Interpreting the US trade deal

Focus on the gains from import liberalisation

- AJAY SHAH

The trade agreement between India and the United States (US) has generated political criticism in this country. It is said that there is a “wholesale surrender” of the national interest. Farmers have organised protests. Security experts warn that India is relinquishing strategic autonomy by stopping Russian oil purchases.

The mercantilist view — that exports are the prize and imports are the price we pay — is economically flawed. At a fundamental level the prize in international trade is (a) imports (things that we get to buy from abroad) and (b) Indian firm productivity and economic growth. The value of each trade agreement is measured by reduction in Indian trade barriers.

High tariffs on intermediate goods and machinery increase the cost of production for Indian firms. By protecting inefficient domestic sectors, we implicitly tax the efficient ones. The narrative that liberalisation is a “surrender” assumes that the status quo was optimal. It was not. The status quo was a high-cost, low-competitiveness equilibrium that hindered India’s integration into global supply chains and thus Indian economic growth. The commitment to eliminate or reduce tariffs on all US industrial goods is a productivity shock. When Indian manufacturers can import high-tech machinery, intermediate inputs, and components from the US without the friction of prohibitive duties, their landed costs decrease.

Economists have a sweet phrase “the Lerner Symmetry Theorem” — a tax on imports is effectively a tax on exports. By lowering import barriers, we are improving the competitiveness of Indian exporters. We trigger a shift in the allocation of Indian labour and capital away from uncompetitive sectors and into the ones that India is really good at, which generates growth in gross domestic product (GDP).