Do not reduce the tariff without ensuring technology transfer
Low tariff is all good, but it's unfair with intellectual property rights. Developing countries needs a level playing that works for them.
The costs and consequences of tariffs, and protectionism
With lower tariffs, the quantity demanded will increase, and the price of the quantity (world price) will decrease. As a result, consumers benefit.
Now what about production? Well, the domestic producers can only charge as much as the world producers. They can't charge a higher price. So when the world price falls, when domestic consumers are able to buy at the world price, domestic producers can only sell at the world price, and they're going to be less willing to sell. So the domestic production will fall, domestic production will fall to this lower amount. At a lower price, the domestic suppliers are only willing to produce a less amount or lower amount.
With tariff, domestic consumption falls, the reason that reduces welfare is because there are lost gains from trade and I'll say more about that in a minute. Second, domestic production increases, you might think that's a good thing, except, however, we're going to have wasted resources because the domestic producers have higher costs than the world producers. On a net level there's going to be more resources going to production than are necessary, there's going to be wasted resources.
Tariffs are bad for consumers who have to pay more, they're good for domestic producers who get to expand production.
With lower tariffs, the quantity demanded will increase, and the price of the quantity (world price) will decrease. As a result, consumers benefit.
What India Imports?
Now, let's look at the things that India imports:
India's highest imports are liquid fossil fuels, electronics, and machinery.
India doesn't have fossil fuel or oil mines, so it can't produce them. I have already discussed why we need to reduce our dependency on fossil fuels and transition to renewable energy as soon as possible.
Next come electronics and machinery. This is where intellectual property rights matter. Without technology transfer, India cannot produce these products efficiently and therefore cannot compete globally. For example, building a semiconductor fabrication plant is extremely expensive, and intellectual property rights add an extra burden to the country.
Developed countries have a long history of exploiting developing countries in the name of intellectual property rights. This gives an unfair advantage to developed nations, and this must stop.
India needs to negotiate well.
Benefits of Trade
First, trade makes people better off when their preferences differ.
Second, trade increases productivity through specialization and the division of knowledge.
Third, trade increases productivity through specialization according to comparative advantage.
If I were to try to grow my own food and tailor my own clothes and have to make my own shoes, I'd be starving, ill clothed, and I wouldn't have very good shoes. I'd certainly wouldn't know much about economics. It simply is not possible for one person to know everything. It's not even possible for one person to know everything about a single topic.
Comparative Advantage
First, just by rearranging who does what, we can make more stuff through specialization in trade even if no one ever gets any better at doing any line of work.
Second, If you get better at doing something, that obviously benefits you, but it also benefits me even though my abilities to produce haven't changed at all.
Watch the video how it works:
The more different we are from each other, the more we benefit from trading with each other.
Will lowering tariffs harm farmers in India?
Who will make a sale with low tariffs? Anyone who sells at the global price will make a sale. India, with its low labor costs, has the potential to increase exports with lower tariffs, benefiting both farmers and companies. However, success depends on the level of specialization and government support for entrepreneurs through quality education. With the right policies, India can become a leading exporter, similar to China. Additionally, food prices in India are lower than global prices, meaning that if India sells at global rates, it can expand its exports. Therefore, lowering tariffs can be advantageous for farmers, enabling them to access international markets and boost their earnings.
Will we lose jobs through lower tariffs?
Let's consider trade and jobs. What happens when a tariff is lowered? Well, imports will increase, and there will be fewer jobs in the import competing industry. For example, if we have a tariff on shoes and we reduce the tariff, we'll have imports of more shoes from China and from Vietnam, and that will mean fewer jobs in the American shoe-producing industry. That's what people see when they think about reducing a tariff. They're worried about losing those jobs in the American industry.
However, we want to see the issue in a deeper way, in a more fundamental way, and a key question to ask is, "Why do people send us goods? Why would workers in China and Vietnam work long hours to send us shoes?" It's certainly not from the kindness of their heart. Ultimately, they want goods in return, goods or services. They are working -- they are producing in order to consume. They are sending us goods because they want goods in return. They are not doing it out of the goodness of their hearts, but out of self-interest as Adam Smith said.
And that leads to a fundamental insight about international trade.
Namely, we pay for our imports with exports. When we import more, we will ultimately export more because we pay for our imports through our exports.
What this means is that trade doesn't destroy jobs overall. Trade moves jobs from import-competing industries to export industries, and overall, wages increase on average because of comparative advantage. Because we pay for our imports with exports, when we import more, we will export more. Jobs will reduce in the import competing industries and increase in the export industries.