The South China Sea dispute is based on both maritime as well as territorial claims. The Paracel Islands, the Spratly Islands, Macclesfield Bank and Scarborough Shoal, and the Pratas Islands are the four contested geographic features in the South China Sea, with the Paracel Islands, claimed by China, Taiwan, and Vietnam and the Spratly Islands, claimed in their entirety by China, Taiwan, and Vietnam, and in part by the Philippines, Malaysia, and Brunei being the most hotly contested. This maritime dispute has at its roots in Beijing’s contentious ‘nine-dash line’, that was Beijing’s cartographic assertion submitted to the UN in 2009. The controversial line lays claims on the maritime and territorial features that are in compliance with the United Nations Convention on the Law of the Sea (UNCLOS). However, its bully-like actions have led to discord in the region. There have been overlapping claims in the South China Sea with China seeking to become the hegemon in the disputed regional topography.

The South China Sea Arbitration

There are six nations that contest all or parts of the oil and gas rich South China Sea, which has led to a series of confrontations between the Dragon and others over the competing claims.

The Philippines in January 2013 put forth a case against China’s belligerent activities and expansive claims in the SCS. An arbitral tribunal was constituted for the hearing of the case under the UNCLOS and final decision in 2016 was in Philippines’ favour; the resource rights in the South China Sea had to be clarified. China’s contentious nine-dash line became the subject of disapproval and the tribunal ruled against it, clearly stating that China was claiming historic rights to the resources within the jurisdiction of its aforementioned nine-dash but in actuality, these claims were nullified with China becoming a signatory of the UNCLOS in 1996 due to its discordancy with the Exclusive Economic Zones (EEZs) of other coastal states.

The tribunal also ruled that the 200-nautical-mile EEZ entitlements of the Philippines and, by conclusion, the other coastal states in the region, are unfettered by the nine-dash line or any claimed EEZ in the Spratly Islands.

China denounced the decision as “null and void” having “no binding force,” it largely kept to its letter if not its spirit in the first year after the award. The United States and its allies, members of ASEAN and India directly or indirectly pressured Beijing to accept the ruling and comply with the UNCLOS. Another reason could have been China’s disinterest in direct confrontation in the region.

China’s Outright Claims Over the South China Sea

Beijing’s venture into the disputed South China Sea has been a part and parcel of its long-term strategy to establish its hegemony over the near and far regions and expand and deepen its sphere of influence, both overland and in the seas. Recently, the dragon’s firing of medium-range missiles into the SCS and its ever-increasing military exercises is an avowal in order to show its sovereignty over the disputed waters.

Even though its untoward claims have no legal basis, as pointed out by Hague Tribunal, which is by and large ignored and disobeyed by China, does not stop it from emerging as a formidable trouble-fomenting power in the South China Sea. What started in the guise of a cooperative mechanism for engaging with the countries in the periphery of the disputed SCS has turned into brazen bullying by Beijing.

Historically, post one-year anniversary of the UNCLOS tribunal’s ruling, as international attention faded, China started strengthening its claims and encroaching upon the EEZs of the coastal states; deepening the purview of its maritime claims and increasing its military and naval presence apart from objecting to the presence of US navigation and laws of free movement. It was greatly engaged in consolidating its grand and objectionable territorial claims engaging in reclamation of physical geographical features on which lay its belligerent claims. Its militarisation of the region and installations at Mischief Reef through naval and aerial facilities and setting up of artificial islands has been a well-known factor.

Beijing has been an aggressive bully in the region trying to establish rules and laws that favour its grandiose plans. It has always maintained that it has full control over the region and has stakes and claims, as in the case of its assertion on a recent White Paper – “China exercises its national sovereignty to build infrastructure and deploy necessary defensive capabilities on the islands and reefs in the South China Sea.”

