Remember VER? Go google. An entire generation of trade economists, trade policy makers, traders, business and political leaders has grown up without much knowledge of VERs. The prospect of another year of inordinately slow growth and high unemployment, imminent political defeat in congressional elections and declining popularity have all combined to encourage the Barack Obama administration in the United States to get some old-fashioned ammunition out of its trade policy warehouse.
Wikipedia has a mouthful on VERs: “A voluntary export restraint (VER) or voluntary export restriction is a government imposed limit on the quantity of goods that can be exported out of a country during a specified period of time. Typically VERs arise when the import-competing industries seek protection from a surge of imports from particular exporting countries. VERs are then offered by the exporter to appease the importing country and to deter the other party from imposing even more explicit (and less flexible) trade barriers.”
VERs were the product of what trade economist Jagdish Bhagwati dubbed as the American tradition of “reciprocitarianism”. In the 1980s their target was Japan. Today it is China. The US House of Representatives passed the Murphy-Ryan Bill, dubbed the Currency Reform for Fair Trade Act, 348 to 79. The act permits the US government to impose countervailing duties on imports from China and recalls to mind the famous Omnibus Foreign Trade and Competitiveness Act of 1988 that was aimed against Japanese imports.
Even as US Treasury Secretary Timothy Geithner refuted charges that the US had launched a “trade war” against China, the mass circulating American newspaper USA Today ran an opinion piece by Richard Trumka that began “We’re in a trade war with China, and we’re losing. For the first time, a majority of Americans agree that ‘free trade’ hurts the United States. The facts back that opinion up, particularly in regards to China. It’s time for action.” USA Today went on to give its opinion: “China is making a trade war inevitable.” Interestingly, the rising temperatures on the US-China trade front contrast with a more conciliatory tone adopted towards India. Even though the Indian software industry and the Indian commerce ministry went ballistic on the Ohio outsourcing ban and the Obama administration’s attempt to curb outsourcing in government procurement, the US Senate in fact did India a favour last week voting out a national legislation, 53-45.
That is significant. In the same week that US lawmakers voted in favour of a Bill that would hurt China, they also voted against a bill that would have hurt India. This should form a helpful backdrop for President Obama’s visit to India.
Both the Asian economies enjoy a trade surplus with the US, but the size of China’s surplus and its mercantilist trade policy, along with the imbalance in the US-China economic equation have made China the favourite whipping boy of US politicians. Much of the rhetoric against China today is very similar to the VER rhetoric against Japan in the 1980s.
However, India cannot sit on its haunches and expect that the threat of protectionism will simply disappear. At a time when India’s trade deficit is on the rise and exports are not doing too well, India needs both a strategy and the markets for reversing this trend.
Given the mood of protectionism in the West, India cannot realistically expect to export more to countries with which it enjoys a trade surplus. This means India has to perforce seek a bigger share of the markets of countries with which it has a trade deficit. China is the most important of such markets.
This suggests that India and the US have to be on the same side of the debate on Chinese mercantilism. India does not have the clout that the US has in imposing VERs on China. But it can come forward with policy options that reduce China’s trade surplus. One such option is for China to invest in Indian manufacturing, producing in India the goods that it presently imports. This would imply a sharp rise in import-substituting foreign direct investment (FDI) from China. India would need a policy framework that would enable this.
Attracting more long-term FDI is a better option for India than the recent trend of being an attractive destination for short-term flows. India must in fact consider putting in place disincentives for short-term capital inflows and incentivise long-term inflows. The Indian model, for a variety of fairly well- known reasons, has been just the opposite. It now appears, as global growth remains sluggish and there are just not enough attractive short-term investment opportunities in equity markets around the world, that India must sooner rather than later consider such options.
While India’s software exporters have secured a breather from US lawmakers, India’s merchandise exporters must remain wary of American reciprocitarianism. One way of dealing with such pressures would in fact be to further liberalise India’s FDI regime.
The recent mess-up with procedures for foreign investment in India’s civil nuclear energy development shows that policy makers need to be more careful in dealing with procedures and policies. While India has so far resisted opening up the defence sector to FDI this is in fact one area in which India would benefit from more import-substituting FDI, especially at a time when India’s defence budget is on the rise.
It makes little sense for India to be spending billions of dollars importing defence equipment into India and not allowing the foreign firms that sell such finished equipment to in fact manufacture their products in India. There can be only one reason for this stilted policy. Politicians and middlemen get kickbacks on imports, that too stashed away in offshore banks, while such cuts in domestic procurement are more difficult to organise and account.
