India Importing Cotton is an Example of What is Wrong With World Trade

Cotton has a long history in India. It is the crop which galvanized the independence movement against the British. The movement led by Gandhi to produce domestic cloth woven from domestic cotton and the boycott of cloth imports from Great Britain had undercut the colonial British economy. Economic self-reliance or a form of near-autarky was what was advocated by Gandhi to undermine the British empire which imported cheap natural resources from its colonies and sold finished and semi-finished goods made in the industrial mills in Britain in the territories it occupied. Many argue that this is also the neo-colonial strategy that China is currently pursuing in its trade relations with other countries.

India is usually an exporter of cotton. Lately it has begun importing it, contributing to the country’s trade deficit. Two reasons standout for India’s cotton imports. One, limited domestic supply because of droughts or crop disease and two, a strong rupee which sometimes makes it cheaper to buy cotton in the world market than produce it domestically. While the first reason may, on occasion, make imports necessary and sensible, the second reason is purely the current global paradigm of trade at work: in a regime of free trade, under Ricardian comparative advantage, if it is cheaper to produce a good or a service in another country then countries which incur higher costs of producing the same goods or services domestically will import. The importing countries’ economic structure and labor market will shift away from producing the imported goods and services domestically and focus on others where they have comparative advantage in the ideal world that trades in goods and services freely across borders without any protections for domestic products.

The Ricardian comparative advantage may be attractive at an initial glance because it envisions a world of freely trading countries engaging in only that economic activity in which they are more economically efficient. However, the reality is such a division of labor across countries in the production of goods and services may be unsustainable because the world demand for various goods and services will always be higher than the possible world supply due to fewer producers and a disproportionately large number of consumers. Prices could be higher than in autarky over the long run and oligopolies of suppliers of goods and services will be created around the world.

Moreover, if, for example, selling natural resources cheaply is the comparative advantage of some countries, no domestic industry will be developed in such countries because they would import goods and services with the revenues earned from their natural resource exports. This lack of development of domestic industry has negative feedback effects on the amount of revenues extraction of natural resources can generate for these countries because the technology to extract natural resources does not belong to them but to other countries which specialize in those technologies. Therefore, despite being rich in natural resources, many countries remain poor due to lack of technical know how to exploit their own resources to their maximum benefit and they also enter into lopsided bad deals in their eagerness to earn income.

What we see in reality is some balance between economic specialization in world trade and competitive domestic production of the same or similar goods and services in various countries. What needs to be done in this age of the multinational corporation (MNC) in a largely sovereign and democratic world – which is very different from the age of the colonial multinationals such as the East India Company when the colonial master profited from the assets of the colonies without colonial development – is to institute a global trade regime of quasi-autarky as Gandhi had envisioned. Only natural resources and food that countries are deficient in and management and technical know how cross borders, and most needs of goods and services of countries are met through production within their borders by both the MNCs and domestic companies either in collaboration or in competition with each other.

India, given that it has proven to be self-sufficient in agriculture, must ensure its agriculture sector does not trigger the need for imports as with cotton as an example. This, however, does not mean that India should shoot for a cheaper rupee to make Indian cotton less expensive. It means that whatever the global price of cotton, India should specialize in cotton and cotton-related goods and services while committing to at least self-sufficient domestic cotton production through perhaps better agricultural techniques or better seeds that are drought and disease resistant. India should commit to innovation in agriculture, develop its own agricultural MNCs while welcoming foreign MNCs into its domestic market. This applies not only to agriculture but to all sectors of the Indian economy.

Quasi-autarky is a feasible option for India and in fact, as Gandhi envisaged, for the rest of the world as well.

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