Emerging Economies in a Protectionist World

As global trade tensions escalate and automation reshapes manufacturing, emerging economies are facing a critical juncture in their development. The model of export-driven manufacturing growth, which propelled nations like China into the middle-income category, is increasingly hindered by protectionist measures in developed nations. India, despite its growing prominence in services exports and economic progress, must address challenges such as human capital development, infrastructure gaps, and economic inclusivity to sustain growth in a protectionist environment.

Factors Fueling Protectionism in Global Trade

1. Economic Nationalism and Deindustrialization: Economic nationalism, driven by the loss of manufacturing jobs in advanced economies, is prompting protectionist policies to revive domestic industries. For instance, the U.S.'s Inflation Reduction Act (2022) prioritizes local green technology production, and the EU’s Critical Raw Materials Act (2023) seeks to reduce dependence on imports for clean energy.
2. Geopolitical Tensions and Economic Decoupling: Rising tensions between global powers like the U.S. and China have led to economic decoupling. For example, the U.S. imposed restrictions on China’s access to semiconductor technologies in 2023, and China retaliated by limiting exports of essential materials like gallium and germanium, disrupting supply chains.
3. Pandemic-Driven Supply Chain Weaknesses: The COVID-19 pandemic highlighted the vulnerabilities in global supply chains, with countries increasingly focusing on localizing production for essential goods. India, for instance, temporarily restricted the export of ventilators in 2020. The World Trade Organization reported a 5.3% decline in global trade in 2020, exposing the fragility of international trade systems.
4. Inequality and Populism: Economic disparities within and between nations are stoking populist movements that call for protectionist measures to safeguard domestic jobs. Brexit (2016) is a prominent example, where trade policies were blamed for job losses in manufacturing sectors, fueling populist demands for trade barriers.
5. Environmental Protectionism: Nations are using environmental concerns as a basis for protectionism. The EU’s Carbon Border Adjustment Mechanism (CBAM) (2023) imposes tariffs on imports from countries with higher carbon footprints, affecting exports from developing nations like India. As global emissions rise, environmental tariffs are becoming increasingly common.
6. Technological Protectionism: The race for technological supremacy has led to digital protectionism, with restrictions on data flows and intellectual property. India’s 2022 data localization rules, which require companies like Google and Amazon to store data domestically, exemplify this trend.
7. Agricultural Protectionism: Agricultural subsidies and tariffs are also used to shield domestic farming sectors from global competition. For instance, the U.S. Farm Act (2018) allocated substantial subsidies for U.S. farmers, while India invoked the peace clause at the WTO to protect rice subsidies in 2024.
8. Inflation and Economic Instability: Rising inflation has led many nations to implement export bans and import restrictions to stabilize domestic markets. Indonesia’s 2022 ban on palm oil exports, for example, caused a sharp increase in cooking oil prices, affecting countries like India.
9. Declining Multilateralism: The weakening of global trade institutions like the WTO has prompted nations to increasingly resort to unilateral trade actions. The WTO’s Appellate Body has been non-functional since 2019 due to U.S. opposition, further encouraging bilateral trade agreements and protectionist policies.
10. Domestic Political Pressures: Political leaders often implement protectionist measures to appease domestic voters, especially ahead of elections. In the U.S., the 2024 presidential race saw both major parties calling for stricter tariffs, demonstrating a bipartisan shift towards protectionism.

