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Mangoes not Kiwis

Updated: Aug 24, 2021

“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy...What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom”.

Adam Smith

For many years now in India, several groups and governments have held a negative view of international trade. They have long argued that international trade would harm the local industries. We thus need to be cautious about free trade, due to the brutal impact of colonial policies on India’s local industry and the idea of Swadeshi-popularised during the Independence movement.

However, it ignores the fact that colonial trade was organised loot and legalised plunder. International trade is an entirely different dimension.

It is an instrument of economic growth and development that we have long tried to shy away from.

After Independence, the focus was on making India self-reliant and thus several protectionist measures were implemented which prohibited imports, the most important of which was the concept of import substitution. Recently, there has been a large campaign to promote import substitution and import restrictions.

Now, it is essential for every country to expand their industrial base and have a strong manufacturing sector in the country, but this does not mean that the country should produce everything and drastically reduce its imports. This theory of protectionism only leads to deterioration of economic growth in the long run; a classic example of this would be the economic condition of the erstwhile Soviet Union, mainly because it is impossible for a country to produce everything while also maintaining sufficient levels of efficiency and quality.

International trade allows for better allocation of resources and manpower which is extremely important in a country like India where we have a large population.

Adam Smith argued that countries that have an absolute advantage in the production of a commodity should produce that commodity and import commodities which they do not have an absolute advantage over. David Ricardo took it one step further and argued that even if a country has an absolute advantage over a commodity, it can still benefit from trade as the opportunity cost of production could vary in different countries.

It would be beneficial for all countries to produce commodities over which they have a comparative advantage in production. Therefore, a country like ours should produce more commodities like spices and mangoes, over which we obviously have an advantage in production due to our geographical and climatic conditions and import commodities like kiwis and avocados over which we do not have an advantage in production.

Now, one may argue that the price of locally produced commodities would be much cheaper than imported goods. However, this proves to be wrong when we look at the costs of certain commodities which were produced in India and the costs of the same commodities when produced abroad.

For example, the domestic cost of producing a refrigerator between 1962 and 1969 was 2250 INR; however, the same refrigerator when produced abroad cost just 900 INR.

The same holds true for a wide range of products during the period between 1962 and 1969 like sugar, Penicillin, DDT, engine oil etc. [1]

Thus, it is evident that importing these goods would have been much cheaper than trying to produce them at home.

The concept of import substitution therefore falters when we look at comparative costs and efficiency. The reason that the domestic cost of these products was so high was because we did not have a comparative advantage in the production of these goods in our country. The resources used to produce these goods could have been better utilised in the production of other commodities over which we have a comparative cost advantage. This, in turn, would have benefitted both our country and the exporting country as the prices would have been much lower.

It is important to note that international trade has several benefits for us.

It was recently decided that the defense sector would ban the import of around 100 defense related goods and technologies in a bid to boost the local industry.[2]

This, however, would be counterproductive in the long run because more resources would be used in producing these goods, rather than these resources going into sectors over which we have a comparative advantage, like the IT service industry due to the availability of cheap labor. Another case in example is the electronics Industry in India. The idea of import substitution was implemented on the industry in the year 2013-2014, and since then the export of electronic goods hasn’t increased much. It went up from 7.6 billion dollars in 2013-2014 to 8.9 billion dollars in 2018-2019.

A large number of local firms have come up, but none of them match global standards. It is very clear that we have a cost disadvantage here and it would be better if we import electronic goods.[3]

One single person cannot do everything and the same applies to a country, a single country cannot produce and manufacture everything and should therefore rely on imports.

This reduces the improper allocation of resources and increases efficiency and profits. A country should see no difference between the goods produced locally and goods produced abroad in a bid to have a robust free trade policy.

In the years to come, India must open up to more Free Trade Agreements and be willing to open up the economy to international trade, to result in a strong economy. The very fact that most of the major economies in the world are also economies that trade the most is proof enough that international trade is the way forward.

The US is the largest importer in the world.[4] This does not mean that they have a weak economy; on the flip side, they are the largest economy in the world in terms of GDP.[5] We need to, therefore, overcome our fear of imports.

Evidence has shown that countries like Singapore, which practice unilateral free trade, have also seen increased economic growth and development. Singapore has an average tariff rate of less than 1 percent and about 96 percent of the goods imported [6] are duty free. The country also has the fourth largest per capita GDP [7] in the world in terms of purchasing power parity; imports are not a barrier to its economic growth.

Trade barriers like import tariffs only do more harm than good and the final burden of these barriers eventually falls on the consumers.

Free Trade also promotes consumer choice as more firms would enter the market and reduces the risk of monopoly formation.

This would also ensure that quality standards are maintained (Just ask anyone about the quality of ball point pens in the country before 1991!)

Trade also promotes goodwill and international cooperation between countries and would result in a better social, political, and economic environment- the European Union is a great example of this.

The way forward for India, therefore, is not import substitution and self-reliance but international cooperation and a liberal trade policy.

And, we must do this not for any other reason but for the fact that it is the most ethical and moral thing to do and thus the most patriotic thing as well because the basis of free trade is not just utility but justice.

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