India has the third highest tariff rate among major countries. Iran and Venezuela are the other major countries with higher tariffs than India. According to the World Bank, India imposes a weighted average tariff rate of 11.5%. In comparison, China has a tariff of 3%, Pakistan has a tariff of 8%, Vietnam has a tariff of 1%, and Sri Lanka has a tariff of 4.4%. The countries in the European Union have a tariff of 1.3%. Australia has a tariff of 1%. The US has a tariff of 1.5%.
Tariffs make imported goods expensive and force citizens to pay higher prices for low-quality local goods. For example, in India, laptops are 30% more expensive than in the United States. An average American is 33 times richer than an average Indian ($82,000 versus $2,500 GDP per capita). Coupled with this growing income disparity, such a steep price differential hampers skill development among youth.
It’s been a fear for centuries that foreign competition threatens local industry and employment. In 1845, Frederic Bastiat petitioned the French government to protect the domestic candle manufacturing industry from foreign competition – the sun. Bastiat argued that the sun lights up people’s homes for free and reduces the candle demand. If the government could enact trade barriers such as prohibiting windows and blocking the sun, people would be forced to purchase candles. Hence, protecting the domestic industry from foreign competition will increase demand, employment, and GDP.
While Bastiat wrote a satire, a prominent labour union in the United States actually filed a grievance against goats in 2017. Western Michigan University had replaced the union members with goats to clear vegetation and landscape their campus. However, the labour union argued that the use of goats cost them their jobs and threatened their livelihoods.
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In a free world, people are paid somewhat proportionate to the value they add. Should we support policies that block the sun or bar the goats from grazing so people can have jobs even if these jobs add no value? Trade barriers such as tariffs do not contribute to human prosperity. They may generate employment in the short run but lead to long-term economic stagnation and decline.
In reality, tariffs facilitate a transfer of resources from domestic consumers to affluent domestic industrialists. Tariffs safeguard the interests of domestic industrialists at the expense of common citizens. After the 1991 economic reforms, several business houses floundered in the face of foreign competition. The presence of tariffs eliminates competition for domestic industry and disincentivizes them from improving quality and reducing prices. Protected by tariffs, domestic industrialists use their resources to lobby with politicians rather than investing in research to increase competitiveness.
Tariffs exist because domestic big businesses lobby for them. George Stigler (1982 Nobel Prize recipient in Economics) pointed out that big companies capture regulation at the expense of consumers. It is easier and more lucrative for a few big business houses to unite as an interest group and lobby for a favourable policy (such as tariffs). They face lower costs of coming together and a limited free rider problem. Further, the benefits are also concentrated. In contrast to big businesses, it is costly and difficult for millions of consumers to unite against unfair tariffs. The price increase due to tariffs is not enough to motivate them to skip their jobs or businesses to oppose the policy.
For example, while the United States imposes zero taxes on Indian drugs, India poses a 10% tax on US-made drugs. A 10% tax on imported drugs benefits a few pharmaceutical firms and hurts millions of Indian consumers. However, while the benefits accrue to a few pharma firms, the costs are distributed among millions of consumers. Hence, people are unlikely to protest as it is rational for individuals to accept unfair tariffs.
India has been lowering tariffs since 1991. However, tariffs have increased in the last 10 years. In 1991, India’s tariff rate on imports was 56.4%. India gradually lowered its tariffs to 26.5% in 2001. By 2015, India lowered the tariffs further to 7.3%. However, as per WTO estimates, the tariff rate had increased to 11.5% in 2022.
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In addition to increasing tariffs, India has increased non-tariff barriers to support organised producers. According to the United Nations Conference on Trade and Development (UNCTAD), India has increased the number of Non-tariff Measures (NTMs) against imports from 389 in 2012 to 582 in 2022. To make matters worse, India has increased the Frequency Ratio (the percent of imported products subject to NTMs) from 31.2% in 2010 to about 47%. It has also increased the Coverage Ratio (the percent of import value subject to non-tariff measures) from 42.5% in 2010 to 69%. Such measures have benefitted the organised producers at the cost of unorganised consumers.
When India lowered tariffs in 1991, productivity, employment, and GDP growth increased. High-value jobs replaced the existing jobs. Several domestic firms became key players in global markets. Citizens were able to buy high-quality goods at lower prices. Therefore, India should lower its tariffs in response to US President Donald Trump’s threat of reciprocal tariffs. A stronger trade relationship between India and the United States will translate into an improved geo-political partnership between the two countries. Low import tariffs will benefit firms that manufacture exports as imported goods are used to manufacture exports. This may create short-term temporary job losses but will lead to long-term high-value employment and prosperity.
Ghanshyam Sharma is associate professor of Economics in RV University.
