Donald Trump's America would look like India

By Michael Schuman|Bloomberg

Donald Trump may never have an opportunity to put his nationalist economic ideas into practice, but they are almost certain to outlive his campaign. Many workers have come to believe that free trade kills jobs and that they and the U.S. economy overall would be better off if more stuff was made at home rather than in China or Mexico.

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To a certain extent, factories are already moving home, as the trend of “reshoring” from places like China gains momentum. And on the surface, the make-it-in-America rationale seems to pass the common sense test. More manufacturing at home means more factory jobs for Americans and a smaller trade deficit with the world.

The trouble is, we already have a pretty good idea of what this America would look like. It would look like India.

I don’t mean today’s India, the world’s fastest-growing big economy, which has opened itself up to trade and foreign investment. I’m talking about the India I saw on my first trip there in 1991, after the country had endured years of socialist economic planning. The level of technology and consumer choice was appalling. Drivers still rumbled about city streets in clunky Ambassador sedans, based on a 1950s-era car model. Customers had to wait months for big-ticket items like motorbikes and appliances. Quality was shoddy. And India remained one of the poorest nations on earth.

Part of the problem was that India, like many emerging economies, was deeply suspicious of trade. Influenced by its anti-colonial struggle, the country’s leaders in the 1950s and 1960s were convinced the global economy, dominated by their former European masters, was rigged against poor nations. They argued that the only way to develop modern industry and reduce poverty was to detach from international networks of exchange. They thus pursued import-substitution policies, throwing up barriers so that domestic industry could take root and grow.

Those policies failed. Coddling domestic industry eliminated any incentive for companies to turn out better products; consumers were stuck with whatever slop local factories felt like making. Indian firms were also cut off from the critical technological changes transforming industries elsewhere. Narayana Murthy, the founder of IT services giant Infosys, has said that it took him so long to get permission from regulators to import computers in the 1980s that, by the time the permits turned up, the models were already out-of-date.

With uncompetitive manufacturing, India wasn’t able to export and capitalize on demand in wealthy nations like the US, which China, South Korea and other countries in the region successfully tapped to boost incomes. India to this day has never matched the large-scale manufacturing of its East Asian neighbors. That’s a big reason why India’s GDP per capita remains a fifth of China’s.

The U.S. economy is obviously much more advanced than India’s was in the 1950s, and New Delhi’s policymakers compounded the country’s problems by tying up private enterprise in a web of regulations that came to be known as the License Raj.

But the policies Trump and his supporters would have to implement to make his economic promises a reality -- such as tearing up trade pacts, imposing higher tariffs on imports and slapping punitive taxes on companies that move manufacturing offshore -- are, in essence, akin to India’s import-substitution program and would have similar effects. Foreign-made products would become prohibitively expensive, curtailing consumer choice. Factories behind protective barriers would have little incentive to invest in innovation or quality. Trapped in a high-cost environment, they’d have trouble competing in global markets.

The idea that this would lead to more jobs and fatter incomes is hard to credit. Unable to export, and forced to charge higher prices for their wares at home, factories would require only small workforces to meet capped demand. Or they’d invest heavily in automation to press costs down, replacing workers with robots on assembly lines. Even worse, America’s trading partners would almost certainly retaliate against U.S. companies, killing off jobs that depend on trade. One study makes the case that Trump’s trade policies “would send the U.S. economy into recession and cost millions of Americans their jobs.”

In the end, such policies would isolate American industry from the global trends that drive economic progress. U.S. firms have proven adept at capitalizing on globalization to raise efficiency and profits while keeping the most valuable aspects of their businesses at home. Cutting U.S. firms off from the world would undercut their competitiveness, or force them to invest more and more outside of the country anyway, creating more jobs overseas than at home.

It’s telling that India chose to go in the other direction, after a 1991 foreign-exchange crisis forced a deregulation of trade. Now consumers can buy practically anything they want, Indian companies have gained in competitiveness and the population has become markedly richer. That’s the kind of country the U.S. should want to be.