THE CONTEXT: The classical foundations of international trade, laid by Adam Smith’s principle of absolute advantage and refined by David Ricardo’s theory of comparative advantage, ushered in the age of globalised interdependence and specialisation. However, the geopolitical and geoeconomic realities of the 21st century—particularly in critical sectors such as semiconductor manufacturing—are challenging these orthodoxies. States like the USA’s strategic recalibration signals a paradigm shift from Ricardian efficiency to national resilience and techno-sovereignty.
CLASSICAL THEORIES OF TRADE: SMITH AND RICARDO:
| Thinker | Theory | Essence | Implication |
|---|---|---|---|
| Adam Smith (1776) | Absolute Advantage | Nations should produce goods they can make more efficiently than others | Advocated unilateral specialisation and free trade |
| David Ricardo (1817) | Comparative Advantage | Even if a country is better at producing both goods, it benefits by specialising in what it is relatively better at | Trade leads to mutual gains through opportunity cost optimisation |
EVOLUTION OF GLOBAL TRADE PRINCIPLES: CLASSICAL VS CONTEMPORARY
| Aspect | Classical Trade Logic | Contemporary Strategic Logic |
|---|---|---|
| Drivers | Efficiency, Specialisation | Resilience, Security, Technological Sovereignty |
| Principles | Comparative Advantage | Strategic Autonomy & Supply Chain Control |
| Instruments | Tariff Reduction, Multilateralism | Industrial Policy, Subsidies, Export Controls |
| Examples | Wine from France, IT from India | Semiconductors reshored to the US, Rare Earths to be locally sourced |
HYPER-GLOBALISATION AND ITS DISCONTENTS
Period: 1990s–2010s
Features:
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- Outsourcing and offshoring to optimise comparative advantages
- Value chain fragmentation: Wine in France, garments in Bangladesh, chips in Taiwan
- Doux commerce thesis: Interdependence as a peace strategy
This era assumed economic efficiency overrides strategic vulnerability. Nations became deeply embedded in Global Value Chains (GVCs), overlooking single-source dependencies and geo-economic chokepoints.
SEMICONDUCTOR SECTOR: STRATEGIC VULNERABILITIES IN A HYPER-GLOBALISED WORLD:
| Country/Company | Global Share | Specialisation |
|---|---|---|
| Taiwan (TSMC) | 56.7% (overall), 90% (sub-7 nm chips) | High-end, AI, Quantum |
| USA | Decline from 37% (1990) to 12% (2020) | Losing strategic capacity |
| Japan, South Korea, China | Regional players | Mid-to-high range |
Taiwan’s Dominance
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- TSMC (Taiwan) alone controls 56.7% of global semiconductor output and 90% of high-performance AI chips.
- Strategic vulnerability: Taiwan Strait is a chokepoint, a potential flashpoint due to China’s assertiveness.
US Strategic Response: Geoeconomics Over Pure Economics
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- CHIPS and Science Act (2022): $52.7 billion in subsidies and tax incentives to reshore chip manufacturing.
- TSMC’s $65 billion investment in Arizona, producing 4nm (2024) and planning 2nm by 2028.
- From free trade to techno-nationalism and industrial sovereignty.
IMPLICATIONS FOR INTERNATIONAL RELATIONS:
Strategic Interdependence vs Strategic Vulnerability: The pandemic, followed by the Russia-Ukraine conflict, exposed the fragility of hyper-globalised supply chains and redefined the nature of interdependence—from a peace-promoting force (doux commerce thesis) to a strategic liability.
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- China’s weaponisation of rare earths (used in electronics and defence) and gas cut-offs by Russia to Europe exemplify how supply chain chokepoints can be wielded geopolitically.
- US–China Tech Decoupling:
- The US has imposed sweeping restrictions on advanced chip exports to China (e.g., NVIDIA’s AI chips and ASML’s extreme ultraviolet lithography).
- This reflects a shift from market-driven efficiency to national security-centric trade.
- National Security Strategy of the US (2022) explicitly identifies technological dominance as a critical pillar of global power.
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- Scholar Henry Farrell and Abraham Newman call this the age of “Weaponised Interdependence“, where countries leverage network centrality in data, finance, or tech.
