Why WTO ruling against India's solar cell mission is hypocritical

The World Trade Organization (WTO) had ruled against India's policy of "protecting" its domestic solar cell manufacturing industry by imposing a "domestic content requirement" for solar cells and modules for the Jawaharlal Nehru Solar Mission. Recently, it has been reported that India's appeal against the ruling has been turned down by the WTO's appellate body.

It is ironic that the protection of an "infant industry" has been objected to by US manufacturers when the whole philosophy of protecting "infant industries" from international competition, and allowing them to grow until they can compete on equal terms in the international arena, was a US creation. Alexander Hamilton, secretary of the treasury of the USA (1789-95) was the originator of the notion of the urgent need for protecting "infant" US industry from developed - primarily European - manufacturers and thus enabling a strong industrial base to emerge in what was then a newly-independent nation with a "developing" economy.

The United States of America took time after independence to implement the "infant industry" protection, but from the early 19th century till about World War II, the US deployed very significant and effective protectionist measures to help its fledgling industries to grow. Between 1820 and 1931, average tariff rates on manufactured products ranged between 40-48 per cent (weighted average, as percentage of value), which combined with the relatively high cost of transporting goods to the USA-ensured effective protection for its infant industries. (Source: Ha-Joon Chang's Kicking away the ladder; development strategy in historical perspective).

The US has also aggressively protected and subsidised its agriculture, imposed quotas on textiles and anti-dumping duties on errant exporters. In the larger context of the much-touted "free markets and minimal government" philosophy, it is useful to remember that huge defence-related procurements and heavy funding for research and development are a huge boost for industry. As reported by the US pharma industry association, about 43 per cent of pharmaceutical R&D is funded by industry, while 29 per cent  is funded by the US government's National Institutes of Health (Source: Ha-Joon Chang's Kicking away the ladder; development strategy in historical perspective).

One objection to this lesson from history can be that, in the past, many inappropriate and morally-reprehensible policies were followed by all societies and it is right that we should not repeat such policies now. This is acceptable when applied to issues like slavery and drug peddling, which made the now-sanctimonious West very rich indeed, but are in absolute terms immoral and inhuman, and must not be imitated. However, the argument does not apply to measures like protection through tariffs or other means. The developed West, not just the USA, protected their industries in various ways when they needed them to grow; and once they became strong and dominant and needed world markets for sustained growth, protection was abandoned and "free trade" became the ruling mantra.

Another argument, relevant in the Indian context, is that a protected environment, coupled with barriers to entry, promotes crony capitalism and the subsequent rent seeking - best illustrated by the Ambassador car in India. Protection can ensure near monopoly markets for products that are technologically way behind the times - more or less obsolete in the developed world resulting in their technology being made available very cheaply - and which witness virtually no serious technological advancement over the years.

The answer is that protected industries have to be monitored closely and constant technical growth ensured. Monopoly rent-seeking can, in large economies like India, be discouraged by removing barriers to entry in domestic manufacturing and thereby encouraging local competition. In any case, this is a potential problem to be solved when and if it arises, and does not justify the removal of tariff or other protection for, and active encouragement of, domestic manufacturers important for our growth.

The need for proactive state intervention in the economy to promote development is a given and does not require any justification. However, this does not have to be confined to public goods-centric education, health, transport infrastructure and the like. Whichever industries are critical for our long-term development must be encouraged in whatever way works best. No self-serving rules made by those who have broken every rule, of both humanity and fair commercial dealing, in the past should be allowed to come in the way. We must not forget that, in 1700, the import of "calicoes"-superior cotton products - from India was banned to protect the English cotton textile industry and when the English industry grew to world dominance, no import tariffs on cotton goods from the UK were permitted even to the British colonial government in India till 1917.

If there is one lesson to be learnt from history, it is that national self-interest is the only appropriate guiding principle in matters economic and commercial. Free trade is not part of God's Law and never has been. "Comparative advantage" is not fixed - it can change as many developed economies in the world have shown. Yesterday's exporter of cheap agricultural products can become an industrial powerhouse over a couple of generations.

Dynamic private entrepreneurship combined with active and appropriate state encouragement can and has worked wonders.And the Devil take the hindmost!