Conclusion

Beijing through its deplorable actions has been able to outrightly build a forceful maritime presence in the South China Sea, strengthening its surveillance and intelligence capabilities; its aerial capabilities have also helped it to gain a strong foothold over the region, thus, bringing it closer to the realisation of its broad strategic goals of hegemony of the region, sans any respect for the laws of the sea or the international rules-based order. The other adversaries have also been subdued by China’s overwhelming presence in the region and even, the US credibility, action and capability has been undermined with Chinese sovereign control over the contested territory being somewhat fait accompli. Chinese downright assertions over the South China Sea have antagonised the neighbouring states with the ASEAN being virtually helpless in the face of adversity that Beijing has thrown on to them. Moreover, in the present scenario in a world ravaged by COVID-19, it is difficult to control the bully and prevent it from infringing on the rights of other rightful contenders of the South China Sea resources.

References:

Council on Foreign Relations. (n.d.). Territorial Disputes in the South China Sea. Council on Foreign Relations.

Kumar, A., & Chari, S. (2020, September 6). China creating a flashpoint in South China Sea. Sunday Guardian Live.

Kuok, L. (2019). How China’s actions in the South China Sea undermine the Rule of Law. Global China.

Tsirbas, M. (2016, June 2). What Does the Nine-Dash Line Actually Mean? The Diplomat.

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15th East Asia Summit

The 15th round of the East Asia Summit was held on the 14th of November. The Indian Republic was represented by Dr. S. Jaishankar. The summit was chaired by the Prime Minister of Vietnam H.E Nguyen Xuan Phuc, who also serves as the chair of the ASEAN. The External Affairs Minister used the platform to reaffirm the importance of the East Asia Summit, while speaking about the need to adhere to international laws, respecting territorial integrity, and promoting a rule-based global order. His comments tie into India’s recent experience of a border skirmish with its Eastern neighbor, and at the same time, his comments shed light on the country’s plans. The importance that the Indo-Pacific holds for the Indian Subcontinent, was evident by Jaishankar’s remarks, where he referred to the region as an integrated and organic maritime space.

Jaishankar further expressed concerns about actions and decisions in the South China Sea that have led to an erosion of trust. While talking further about the South China Sea, he called for a joint initiative post the COVID 19 pandemic to tackle the challenges cutting across international boundaries such as terrorism, climate change, and the pandemic. Lastly, the discussion moved to the issue that the world has been continuously grappling with. Jaishankar in his remarks about the COVID 19 briefed the EAS leaders about India’s response to the pandemic and highlighted India’s efforts to support the international community. All nations present at the summit issued a joint call to keep all global supply chains open for an expeditious and sustainable economic recovery.

17th ASEAN Summit

India was represented at the ASEAN by Prime Minister, Mr. Modi. The ASEAN Summit was chaired by H.E. Nguyen Xuan Phuc, the Prime Minister of Vietnam. In his opening remarks, the Indian Prime Minister chose to shed light on the importance of ASEAN, by highlighting its centrality to India’s Act East Policy. The Prime Minister underscored the importance of strengthening convergence between India’s Indo-Pacific Oceans Initiative and the ASEAN Outlook on Indo- Pacific, to ensure a free, open, inclusive, and rules-based Indo-Pacific region.

The Indian delegation to further cooperation with ASEAN nations reiterated India’s broader support to the international community and extended an offer to contribute US$ 1 million to the ASEAN COVID 19 Response Fund. The Prime Minister further talked about the importance of greater physical and digital connectivity between ASEAN and India and repeated India’s offer of a US$ 1 billion Line of Credit to support ASEAN connectivity. Lastly, the heads of state and international leaders present at the Summit, while recognizing India’s contribution to the peace and stability in the region, decided to adopt the new ASEAN-India Plan of Action for 2021-2025. The member states present insisted on the significance of keeping up and advancing harmony, dependability, wellbeing, and security in the South China Sea and guaranteeing opportunity of route and overflight.

20th Summit of SCO Council of Heads of State

The 20th Summit of the Shanghai Cooperation Organisation was held on the 10th of November in a virtual format. India was represented by the Prime Minister, while the Summit was being chaired by the President of the Russian Federation, Vladimir Putin. The Summit was attended by an array of partners, that comprised the Secretary-General of the SCO Secretariat, Executive Director of the SCO Regional Anti-Terrorist Structure, and the President of the four Observer States of the SCO, which includes: Afghanistan, Belarus, Iran, and Mongolia.