Diplomacy through Technology Alliances: Due to rising techno-nationalism, states are forging issue-specific, technology-centric partnerships, marking a new frontier in foreign policy.
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- India–US Initiative on Critical and Emerging Technologies (iCET):
- Announced in 2023, it focuses on semiconductors, quantum computing, AI, space, biotech.
- Supported by institutional collaboration between BIS, ISRO, DRDO, and US DoD, making it a techno-strategic alliance rather than just a trade deal.
- Enhances India’s integration into the “Chip 4 Alliance” (US, Taiwan, Japan, South Korea) ecosystem indirectly.
- QUAD Supply Chain Resilience Initiative:
- Focuses on rare earths, battery components, pharma APIs, and semiconductors.
- Aims to diversify critical supply chains away from authoritarian regimes.
- Aligns with India’s PLI schemes and its aspiration to become a trusted partner in the Indo-Pacific value chains.
- India–US Initiative on Critical and Emerging Technologies (iCET):
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- The shift indicates that strategic autonomy and trusted partnerships are now the dual anchors of India’s foreign economic policy.
Global Governance Challenges: Multilateralism Under Stress
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- The classical rules-based multilateral trading system (WTO) is increasingly circumvented due to rising economic nationalism and issue-based plurilateralism.
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- The Most-Favoured Nation (MFN) principle under WTO is being diluted:
- US CHIPS Act (2022) and EU Chips Act (2023) provide targeted subsidies violating the spirit of non-discrimination.
- Export controls on technology (AI, drones, quantum tech) are security-motivated, not market-driven.
- Rise of “coalitions of the willing”:
- Examples include the Indo-Pacific Economic Framework (IPEF), Global Gateway (EU), and Blue Dot Network.
- These frameworks emphasise values-based trade (democracy, transparency, sustainability) over universal trade rules.
- India’s Position:
- India has resisted WTO’s e-commerce moratorium and TRIPS waivers that disproportionately benefit tech monopolies.
- Advocates for “developmental multilateralism” rooted in equity and technology transfer, as per the G77 and Global South agenda.
- The Most-Favoured Nation (MFN) principle under WTO is being diluted:
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- Economist Dani Rodrik argues that a “rebalancing between national sovereignty and global rules” is inevitable for fair and effective global economic governance.
IMPLICATIONS FOR INDIAN ECONOMY AND STRATEGIC INDUSTRIAL POLICY:
India’s Semicon Vision: From Aspiration to Strategic Necessity
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- India’s ₹76,000 crore Semicon India Programme (2021), under the Digital India initiative, marks a shift from mere import-substitution to critical technology self-sufficiency.
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- Anchored around:
- Chip fabrication (fabs)
- Display manufacturing
- Design ecosystem
- Talent development
- India–US Commercial Dialogue (2023) and iCET (Initiative on Critical and Emerging Technologies) aim to align India’s semiconductor roadmap with trusted technology supply chains and collaborative R&D.
- Anchored around:
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- As per NITI Aayog (2024), India imports over 90% of its semiconductors, exposing it to supply-side vulnerabilities and currency shocks.
- Indigenous chip capacity is now seen as a foundation for digital sovereignty, national security, and economic resilience in the Fourth Industrial Revolution.
From Efficiency to Resilience: Redefining Industrial Strategy: The pandemic and Ukraine conflict underscored the limits of just-in-time global supply chains, revealing fragility in critical sectors like pharmaceuticals, electronics, and defence.
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- India’s strategic industrial shift prioritises:
- Reshoring supply chains
- Redundancy and shock-absorption capacity
- Security over marginal efficiency
- Examples:
- API Repatriation: India now incentivises domestic bulk drug parks to reduce dependency on China.
- Defence Manufacturing: ₹1 lakh crore defence production target (2025) under Atmanirbhar Bharat Abhiyan.
- Electronics Manufacturing: Over ₹2 lakh crore worth of mobile production under PLI schemes (MoCIT data, 2024).
- India’s strategic industrial shift prioritises:
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- Economist Raghuram Rajan warns against inward-looking protectionism but supports strategic diversification in key sectors.