Implications of Protectionism for India

1. Challenges to Export Competitiveness: Protectionist barriers in developed markets limit India’s ability to access global markets, undermining its export competitiveness in sectors like textiles and clean energy. Reports show that India’s merchandise exports dropped by 5% in 2023, with key sectors such as textiles facing difficulties.
2. Supply Chain Disruptions: Protectionist policies disrupt India’s integration into global supply chains, raising costs for critical imports like semiconductors. The U.S.-China semiconductor dispute, for example, impacted India’s electronics and EV industries, affecting its $10 billion semiconductor mission.
3. Impact on MSMEs: Protectionist measures in developed markets reduce demand for products from India’s Micro, Small, and Medium Enterprises (MSMEs). The Carbon Border Adjustment Mechanism (CBAM) is expected to severely affect India’s steel and cement industries, imposing tariffs on exports to the EU.
4. Inflationary Pressures: Import restrictions push up the cost of essential goods, exacerbating inflation. Indonesia’s export ban on palm oil in 2022 made refined palm oil 27% more expensive in India, and similar restrictions on fertilizer exports by Russia and Belarus increased costs for Indian farmers.
5. Decline in FDI: The rise of protectionism reduces investor confidence, leading to a decrease in Foreign Direct Investment (FDI) inflows. In 2023, FDI to India dropped by 43%, and foreign institutional investors withdrew nearly $10 billion from the Indian stock market, reflecting global uncertainty.
6. Focus on Trade Disputes: As protectionism grows, India is forced to dedicate more resources to resolving trade disputes rather than forming new trade alliances. For example, India has sought arbitration under WTO rules against Australia over issues related to the services sector.

Is Atmanirbhar Bharat Protectionism?
While Atmanirbhar Bharat, India’s initiative for self-reliance, has led to some protectionist measures, such as increased tariffs on imports and the Promotion of Domestic Industry through the Production-Linked Incentive (PLI) Scheme, it is not purely protectionist. The initiative aims to strengthen India’s global competitiveness, especially in sectors like electronics, pharmaceuticals, and semiconductors. India’s participation in trade agreements with countries like Australia, the UAE, and the UK shows that Atmanirbhar Bharat is more about strategic resilience and selective liberalization than isolation.

Balancing Protectionism with Globalization: Measures for India

1. Strengthen Strategic Trade Partnerships: India can balance protectionism by negotiating Free Trade Agreements (FTAs) that offer mutual benefits. The India-Australia Economic Cooperation and Trade Agreement (ECTA, 2022) is an example, where sectors like textiles benefit from tariff reductions while sensitive industries remain protected.
2. Promote Selective Liberalization: India should liberalize sectors where it enhances competitiveness while shielding nascent industries. For example, the PLI scheme, coupled with reduced tariffs on components for electronics and electric vehicles (EVs), can integrate India into global value chains.
3. Build Resilient Supply Chains: India must diversify its supply chains to avoid over-reliance on any single nation. Expanding the “China+1” strategy to other critical sectors like pharmaceuticals and renewable energy will reduce risks and enhance resilience.
4. Enhance Multilateral Engagement: India should actively participate in reforms of multilateral institutions like the WTO, advocating for fair trade practices and dispute resolution mechanisms to ensure a level playing field.
5. Invest in Domestic Infrastructure: Strengthening infrastructure, logistics, and innovation ecosystems is essential to boost India’s global competitiveness. Initiatives like PM Gati Shakti aim to lower logistics costs, helping MSMEs and exporters compete globally without relying on protectionism.
6. Sector-Specific Safeguards: India should implement safeguards to protect vulnerable industries while promoting liberalization in other sectors. Anti-dumping duties, for example, can ensure fair competition in steel while encouraging liberalization in textiles.
7. Capitalize on Digital and Services Trade: India should leverage its strengths in digital services and IT to attract global collaborations and investments, fostering growth in high-value sectors.
8. Prioritize Skills for Global Competitiveness: Programs like Skill India must focus on advanced manufacturing and renewable energy, preparing India’s workforce for emerging industries and boosting FDI in high-tech sectors.
9. Foster Export-Oriented Ecosystems: India must create specialized zones and clusters to facilitate export-oriented industries while integrating with global value chains. Revamping the Special Economic Zones (SEZs) model can enable modern manufacturing and services growth.
10. Adopt Climate-Conscious Trade Policies: India should align trade policies with global sustainability trends to avoid backlash under environmental tariffs. By investing in renewable energy manufacturing and low-carbon certification for exports, India can maintain competitiveness in green markets.

Key Takeaways
Protectionism presents challenges for India, particularly in terms of export competitiveness, supply chain disruptions, and foreign investment. However, it also provides an opportunity for India to strategically navigate these complexities. Through initiatives like Atmanirbhar Bharat, India aims to strike a balance between self-reliance and global competitiveness. By pursuing selective liberalization, building resilient supply chains, enhancing multilateral engagement, and investing in infrastructure, India can thrive in an increasingly protectionist world.