This was the third meeting that the Indian Delegation attended, since becoming a fully participating member of the SCO back in 2017. The Prime Minister used the forum to intimate other members of India’s plan in the United Nations, as a non-permanent member of the United Nations Security Council. Mr. Modi emphasized India’s plans to focus on the theme of ‘reformed multilateralism’ to bring about desirable changes in global governance.

Further, the Prime Minister made known the country’s firm belief in regional peace, security, and prosperity and its future ambitions of raising a voice against terrorism, smuggling of illegal weapons, drugs, and money laundering. In terms of strengthening the Republic’s relationship with the Shanghai Cooperation Organisation and Member nations, the Indian Delegating reflected on India’s strong cultural and historical connection with the SCO region and reiterated India’s firm commitment towards strengthening connectivity in the region with initiatives like International North-South Transport Corridor, Chabahar Port, and Ashgabat Agreement.

In his concluding remarks, the Indian Prime Minster expressed his willingness to host the next regular meetings of the SCO Council of Heads of Government on the 30th of November. Lastly, the Indian Prime Minister congratulated President Emomali Rahmon of the Republic of Tajikistan for taking up the chairmanship of the SCO next year and assured full cooperation from India’s end.

India-Mexico Meeting

The Indian External Affairs Minister met with H.E. Ambassador Ernesto Araujo, the External Relations Minister for Brazil. The Indian Delegation started the talks by conveying their condolences to the Brazilian families who lost loved ones in the terrorist attacks in France. The Ministers discussed opportunities for cooperation in the post-COVID world and emphasized the importance of Brazil-India cooperation in terms of economic recovery efforts, healthcare, cybersecurity, and supply chain resilience. The Ministers also discussed a wide range of regional and multilateral issues especially in the context of India’s upcoming membership of the UNSC, the role of G4, and India’s priorities in the UNSC.

India-Italy Virtual Summit

A virtual bi-lateral summit, between the Prime Minister, Shri. Narendra Modi and the Italian Prime Minister Prof. Giuseppe Conte was held on the 6th of November, 2020. Recalling the Italian Prime Minister’s visit to India two years ago, Mr. Modi appreciated the rapid strengthening of India- Italy relations. The summit acted as a common platform for the two leaders to review their bi-lateral frameworks and discuss a wide range of issues including political, scientific, and defence technology. Lastly, on the multilateral level, both sides agree to coordinate closely at platforms such as G-20, to face global issues such as the COVID 19 and the economic downturn caused by the same.

Removal of Sudan from the list of State Sponsors of Terrorism and normalization of relations with Israel

On the 9th of November, the External Affairs Ministry released a statement, declaring that Sudan has been removed from the list of countries that are sponsors of terrorism. The Ministry acknowledged that the Indian-Sudanese relations are historic and special and forged based on shared values. The Indian Government also congratulated the Transitional Government and the people of Sudan on the signing of the Juba Peace Agreement, and hope that these positive developments will usher in democratic changes and contribute to enhancing Sudan’s development, peace, security, and stability.

Conclusion

India in the last month has taken significant steps towards establishing an environment of mutual respect and peace, while trying to set initiative a dialogue in the region which can act as a potential check on increasing Chinese aggression. With there being a constant mention of the shared problem of the COVID-19 pandemic, and the recent news coming out regarding the Pfizer and the Moderna vaccine, achieving 90% and 94.5% effectiveness, the country would have to focus on both production and distribution of the same if it is approved. Lastly, the next few months or even the coming years will be marked by a constant struggle aimed at economic recovery. It will be interesting to see how India’s strategic diplomatic ties help the country get back on its feet.

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Current Economic Inequality

While economic growth has certainly been witnessed in the region, the growth has been worryingly unequal. Recently, with the growth of digitalisation and improvements in technology, while productivity has increased, there has been a trend to favour capital over labour. This has contributed to income equality, which is exacerbated by another trend of favouring skilled labour over unskilled labour. Most ASEAN countries are currently stuck in a middle-income trap. 

