A well-calibrated Foreign Trade Policy is key to helping import competing industries. Higher import tariffs will hurt exports
An overarching goal of the forthcoming national Foreign Trade Policy (FTP) will be to turn trade into an engine of economic growth that is also sustainable. Trade induced economic growth occurs through different channels including trading greater volumes and products of higher value.
The growth sustainability challenge refers to cost competitiveness in maintaining a global presence, and the environmental implications which involve the use of greener technology that is generally costlier. Cost competitiveness translates to lower input costs on account of labour, material, machines, infrastructure and logistics.
Both growth and sustainability, in turn, have employment implications. For instance, greater exports will support employment, while the use of modern production techniques to save on the rising labour costs can impact adversely. Thus, trade policy is often evaluated for its employment impact. However, tweaking FTP for an employment outcome can be counterproductive in the long run.
Impact on jobs
Often a liberal import policy is criticised for its employment displacing effect. This simplistic view is misleading and fails to consider the full range of factors through which exports and imports can affect employment. The overall effect of trade on employment is what matters in the end. Imports are considered as a leakage in the circular flow of income within the domestic economy and hence expected to reduce employment. A thorough and deeper understanding is necessary.
The available estimates based on Input-Output analysis confirm the positive effect of exports and negative effect of imports on employment. The net trade generated an employment surplus of 2.3 per cent of total employment, during 1993-94, a period closely reflecting the pre-liberalised economy. By the end of the following two decades, this transformed into an employment deficit of (-) 1.5 per cent from net trade; trade flows being measured at the prices prevailing during the pre-liberalised period (to account for inflation).
It is relevant here to note that the employment effects are a composite of direct employment and indirect employment (generated within the upstream suppliers), with the latter being more significant. Prior to the trade liberalisation, an indirect employment–to–direct employment ratio of 1.08 was registered for exports, signifying that the indirect employment effects of export were greater and the exports benefit other producing sectors through employment support.
Over the following two decades, the ratio increased to 1.4, emphasising the indirect employment potential of exports, which was 40 per cent more than the direct employment. With regard to imports, the indirect employment foregone therein other sectors of the economy has been comparably high at 1.73 times the direct employment during the pre-liberalisation period. The ratio increased further to 1.94 indicating that the indirect employment foregone has been nearly double the (direct) employment foregone due to imports.
However, the static linkages are just one of the several channels through which exports and imports can affect employment. Policy prescriptions should be based on an understanding of the full range of the channels through which trade can affect employment.
While the direct and static effect may well be negative, imports can positively contribute to employment growth through a number of indirect and dynamic channels. In general, in a world of global value chains (GVCs), export growth is found to be complementary with import growth. Further, imports of intermediate and capital goods are an important channel through which domestic firms can acquire the benefits of foreign technology, and improve their efficiency and competitiveness.
Boosting domestic competition
In fact, import liberalisation is often used to strengthen domestic competition, which ultimately benefits the consumer through lower prices. Greater competitive pressure from imports as well the access to better quality intermediate inputs would exert a positive influence on the productivity levels of domestic firms, which, in turn, would lead to higher production, export and employment growth. Lower tariffs on intermediate inputs would also encourage MNCs to undertake export promoting investments in the country and domestic industries to participate in GVCs. Greater participation in GVCs in turn would lead to higher exports and employment.
In short, under a dynamic setting, not only exports but also imports help output and employment growth through channels such as learning from exporting, exploitation of economies of scale, knowledge spill-overs from foreign market participation etc.
Keeping the dynamic gains from trade liberalisation aside, and considering just the static perspective, a high volume of exports can still more than offset the employment foregone due to imports. The relative (high) employment intensity of exports further underscores their role in employment generation and hence the continued impetus on export promotion is necessary.
On the import front, the increasing employment forgone, as also through its stronger indirect impact should not be interpreted to advocate for (continued or higher) import protection. Past experiences have shown that import protection through a trade policy, without an industrial policy in place, can be only a temporary guard against unemployment.
Although raising tariffs can be a source of interim employment relief, an industrial policy must be used simultaneously to strengthen the domestic industry. It needs to be unmistakably recognised that employment forgone from imports is due to the inability of domestic producer to compete. And, eternally higher tariffs are not a solution.
In fact, resisting imports without a domestic competence can be a severe restraint as observed in the post-Covid period where many domestic industries, such as tyres and pharmaceuticals, suffered either from limited or costlier supplies, when the Chinese imports were opposed. Therefore, the domestic industry must be brought on a strong footing; which cannot be expected through raising the tariffs alone.
The experience of Indian economy is found in contrast to the experience of smaller economies such a Vietnam where employment in both exporting and importing sectors increased under conditions of increasing liberalisation and greater competition. So catching-up on the exports under an import-constraining regime will not be an effective mechanism to achieve Atmanirbharta. In fact, import competing industries should be supported through a policy to improve their competitiveness comparable with international standards. Raising tariffs will impact the export(ers), eventually hurting export-supported employment.