The Hill op-ed: India's Problematic Protectionist Plan

Tom Gavin, ITI photo

Starting Wednesday, the U.S. will host the third U.S.-India Strategic Dialogue, with economic issues front and center in the discussions.  We expect that one of the trade issues that will come up is the Indian government’s preferential market access (PMA) mandate for electronic goods.  It's a policy that could severely hurt trade between the two countries, especially in the technology arena.

As the two sides come together, ITI's Dean Garfield, in an op-ed for The Hill, looks at what the stakes for the U.S.-India trade relationship and the danger that the Indian PMA poses for global trade.  

Smart policy and the removal of economic barriers have driven the amazing development of the Indian economy over the past few decades. Yet, today, that progress is threatened by new obstacles being erected by the Indian government – obstacles that could, ironically, isolate India from the benefits of participating in the global market. If left unchecked, other nations could mimic the Indian approach, injecting even more uncertainty into the fragile calculus of the global economy.

Despite its obvious domestic political lure, India’s plan to provide preferential market access (PMA) for home-grown information and communications technologies (ICT) is concerning. While growing jobs and improving security are legitimate objectives of all governments, India’s PMA approach would hinder imports of the innovative technologies that have proven essential to the growth of its ICT sector and intrinsic to helping its citizens and businesses benefit from this high-tech century. 

Specifically, the PMA regulations would provide government procurement preferences to domestically manufactured electronic goods. Alarmingly, India threatens to apply the requirements to private-sector companies licensed by the government. These requirements would limit the ability of the Indian government and private industries alike to access the world’s most innovative technologies by forcing them to choose from a limited pool of approved ICT products.

The PMA is certain to further jeopardize investment in India’s ICT sector. Indian software and services industries have become models of success largely through open market policies; yet the country’s trade in advanced technologies is only a fraction of what it could be. That potential will never be realized if India isolates itself through policies that frustrate foreign investment and products in the Indian economy.

Already, India’s reputation as a destination for foreign direct investment (FDI) has suffered. FDI levels have been falling, contributing to slower economic growth and an increasingly unpredictable regulatory environment. Morgan Stanley, Goldman Sachs, StanChart, Citi, HSBC, and other global banks have lowered their growth forecasts for India, with experts predicting another drop in FDI this year.  A recent Nomura report found that, in 2011, multinational companies pulled $10.7 billion out of India – 48.6 percent more than they withdrew in 2010. The reason: the high cost of doing business and regulatory uncertainty.

Despite these warning signs, other nations are being tempted to implement their own versions of PMA. Most recently, Nigeria announced a similar ban on imported computers and technology products for use in public institutions in order to promote in-country products.  Brazil has signaled its intention to follow suit through a spectrum auction loaded with local content requirements. If left unchecked, this trend could lead to a fragmented, chaotic global trading regime more representative of a stagnant, old-world barter system than a dynamic, globally interconnected 21st century marketplace.

To promote global competition and economic growth, nations participating in the World Trade Organization (WTO) crafted rules under which key aspects of India’s PMA likely would be prohibited. Specifically, the General Agreement on Tariffs and Trade prohibits member nations from discriminating against foreign competitors by forcing private sector companies into “buy-local” contracts with domestic suppliers.

For the past two decades, India has created an economy that promotes investment and innovation by breaking down market barriers. India’s success is proof positive that creeping protectionist schemes like PMA don’t work. At best, isolation sacrifices growth in the name of preservation. Isolation ignores innovation, freezes opportunity, and drives a stake through the heart of economic growth. It is a lesson that can be taught more quickly if global trade laws are enforced and if multinational corporations are prepared to use the power of their investments to drive better policy. Otherwise, more countries will pursue the short-term lure of these protectionist policies.

To counter the PMA, the U.S. government must intensify bilateral efforts with India, with a focus on market access. The upcoming U.S.-India Strategic Dialogue provides American leaders a key opportunity to speak out against wrong-headed trade practices. The U.S. should remind the Indian leadership that our bilateral trade relationship has been mutually beneficial when economic barriers are removed. This new form of protectionism must be met with firm resolve to defend transparent, market-based trade rules and practices.

An old proverb says that wisdom made its home in India before any other nation.  Let us hope the Government of India has the wisdom to return to the market-based formula that has been the source of economic success -- for the Indian economy, the Indian people, the United States, and the rest of the world.

This article first appeared on The Hill on 6/12/2012 at 4:01 p.m. ET.

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