Trade wars and chocolate bars, what India of the 1970s can teach Trump

Time of India

7 days ago

Cooking, and eating, are often on Abhijit Banerjee's mind. But for the Nobel-winning economist, what starts with planning the night's dinner usually ends up in questions about the consumption, production, distribution of food, and their intimate relation to the broader economic issues of our times. His new monthly column for The Sunday Times, is about eating and thinking, about pleasure and responsibility, about global food and the Indian palate. Illustrated by Cheyenne Olivier, it offers recipes for life and lunch LESS ... MORE
One advantage/disadvantage of being old is that I lived through what is history to so many others. President Trump adores William McKinley, the 25th US president, for his tariffs, but at 78, he is way too young to have lived behind a properly high tariff wall. I, on the other hand, lived in the India of the 1970s, when we had managed to kill almost all international trade through a combination of tariffs and other rules for importing (non-tariff barriers in trade parlance).
I mostly experienced trade barriers through the important lens of chocolate. India, for reasons I do not claim to understand, did not grow much cocoa in those days, despite having many areas that seem suitable for that crop based on where else it grows. So, all the cocoa was imported and the exorbitant duties made it expensive. To keep the chocolate affordable for ordinary middle-class kids like me, Cadbury's used minimal amounts of cocoa.
Illustration credit: Cheyenne Olivier (France)
The net result was something milky and intensely sweet, not unlike most Indian confections, but chocolate mostly only in name. The trouble was that I had tasted the real deal, courtesy some of my parents' kind friends who either lived abroad or had gone on a visit. And it tasted very different — there was a bitterness and depth to them that was unmistakable.
On our occasional trip to Kolkata's crumbling 'New Market', or to movie theaters in its vicinity, I would notice men in tight pants who were clearly trying to attract my mother's attention (and failing). Fairly soon, I figured out that they were selling various smuggled items, mostly watches, perfumes and CHOCOLATE. I could see from the print on the wrapper that though it said Cadbury's, this was a different breed. My instincts told me that my mother would not take kindly to the idea of buying contraband Cadbury's, but it was hard to shake off the desire to try it out.
As I grew into teenage, my understanding of the gains from trade became less one-dimensional. For one, I was more aware of how people around me dressed, and it became clear that there were jeans and jeans. Those that flopped a bit, like mine, and the ones exuded a steely foreign firmness. I remember admiring the new pair that a neighbour was wearing and his telling me, very proudly, 'impotted', which to me sounded like impotent. I started giggling, at which point he got very huffy and commented on my apparent tendency to be jealous, which to be fair, I was a bit. All that has changed now. According to some industry estimates, India is the third largest exporter of denim in the world. Unfortunately, we still don't have our global brand of jeans, but there is no doubt about the quality of the denim. For one, I am biased but I think my friend Suket Dhir makes some of the most stylish denim products I see anywhere.
There are two more or less standard theories of what changed. One that we heard a lot in India before the opening of the economy in 1991 is that we need the pressure from imports to force our producers to get to global quality. My colleague David Atkins, with Amit Khandelwal from Columbia University and Adam Osman from the University of Illinois, participated in a randomised experiment in which some carpet manufacturers in Egypt that had previously produced only for the domestic market, were connected to potential importers abroad. It took some time for them to get going, but eventually, they started exporting and making more money, and perhaps more interestingly, weaving higher-quality carpets in the same amount of time. The authors called this learning-by-exporting.
The alternative view is sometimes described, confusingly, as learning-by-doing. It is better described as learning-by-not-importing. The idea is that it takes some time to learn how to produce quality, and if you are new to the business, there is an apprenticeship period where the competition from abroad might make it impossible to sell profitably. Knowing that they are in for a prolonged period of loss before things turn around, firms may not take on certain products that would otherwise be natural for their country to produce.
This argues for temporarily shielding domestic firms from foreign competition to allow them to find their feet. The idea goes back at least to Alexander Hamilton, author of the Federalist papers and now a subject of a great musical, and is often referred to as the 'infant industry argument'.
A recent paper in the American Economic Review by Reka Juhasz finds support for this theory in France during the Napoleonic wars. Before the war, France was slow to adopt mechanised cotton spinning technology developed in Britain. Instead, they imported British cotton yarn. A war-time blockade of British manufacturers changed that, especially in the north of France. This was where trade was particularly effectively blocked, unlike in the south, where exports from Britain continued to seep in. Juhasz shows that this difference in access to British cotton leads to an interesting reversal. The south, the part of France which had more mechanised spinning before the war, fell behind the north during the blockade. After the war ended and trade resumed, the north kept its lead and managed to compete successfully with the cotton from across the Channel. The infant industry grew up. It didn't need protection anymore.
The timing of take-off in the Indian denim industry is consistent with a learning-by-exporting view, since it mostly happened after liberalisation in 1991. However, given that the industry actually started in the 1980s behind the tariff wall, it is possible to argue that the trade barriers helped the infant industry to get prepared to meet global competition. The take-off still happened after the economy opened up, perhaps because importing the machines and other inputs for making denim became much easier after 1991.
I remember working with locally available inputs in the 1970s, the goal in my case being to replicate the Black Forest cake that I had loved at the then-famous Kolkata restaurant called Skyroom. I had my prized can of Himachali cherries for the filling, but the chocolate batter made from several slabs of domestic chocolate refused to look anything like the rich brown viscous liquid that they showed in the photo, and I eventually gave up. Perhaps it was a bit the same for the denim-makers.
Whether it is helping the exporters or stopping the imports, the intervention is meant to be temporary, just long enough that the industry can get going. The traditional position of economists is that if a country needs permanent refuge behind a high tariff wall to keep a particular sector going, it is probably better to shut down and focus on whatever the country is good at. Exports of successful products can pay for the imports of the ones that don't do well.
Politicians, including President Trump, often have a very different view on this. The problem is that trade has winners and losers, and they are not the same people. In the US, the big winners are relatively well-educated people who live on the coast; the losers are less educated residents of the middle of the country. The winners win more than the losers lose, economists would say, so why not tax the former to compensate the latter? The catch is that the US, unlike many European countries, has no tradition of large-scale redistribution through taxes and transfers. Instead, Trump wants to permanently block the imports of a wide range of products in the hope that it 'reshores' the industries that were lost due to trade and brings back the associated jobs to the mid-Western workers.
At one level, this is not very different from what we do in India to protect the livelihoods of farmers: we have essentially permanent tariffs of 35% or more on things like corn, which is what annoys the US. At another level, however, it is vastly more audacious. We are merely trying to keep the farmers in business: Trump wants firms to start new businesses, businesses that have been gone for a generation or more, and create jobs. They will need fresh, large investments and newly trained workers. Buyers will need to be willing to pay the premium and swallow the lowered quality, like we did in India in my youth. Retailers will need to not look for alternatives, if not from China, from Brazil or Rwanda. Managers will need to hire workers rather than deploy robots to do all the work. The investors will need to believe that this new regime will last, and they won't fall victim to some new deal that the President (or the next President) likes better.
The reshoring probably won't happen. But in its name, the world economy is being upended; no one knows where it will land. In the meanwhile, I remain on the lookout for shifty men on Boston streets selling illicit bags of the wonderful Chinese black walnuts and sweet salty candied plums.
This is part of a monthly column by Nobel-winning economist Abhijit Banerjee
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Views expressed above are the author's own.