Protectionism & Corruption

My previous post has provoked some responses. In particular, Aaren feels that the preferential treatment given to auto MNCs who have invested in manufacturing/assembly facilities here is justifiable because: "This helps promote India as an investment destination, more jobs in the country, more income for people leading to more consumption."

Actually, these impossibly high tariff barriers only promote corruption - while also fleecing the consumer. Let us see how.

If the tariff was set at a uniform 5 per cent, designed to gain revenue while being "neutral" on the market, auto MNCs who gain market share here will immediately invest in manufacturing/assembly facilities, because it will save costs on the transport of fully built-up cars. This is definite.

However, let us see what happens when the tariff is set at 116 per cent. This tariff will not earn any revenue. Simultaneously, it will offer a perverse incentive to all auto MNCs - the incentive to engage in "tariff jumping."

Auto MNCs will see this "tariff wall" as an "incentive" to locate plants in India - and they will also see that by undertaking this "tariff jumping" they can cheat Indian consumers by offering them limited choices, higher prices etc.

None of this would happen if the tariff was low and "neutral." Then, market prices would reflect full-blown competition. Consumers would be Kings. Revenue too would be generated - and hopefully used to build roads.

Indeed, even second-hand should be allowed in at the same tariff level - so that, very soon, all Indians own cars. Just as each Indian has a phone today. The tariff of 180 per cent on used car imports also earns no revenue. It is part of the incentive to engage in "tariff jumping."

Now, don't you think the politicians in charge have interests of their own?

Or do you think they are all "selflessly serving the people"?

Now equate protectionism with corruption.

So you are dead wrong, Aaren. I would suggest a reading of Frederic Bastiat's "Protectionism - Or The Three Aldermen." An alderman is a city councilor, a civic politician. A better title to this play (not an essay, a play) would have been "Protectionism & Political Corruption." I hope this play will be enacted in all schools and colleges throughout India.