Trade policies must support a strong industrial strategy
Trump’s trade tantrums to Make America Great Again have upset the global trade regime. His principal target is China. Some countries are scrambling to make deals with the US. India’s negotiators must be guided by a long-term strategy to build depth in India’s own industrial capabilities, which have lagged far behind China. The history of Japan’s and China’s industrial growth will guide them. They are in much stronger positions to negotiate trade deals with the US than India. The US needs their manufacturers, and they prop up the US economy by investing their huge trade surpluses in US treasuries.
Japan China India
Manufacturing sector $995b $4.7tr $469b
(19% of GDP) (25% of GDP) (13% of GDP)
Merchandise Exports $717b $3.4tr $437b
Of which, Manufactured* $600b $3.1tr $297b
(84%) (92%) (68%)
Currency Reserves $1.23tr $3.24tr $676b
US Treasuries $1.1tr $761b $226b
*Japan and China’s exports contain more high-tech and complex products with domestic value addition than India’s; domestic value creation is higher
Japan and China built their strong manufacturing industries strategically. Free trade, based on the theory of competitive advantage, benefits everyone in the long run. If every country were to produce only what it can produce better than everyone else, and buy from others what they can produce better, all should benefit with access to the best and cheapest products in the world. The problem with this theoretical view is that competitive advantages are not static, except for commodities. Industrialization is a process of enterprises learning capabilities they did not have before. Trade management is a game of preserving competitive advantage. Every country that has industrialized effectively (including the US in the 19th century), protected its industries while growing its industrial capabilities. Industrially advanced countries protect their monopolies of intellectual property. They prevent developing countries’ enterprises from learning capabilities by raising bogeys of ‘protectionist’ government policies.
Going from less free to more free trade involves the reduction of import duties in steps. In any developing economy, assemblers of finished products—the simplest form of manufacturing— are more numerous than producers of components, who are in turn larger than producers of machinery. Assemblers who sell final products to the public have greater brand visibility and popular support than producers of machinery at the back of the production process. When an economy grows with more consumption assemblers grow faster. They plead for more import of components to continue supplying products at lower costs to consumers. Producers of components, in turn, plead for freedom to import machines to reduce their own costs of production. This inverted import strategy favouring importers and assemblers weakens a country’s industrial capability with long term consequences for its industrial competitiveness. India abandoned industrial policies prematurely in the 1990s. China’s capital goods sector has become many times larger than India’s, and China’s exports of high-tech manufactured products are 48 times more!
Japan built its industries strategically after the Second World War. Industry and trade policies were coordinated by MITI (Ministry of International Trade and Industry, in collaboration with Japan’s industry builders. By 1990 Japan had become the factory of the world for a range of manufactured products—automobiles, electronic products, precision machinery, etc. China, not even in the picture then, became an even larger factory for the world by 2010, by strategically navigating the new rules-based WTO and TRIPs trade regime that replaced the development-oriented GATT in 1995. ‘Free’ trade is never ‘fair’ trade. The most powerful countries set the rules and change them when they do not suit them any longer. After WTO, industrial policies were forbidden because they ‘protect’ domestic industries. TRIPS protected US and Western companies’ intellectual property, with which they control value creation in global supply chains. The US says China has cheated and ‘stolen’ intellectual property. The truth is Chinese industries learned how to produce what they could not before, and to do it as well as US industries.
India is at cross-roads: should it comply with Western trade pressures or build its industrial strengths. India can be a huge market attracting foreign and domestic investors, provided incomes increase in the country, with more people employed in jobs with potentials for improving their skills. Economies develop through a process of learning new capabilities. A country’s domestic enterprises learn to do what they could not do before. Workers within those enterprises learn new skills. India needs a fundamental shift in its view of a labour market. Workers are not just resources for production in a ‘flexible labour market’ to be used and discarded when no longer required. They can be a country’s ‘appreciating assets’, as Japanese workers became, by learning new skills on the job, and enabling enterprises to innovate and compete at higher levels of technology.
Arun Maira
Author of Reimagining India’s Economy: The Road to a More Equitable Society (to be published in May 2025 by Speaking Tiger)
April 10th, 2025