent from 2014-15 to 2018-19). Even though India's primary exports, such as electrical
and non-electrical machinery, organic chemicals, and pharmaceuticals, are subject to low
tariffs in global markets, the recession continues. Exports are slowing due to Indian
producers' lack of competitiveness and failing to meet global product standards.
This budget was presented in order to begin a protectionist route by raising import duties and
eliminating exemptions. By doing so, the government hopes to protect micro, small, and
medium businesses while also boosting the Make in India campaign. While everything has
been done with the local market in mind, tariff protection alone will not be enough to
improve India's domestic market. Despite this, the budget opted for a protectionist approach,
focusing on raising import duties and eliminating exemptions. While the goal was to level the
playing field for India's micro, small, and medium businesses while also encouraging
domestic production, tariff protection alone will not be enough to help the country's
manufacturing sector grow. Experts believe that India requires a comprehensive industrial
policy that addresses low productivity, a lack of money, poor marketing strategies, a lack of
product standards, and insufficient infrastructure. This might make India's exports more
competitive and assist to lower the country's trade imbalance.
Protectionism is only viable when the government seeks to boost production of local
specialties or any other product that can be produced inexpensively due to geographical
advantages. As a result, some may claim that protectionism should be used to boost
production. However, if we examine the current situation, we can see that all of these areas
have already been sufficiently developed to compete on the international market alongside
other world-class products. Because need is the mother of invention, these items can only
improve over time as a result of this competition. Tariff barriers, in reality, hurt the middle
class. They raise consumer prices in the short term. They erode the country's manufacturing
competitiveness and put middle-class employment at risk in the medium run. They stifle
innovation and the formation of the next generation of middle-class jobs in the long run,
undermining our children's foothold in the middle class and sapping the nation's economy
over time.
Protectionism has also has its sets of drawbacks that I think would be unfavourable. Some of
them are:
Stagnating Technological Advantages:
Due to a decrease in market rivalry, local industries no longer try to develop high-end quality
goods. They are no longer required to compete with international brands, resulting in
technological stagnation.
Limited Choices for the Consumers
Customers in the market have fewer options due to a decrease in foreign products imports.
They used to have 10 various sorts of items, but now they only have a few. This is due to a
decrease in the import of foreign goods. This could lead to a situation where producers begin
to take advantage of consumers by charging greater costs for items.
Higher Prices
Due to a lack of competition in the market, producers often take advantage of consumers by
charging exorbitant prices for goods that do not improve in quality. This will be done because
domestic manufacturers are beginning to believe that customers have no other option and
that, in order to meet their demands, they would have to buy domestically made, and
substantially poorer quality items.
Economic Isolation
Protectionism frequently results in political and cultural isolation, which exacerbates
economic isolation. This is because to the fact that protectionism's policies affect more than
just one country. For example, if India imposes a protectionism policy on Chinese imports, it
will have an impact on both India's and China's markets. This could potentially lead to China
withdrawing from additional treaties that the two countries have yet to sign.
Q3. What are reasons behind the pressure exerted on the government by certain domestic
industrial groups to increase protective tariffs on their products?
Ans. Most countries attempt to safeguard their own citizens. When political unrest or civil
conflict erupts in a region of the world, many countries issue travel advisories to their
residents and even pay for their nationals' transportation out of the troublesome area. These
countries invest extensively in defending their industries, just as they do in protecting their
people. Countries have one very powerful tool at their disposal to safeguard their enterprises
and local markets from international competition: the protective tariff. Protective tariffs are
taxes, charges, or other obstacles imposed on foreign goods by a national or state government
to safeguard domestic products and markets (usually in the form of monetary costs).
Increased fees charged on imported items are typically passed on to the consumer, making
imported goods significantly more expensive than domestically produced goods.
This approach is intended to encourage customers to buy more domestic items, so supporting
domestic industries that would otherwise go out of business due to the availability of cheaper
imported goods. Furthermore, as a result of customers purchasing more domestic items in
reaction to rising import prices, more cash remains in circulation in the United States.
Protective tariffs, despite their benefits, are widely criticised by free market economists, who
consider them as economically immoral and an artificial limit on global market forces.
Protectionism occurs when a government enacts laws that impede or obstruct international
trade. Domestic producers and employees are frequently shielded from international
competition by protectionist legislation. Tariffs, import quotas, and nontariff barriers are the
three basic forms of protectionism. Let's look at an example to see what happens when
protectionism is implemented. Assume the United States and Brazil have a sugar free trade
agreement. Sugar producers in the United States are expected to contend that if they could
just be protected from sugar imports from Brazil, the country would have greater domestic
sugar output, more jobs in the sugar business, and higher prices for American sugar farmers.
If the US government imposes a high enough tariff on imported sugar, or imposes a zero-
import quota, the amount of sugar traded between countries may be lowered to zero, and the
price of sugar in the US would rise as a result of the reduced supply.
It is also possible to block only certain types of trade. Assume the United States enacted a
seven-ton sugar import quota. The United States will import no more than seven tonnes of
sugar, therefore that Brazil can only sell seven tonnes of sugar to the US. As a result, the
price of sugar in the United States will rise in response to the new sugar scarcity, based on
demand and supply curves. On a national level, farmers in the United States may be
considered an industrial organisation, with sugar being the product they trade. Import
restrictions are plainly beneficial to protected producers such as sugar farmers in the United
States. These producers can sell more at a greater price because they don't have to compete
with imported products. Import restrictions are clearly detrimental for consumers in the
country with the protected good, in this example sugar consumers in the United States. In
comparison to the equilibrium price and quantity without trade, they end up buying a smaller
quantity of the good and paying a higher price for what they do buy.
The reality that protectionism raises prices for consumers in the country where it is enacted.
After all, there would be little purpose in establishing protectionism in the first place if it did
not benefit native producers. Protectionism is nothing more than a means of forcing
consumers to support producers. Because the subsidy is paid by consumers through higher
prices rather than by the government with money collected from taxpayers, it is an indirect
subsidy. Protectionism, on the other hand, functions as a subsidy. In his 1911 book The
Devil's Dictionary, American satirist Ambrose Bierce described "tariff" as "a scale of duties
on imports, meant to safeguard the native producer against the greed of his consumer."
Unskilled employees are another category that may gain from tariff increases. When one
country implements protectionism, other countries retaliate by raising tariffs on our exporting
goods.
Import tariffs increase the cost of imports while simultaneously causing an economic
rearrangement by diminishing the incentives to specialise. Import-competing industries (those
that compete with goods imported from other countries) have less external competition and
greater room to expand. At the same time, exporting sectors become less competitive abroad
as a result of changes in the nominal exchange rate and rising expenses. As a result of the
higher import taxes, output will shift from exporting to importing, creating competition
amongst sectors. As a result of the shift in output, workers will need to reallocate from
shrinking exporting industries to rising import-competing sectors. This reallocation of
resources requires both time and money, and it has diverse consequences on different
workers.
The restructuring of the economy has an impact on the need for skills. Because skilled
workers are more vital in exporting industries than unskilled workers are in importing
industries, an increase in import tariffs reduces demand for skilled workers, as well as their
earnings. The impact of a rise in import tariffs on a worker varies based on the worker's skill
class, industry, and stage of adjustment due to these diverse consequences. As a result, these
workers' preferences for import tariffs differed dramatically, with unskilled workers in
import-competing industries choosing extremely high import tariffs and skilled workers in
exporting sectors preferring to eliminate tariffs totally.