The data from ASEAN countries is surprising – they all score highly on the Gini Index, which is used to measure economic inequality. Among all ASEAN countries, Thailand scores the worst. According to the Bank of Thailand’s research institute – the Puey Ungphakorn Institute for Economic Research – Thailand’s 36 per cent of corporate equity is held by just 500 people, while they have a population of about 69,625,582 people. The average yearly household income of these people is around US$10,000. But in stark contrast to this meagre amount, the aforementioned 500 reap around 3.1 billion baht (US$102 million) per year in company profits. 

Economic Inequality and Political Instability

Economic inequality can lead to political turmoil and therefore threaten the peace and security of the region. Unmet expectations can lead to a lead to a dissatisfied voters’ base. Such a voters’ base is likely to vote for populist governments or cause civil unrest. Rattana Lao, lead author of a study by the Asia Foundation called Thailand’s Inequality: Myths and Reality of Isan said that “Research has shown that one of the leading indicators that pushed people toward political turmoil and protest is the fact that they are not satisfied with their economic condition and the uneven treatment that they receive.”

A crucial realisation that fails to be accounted for in most discussions surrounding economic inequality is that regional disparities also constitute as a worry. Specifically, when talking about political instability, people from poorer regions rely more on government supports and can have unrealistic expectations from their governments. These people are more likely to be engaged in politics and hence can determine voting outcomes. The dissatisfaction of electors can turn into a series of protests, as witnessed in the case of the Arab Spring. 

Thomas I. Parks, the Country Representative for Thailand at The Asia Foundation writes in regard to the aforementioned report, “The challenge now for Thai leaders is to find the best mix of programs and policies and stick to them. In the coming years, the government must carefully monitor and evaluate the results of its policies and programs, and the lessons learned, and then make adjustments whenever needed.” Regional disparities and the level of income inequality has to dictate policies if governments want to avoid civil unrest. 

Economic Inequality and Hindrance to Trade

Unfortunately, income inequality goes beyond political instability. Persistent-income inequality can significantly impede growth and weaken demand, therefore affecting trade and ASEAN’s goal of economic integration. Believers of trickle-down economics are proven wrong if we look at the experience of ASEAN countries. According to the International Monetary Fund, if the income share of the top 20 per cent increases by 1 per cent, we witness an associated 0.08 percentage point decrease in Gross Domestic Product (GDP) growth in the next 5 years.

There is a clear correlation between economic equality and sustainable economic growth. Policy measures need to strive for equal access to resources and opportunities, otherwise, we may witness some sort of economic growth, but it will only be limited and unsustainable. Economic development, which is what countries should strive for, includes sustainable growth – and it is only possible when there is an overall economic upliftment of everyone in society.

Moreover, ASEAN’s goal of promoting trade in the region is affected when we look at the driving factors of income inequality. Factors that have been identified as contributors include globalisation and warped fiscal policies of governments. For example, Multinational Companies (MNCs) do not pay proper taxes which helps them retain profits but also indirectly takes away crucial funding from government schemes, and therefore this help never reaches the poor. Organisation for Economic Co-operation and Development’s Chief Economist, Laurence Boone said: “At the global level, we must ensure that firms pay their fair share of taxes to create value and employ people.” On the one hand, it is impossible to reject globalisation due to the adverse damage it would do to trade, but on the other hand, it is crucial to make sure the benefits of globalisation are reaped by everyone. Similarly, fiscal policies of countries cannot seek to just remove income inequality – they need to be in line with ASEAN’s policies of economic integration (and therefore, globalisation). In these aspects, ASEAN needs to make sure that it’s member countries remain in tune with its agenda, while at the same time make sure that income inequality is eradicated. 

Conclusion

Both the main objectives of ASEAN are put in jeopardy with the context on economic inequality. In fact, having one objective threatened also affects the other – for example, political instability also disincentivizes people to invest and drives down economic growth. Similarly, slow trade and economic growth leads to resentment amongst the people, and therefore political instability. Ultimately a dangerous cycle can form.

