Reversing protectionism key to resolve chip shortage problem

At present, the biggest chip producer is Taiwan, a tiny nation now threatened with takeover by its neighbour China. The need for an alternative supply source has thus become more urgent and the new initiative is timely

India will have to set aside its current protectionist attitudes exemplified in the Atmanirbhar (self-sufficient) concept, if it is to become a significant player in global value chains. The opportunity to do so has now arisen with the launch of the semiconductor supply chain initiative at the recently concluded Quad summit. The four country grouping plans to utilize its complementary technological, manufacturing and design skills to ensure that production of semi-conductors is no longer held hostage by just a few countries.

At present, the biggest chip producer is Taiwan, a tiny nation now threatened with takeover by its neighbour China. The need for an alternative supply source has thus become more urgent and the new initiative is timely. The critical role of chips in the world today is undeniable. They are needed for automobiles, computers, consumer electronics, military and industrial devices, as well as wired and wireless communications. In other words, they play an integral role in virtually every area of daily life. The current shortage of chips arose during the global pandemic when demand collapsed in some sectors like automobiles leading to suppliers shifting production to other areas like consumer electronics. The volatility of demand led to a situation in which output of a diverse range of products has been stalled just due to the non-availability of the tiny chips. The decision on the new initiative was based on reports of working groups set up in March at the first Quad meeting to delve into areas like 5G, cyber security and semiconductors. These were available at the latest meeting enabling the group to go ahead with the new scheme. What is significant about the plan is that it has arisen from the recognition that national self-sufficiency does not work in this sector. Over the past year and a half, these countries have all begun programmes to set up production facilities within their own borders. The US made plans to address the shortage, while India announced production linked incentives (PLI) for the semiconductor sector. Similarly, Japan offered financial incentives for chip production facilities. One of the reasons was also the indigenization programme for semiconductors launched by China in 2015. But the fact is that semiconductor production is typically spread over several countries, each with its own area of specialization. No wonder then that the group has gone on record to call for a diverse and competitive market. In India's case, one of its key strengths is the huge pool of skilled engineering manpower. This could be an invaluable part of the supply chain along with the design and technical capabilities of the other countries. But experts suggest it could also benefit by using this collaboration to enable the creation of semi-conductor manufacturing facilities with technological aid from one of the Quad partners.

For India's whole-hearted participation in the initiative, however, it would have to set aside the present preoccupation with Make in India and the focus on protecting domestic industries. It is this focus that led to a creeping rise in import tariffs since the Modi government came to power in 2014. The kind of global supply chain being envisaged for semi conductors rests on lowered tariffs that enable easy flow of goods from one country to another. A policy shift is thus needed if this programme is to become a success.

In this context, it is significant that Commerce Minister Piyush Goyal recently warned industry that seeking market access abroad would mean a reciprocal opening up of markets here. Whether this means that the protective tariff regime will be reversed is yet to be seen, but it is clear that there is some rethinking on the issue. The government has already shown that it is prepared to reverse earlier policies in recent times including withdrawal of the retrospective tax legislation and the support provided to the beleaguered telecom industry. A fresh approach seems to be on the anvil in many areas where it seemed an entrenched stance had been taken in the area of economic policy.

Such an approach will also be needed to tackle the bilateral relationship with the US, one of the key Quad members. The Modi-Biden summit has raised huge expectations with the focus being on trade and technology. Here too it is the question of market access that has been one of the biggest stumbling blocks in trade ties. Former President Donald Trump regularly highlighted the high tariffs preventing access to the large Indian internal market. With the entry of the Biden administration, it was expected that some of these issues would be resolved but there has been little change in the situation. In fact, the US has now indicated it is not interested in entering into a free trade agreement for the time being. Clearly, it has been accepted that the chasm between the two sides is too wide to be bridged right now through a bilateral agreement. Though Goyal has stressed that discussions on other areas will be carried forward, it is obviously a huge disappointment for the Indian authorities. The prospective FTA had been discussed with the previous administration but the two sides evidently could not reconcile their differences. It is surely important to protect the country's self-interests in trade negotiations, but some amount of reciprocal market access has to be provided to key trading partners.

It is high time therefore for policymakers to take a more flexible stance on the Atmanirbhar policy. It must be recognized that technological advancements in semi-conductors were possible only because different countries were able to focus on a single element alone and upgrade that particular segment of the chain. It would thus be in the country's long term interest to revert to a policy of greater globalization rather than move towards insularity and protectionism, both in trade and technology issues.