Political instability reduces the likelihood of proper collaboration on an effective economic agenda and trade policies. Frequent regime changes and different leaders might essentially make ASEAN’s goal of proper and effective economic integration difficult to achieve. This, in turn, will lead to poor economic policies, followed by low and unsustainable growth fuelling economic inequality. Economic inequality and hindered trade by creating dissatisfaction amongst citizens will again lead to continued political instability and fragmentation.

In order to make sure that officials’ capacity to implement proper trade policies is not undermined, it becomes crucial to recognise the real-life impact of income inequality and understand the disastrous affects it can have on just numbers and figures of growth, but in lifting people’s social class and living standard. ASEAN’s objective of a better region is threatened by the security risks that economic inequality poses. For example, the recent coronavirus pandemic also disproportionately will affect the poor. In situations such as these, economic equality and consequently equitable access to resources (healthcare, information, a steady source of income etc.) becomes a priority. Poverty and economic gaps don’t just make it tougher for people on the lower end to recover, it also makes every situation tougher for a nation to escape from, and therefore also makes it tougher for a regional entity such as ASEAN. 

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The US-China Dispute

The Red Dragon and Uncle Sam have a lengthy history of being at loggerheads. The US initially refused to recognise China as a sovereign state and indulged in many ministrations to displace the latter’s communist roots.  It was only in the 1970s that diplomatic relations took flight with the US acceptance of One China Policy. Still, their relations were fraught with friction, especially over human rights. When China entered the world economy and began opening up its economy, its engagement enhanced, with China going on to become America’s largest trading partner. With a few hiccups, the relationship seemed to be aiming for cooperation. However, it all radically changed in 2018 when the Trump government’s tariffs targetted China, setting off a vicious trade war that is still ongoing. What started out as a trade dispute couple of years ago has now turned into a full-blown show of might, branching into other areas as well.

In late 2018, the US signaled its hardline approach towards the eastern giant. The Huawei issue only intensified the same, and the US has done everything in its power to kick the Chinese MNC out of the 5G race on charges of spying. By 2019, the trade war had intensified, with both countries levying hefty tariffs on the other, and placing various other sanctions as well. Early 2020 saw the signing of a trade deal which provided a brief breather for the economic world, but the respite period remained short. The onset of the Covid-19 pandemic sent the global economy tumbling. America faced multi-faceted effects: its capitalist system suffered a downfall and the health system was brought to its knees. This tension had the hegemon accusing China of mismanaging the pandemic and causing harm to the world, eventually pulling out of WHO due to the latter’s support of China. China obviously, did not take the accusations well. But it was the new security law imposed in Hong Kong that proved to be the last nail in the coffin. Trump went on to strip the city of its special status, reducing its credibility as a world economic and financial hub. China accused America of interfering in its domestic affairs, and everything has been downhill since.

The Asian Playground

Due to the deterrence that comes with two giants battling each other, the countries are unlikely to engage in an all-out war, even if relations have diminished to a new low. Their historical animosity played out in the Asian region much like the proxy wars that dominated the global landscape during the Cold War. Both nations have tried to expand the ambit of their influence by espousing Asia-centric policies. Obama’s presidency saw a more active role in the region coupled with an enhanced military presence. China on the other hand relies on its geo-economic power to bind Asia to it. The Belt and Road initiative, the String of Pearls approach, ADB Bank and increasing economic investment promises financial advancement for the region. South Asia in one of the most populous regions in the world, yet intra-regional trade is quite fragmented (just 5%), which reduces the economic benefits it can reap. Thus China’s meteoric economic rise has proved to be a fundamental driver of economic growth. 

US security cover coupled with economic benefits from China has helped in the advancement of many countries, resulting in the expectation that Southeast Asia will become the fourth-largest economy in the world, overtaking the European Union and Japan by 2050. Therefore for Southeast Asian nations, especially the ASEAN market is a key area for both America and China. The US is now frantically looking to shift Asian loyalties to its side as it perceives the rising Chinese aggression and economic strength as a threat.  That is why it has taken a strong position against China’s assertions in the South China Sea and has tried to play on the insecurities of the latter’s neighbours regarding the same. This ‘harbinger of justice’ role has helped the nation gain influence in the region, which was a difficult task because of China’s proximity to it. America is also banking on its military and technological investment to gain the region’s unequivocal support. 

Since the beginning of the Sino-American trade war, Southeast Asia has been an undisputed winner on account of the benefits it is reaping. The high American tariffs on Chinese goods have led to a shift in manufacturing processes to the region. In 2019 Chinese acoustics manufacturer Goertek announced that it will shift its Apple’s Airpods wireless headphones production to Vietnam because of the ongoing trade dispute. Similarly, Cambodia has bagged bicycle production for a high-value US firm, and Thailand has become a hub of vehicle assembly plants. According to Forbes, a survey of U.S. firms manufacturing in China found that 18.5% had either moved production to Southeast Asia or were considering it.

Usually, ASEAN countries have been able to maintain a delicate balance between American geopolitics and Chinese geo-economics. But as both countries increase the heat, it is difficult to predict if the future will force the region to choose sides. For now, Southeast Asia is having a good ride!

The Indian Factor

India has been facing a sudden increase in tensions with China too. The border dispute has led to a fresh impasse, the first one since Doklam. But this time the costs have been higher, with multiple skirmishes and martyred soldiers lining the situation. In response, India, akin to America, has tried to economically isolate China by banning 59 Chinese apps and making calls for being ‘Aatmanirbhar’. But it is easier said than done, for the mammoth amount of trade between the two is skewed in China’s favour. Some would think it is natural for India to lean on the US, especially in view of the latter’s vocal support of India in the afore-mentioned border dispute. It is to an extent true too: India has gained around $755 million in US exports since the trade war disrupted relations. India is also the only country capable of countering China’s influence in a disintegrated Asia. It also has a large youthful population capable of rapid mass production which it could use to its advantage in view of the trade war. 

But the path is not as smooth as it looks. There are multiple factors that weigh India down as compared to Southeast Asia when it comes to being business-savvy. The country has a massive supply of cheap labour but lags glaringly in other areas. Poor infrastructure to accommodate foreign production, inadequate technology, complicated labour laws and red-tapism of a sloth-like bureaucracy have tainted the country’s hopes of attracting foreign investment. That is why despite improving its Ease of Doing Business rankings by 37 places, it still is only the ninth-largest trading partner of the USA. Its tedious land-acquisition laws coupled with hostile neighbourhoods have not done much to attract investors. In addition to this, India’s decision to not be a part of the trade agreement with ASEAN called Regional Comprehensive Economic Partnership (RCEP) has put it on the back foot. It passed up on a chance to economically seal the deal with the fastest growing economic region and its markets.

In view of these shortcomings, Southeast Asia proves to be a better region to direct investments to. In fact, India is not extremely affected by the trade war as it has not gained much from it. 

Conclusion

The United States of America and China are the two hegemons that balance the current multi-polar world. This grandiosity of sorts, coupled with their mutual interdependence in terms of trade and technology makes it difficult for them to inflict real-time damage on each other, or indulge in an all-out confrontation. That being said, the current animosity between the two is different from their usual spats. In this pandemic-riddled world their tensions have been aggravated by blame-game, allegations of spying, erosion of Hong Kong’s democratic rights and of course, the rejuvenated trade-war. Many Asian countries have benefitted from this fallout and gained increased investment from the US and more come-hither offers by China. It is now to see how their balancing act will progress. However, India has a long way to trudge before it can fully reap the benefits of the clash and needs to work on its internal infrastructure and policies to attract any advantages.

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The Protectionism Hypocrisy

At the World Economic Forum meeting in 2018 in Davos, PM Narendra Modi, indirectly pointing towards Trump who have been propelling an “America First” Policy said that some nations were looking inwards and being protectionist. He appealed for more accessibility and free trade. Fast forward to 2019, India opted out of the Regional Comprehensive Economic Partnership (RCEP). The reasons are believed to be the fear of being swamped by imports especially from China, putting the domestic industries at risk. Given that India already suffers from a trade deficit from the members of RCEP of $105 billion and out of that $53.56 billion is from China alone, this decision seems very rational. But is it really?

Piyush Goyal (Commerce and Industry Minister) claimed that this decision will boost “Make in India” and that free trade agreements (FTAs) with countries like Japan, South Korea and ASEAN provided them with duty-free access to Indian markets but domestic goods faced barriers in their territories. But this is not the entire picture. To test whether the FTAs were beneficial or not, the Economic Survey 2019-20 conducted research. For this, it took into account 14 trade agreements signed by India. Only the trade agreements with Korea, Japan and Sri Lanka had a negative impact which means that the percentage rise in imports was greater than the percentage rise in exports. Other trade agreements had either no impact or a positive impact.

Talking about the overall effect with the trading partners, the Indian economy actually gained. The impact on exports was 13.4% for manufactured products and 10.9% for the total merchandise. Whereas the impact on imports were found to be lower at 12.7% for manufactured products and 8.6% for total merchandise. Therefore, from the perspective of the trade balance, India has obviously gained in terms of 0.7% increase in trade surplus per year for manufactured products and a 2.3% increase in trade surplus per year for total merchandise. Although, all the views regarding the fallout of the decision to step back from the RCEP agreement are just speculations at this point and we will get to know about the actual effects in the years to come.

Back in January, when Jeff Bezos visited India, he got no reception from PM Narendra Modi. Piyush Goyal advocated that Bezos was only covering up losses from predatory pricing by investing $1 billion in India and also condemned his pledge to create a million jobs by 2025 arguing that it hardly made up for the millions of Indians put out of work by the e-commerce site. It is a popular opinion that the Chinese were able to build tech giants like Alibaba only because they shut out US-based firms like Google and Facebook. Therefore, it is believed that India should also block them and create its own local champions. But to aid its overall development, the Indian economy needs all the economic vigour it can assemble and that involves attracting foreign investors. With its frequent policy changes, India has already got an image as a troublesome and unpredictable place to invest. The government further signalled the investors about their protectionist intentions through this act and risked a dampening effect on investors globally.

Protectiveness Vitiates the Budget as Well

In the budget 2020, the government not only hiked custom duties on a wide range of goods like grocery items, shoes, dolls and toys, ceiling fans, wooden furniture, kitchenware appliances, hairdryers, shelled walnut but also intends to make changes in the Customs Act 1962 through the Finance Bill. It will be amended to give the government the power to impose safeguard duties and tariff-rate quotas on imports on the pretence of injury to the domestic industry. Since the 1991 liberalisation era, this power was restricted to trade of gold and silver. The procedure for claiming preferential tariff rates under trade pacts has also been made complicated with importers having to give declarations along with the certificate of origin.

These changes will surely increase the scope of corruption by bureaucrats as they get more power. Also, these arbitrary tax spikes will lead to economic distortions and worsen the rent-seeking activities by domestic industries as they will lobby for their preferred tariffs which would have been dampened in a world with uniform taxes. Thus, instead, it needs to adopt the strategy of simplified, uniform and predictable tariffs which will eliminate tariff inversion (in which intermediate goods are taxed more heavily than the final goods) and distortion costs could be kept very low.

The current policy choice reflects a highly mistaken mindset that one can cut back on imports while boosting exports, not realising that a reduction in imports, induced by an increase in tariffs, is expected to lead to a decrease in exports of a corresponding value. This is known as the Lerner’s Symmetry Theorem, a result used in international trade theory stating that an ad valorem import tariff will have the same effects as an export tax and is based on the observation that the effect on relative prices is the same regardless of the policy.

A Call to Escalate Exports

According to the World Trade Statistical Review, 2019 by World Trade Organisation (WTO), India’s average annual growth rate in merchandise exports was 5.3% between 2008 and 2018 which is well below Vietnam, Bangladesh and China. The growth rate of India in commercial services export was 8.6% per year on average from 2008 to 2018. This is below many of the developing countries namely China, Philippines, Vietnam, Singapore, Thailand, Qatar and Myanmar. There has been a substantial increase in exports of transport equipment, chemicals and food products which contributed to moving up India to the 19th position in world rankings of top exporting countries.

Although India has achieved many milestones in the last decade, it can do much better given its potential and unexplored territories. In fact, the government should try to increase its exports than constantly trying to decrease the imports if it wants to be a $5 trillion economy. Some scholars argue that the huge trade deficit of India is not because of increasing imports but of decreasing exports. “Unless India’s exports grow at 15%, we won’t get 8% growth. For that, we should reverse some of the protectionist measures taken. If we turn protectionist, I don’t know how can we be an exporting power. Self-sufficient exporting powerhouse is an oxymoron” – Arvind Subramanian said while speaking at a webcast organized by EY India.

In the Economic Survey, while discussing India’s performance on Ease of Doing Business (EoDB), a series of case studies shows the inefficiency in the Indian system of Trading Across Borders. As Italy topped the EoDB ranking in Trading Across Borders, they compared India’s performance with that of Italy. India takes 60-68 hours in border compliance for exports while Italy took only one hour. Moreover, the cost of compliance is zero in Italy compared to $260-281 in India for export. Almost 70% of the delays occur due to procedural complexities, multiple documentations and involvement of multiple agencies for approvals and clearances. These inefficiencies, in turn, lead to time delay and end up pushing the cost to trade. Increasing digitalization and integrating multiple agencies into a single digital platform can reduce these inefficiencies and improve user experience substantially.

Also, a study found that an apparels consignment going from Delhi to Maine (USA) takes roughly 41 days, but 19 of these are spent within India due to delays in transportation, customs clearance and loading at sea-ports. A study of carpets exports from Uttar Pradesh to the United States also showed similar results. Apparently, the process flow for imports is more efficient than that for exports. In contrast, however, the imports and exports of electronics through Bengaluru airport were found to be top-notch. It thus recommended that the processes of Indian airports should be replicated in sea-ports as well.

It also suggested adopting policies aimed at strengthening its involvement in the export market for Network Products (NP) in order to get linked with the Global Value Chain (GVC). Through observations, it has been found that countries who substantially increased their exports and managed to maintain it did it through linking up with the GVCs. Given our vast labour force with relatively low skill-set, India’s strength lies in the assembly of NP. While the short-term objective is the expansion of assembly activities on a large scale by making use of imported parts & components, giving a boost to domestic production of parts & components should be the long-term objective. Assembly is a highly labour-intensive area that can provide jobs for the huge population of our country, while domestic production of parts & components can create high skill jobs. But for a country to become an attractive location for assembly activities, it is crucial that import tariff rates for intermediate inputs are zero or negligible. Thus, India needs to control itself on the tariffs and restrictions. India needs accessibility, it needs foreign investment, it needs the competition to be a world-leader.

Conclusion

There are different kinds of restrictions when it comes to protectionism. We can certainly have the set of duties which seeks to create a level playing field for the MSMEs but it becomes harmful when we instead try to protect the industries which are already in a good position in terms of opportunities in the hope to flourish them. There is just a slight difference between these two kinds and policymakers need to incorporate this idea when drafting policies. For instance, India refused to allow permanent tariff liberalisation on health and farm products at the WTO Council Meeting as an answer to trade disruptions caused by COVID-19 is not harmful protectionism. Every country will bear the brunt of COVID-19, the difference being the level of disruptions faced by each one of them. But we should also keep in mind that the least developed and developing countries need to be guarded given the lack of resources available to defend themselves from the crisis.

India acknowledges the disruptions caused in the flow of medical supplies, food and other goods and services across borders and has been playing a proactive role in combating it but doing so at the cost of its own industries is something India (or for that matter none of the countries) would like to do given the economic crisis they are going to face. At the same time blindly putting up restrictions will only lead to increased prices for competitively produced imports and the customers will end up footing the bill. India committed the same mistake back in the 1970s. In order to be self-sufficient, a country needs to make its industries capable through the competition so that the users do not pay the price by buying some cheap quality or inefficiently produced product. Protectionism is not the way forward if we want to grow. We should have an equally or even more efficiently produced substitute ready if we want to raise the tariffs. Thus, India should instead focus on the production inside the country and work on infrastructure, logistics, productivity and lifting the standards of products if it wants to reduce the trade deficit.

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