Geoeconomics as National Strategy: Redefining Sovereignty: India’s economic doctrine is moving from market-led liberalisation to state-facilitated competitiveness in geostrategic domains.
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- Production Linked Incentive (PLI) Schemes: Covering 14 critical sectors including electronics, pharma, textiles, and drones. Aim: Build scale, create jobs, and reduce import dependence.
- PM Gati Shakti Masterplan (2021): ₹110 lakh crore integrated infrastructure plan to reduce logistics costs (~14% of GDP currently) to global benchmark (~8%).
- National Logistics Policy (2022): Focuses on multimodal connectivity, unified digital systems, and private participation.
- Viksit Bharat 2047 Framework: Prioritises tech-driven, inclusive, and green manufacturing ecosystems.
THE WAY FORWARD:
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- Calibrated Trade Strategy for Strategic Integration: India must adopt a “smart globalisation” approach that balances selective liberalisation with strategic self-reliance, avoiding both protectionist isolation and unregulated openness.
- For critical sectors like semiconductors, AI, defence and pharma, India should negotiate reciprocal access, technology transfer, and investment safeguards under bilateral and plurilateral FTAs.
- Deepen Techno-Diplomatic Alliances to Build Strategic Sovereignty: India should actively leverage platforms like iCET, QUAD Tech Network, and EU–India Trade & Tech Council to secure technology access, co-develop critical infrastructure, and establish interoperable standards.
- Such alliances not only diversify India’s supply chains but also embed it within trusted value chains, reducing dependency on geopolitical chokepoints.
- Calibrated Trade Strategy for Strategic Integration: India must adopt a “smart globalisation” approach that balances selective liberalisation with strategic self-reliance, avoiding both protectionist isolation and unregulated openness.
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- Strengthen End-to-End Semiconductor Ecosystem through Value Chain Anchoring: Rather than focusing solely on chip fabrication, India must invest in design, packaging, testing and Intellectual Property (IP)—areas with lower entry barriers and higher job multipliers.
- Incentivising domestic design houses through tax credits and public-private R&D (e.g., with IIT-M, CDAC) will help embed India into the global semiconductor value chain (GSVC).
- Learning from South Korea’s K-Semicon vision and leveraging the Semicon India Programme (₹76,000 crore), India must adopt a full-stack strategy.
- Institutionalise an India-Tech Skill Grid for Industry 4.0 Readiness: India must align skilling under Skill India, PMKVY, and SANKALP with the demands of future tech sectors like clean energy, semiconductors, AI/ML, and quantum computing.
- A centralised ‘Skill Stack Repository’ integrated with Digital India stack and UDYAM platform can enable dynamic skill-matching for MSMEs and large-scale industries.
- This operationalises the Sharda Prasad Committee (2016) recommendation for demand-driven skilling and realises India’s demographic dividend in its most strategic sense.
- Operationalise a National Industrial Sovereignty Strategy (NISS): To ensure long-term competitiveness and shock resilience, India must consolidate its PLI schemes, National Logistics Policy, Gati Shakti and Semicon Vision under a unified strategic framework.
- This NISS should include geo-economic risk mapping, technology foresight cells, and green manufacturing transitions, embedded within NITI Aayog’s industrial policy wing.
- Inspired by the European Union’s Strategic Autonomy Framework and the China+1 diversification principle, this will make India future-ready without regressing into outdated import substitution.
- Strengthen End-to-End Semiconductor Ecosystem through Value Chain Anchoring: Rather than focusing solely on chip fabrication, India must invest in design, packaging, testing and Intellectual Property (IP)—areas with lower entry barriers and higher job multipliers.
THE CONCLUSION:
The return of industrial policy and strategic nationalism signals the twilight of pure Ricardian logic in global trade. While comparative advantage remains a valuable economic principle, geopolitical uncertainties have necessitated a recalibration. The semiconductor sector epitomises this shift—from efficiency to sovereignty, from free trade to secure trade.
UPSC PAST YEAR QUESTION:
Q. How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? 2018
MAINS PRACTICE QUESTION:
Q. The global semiconductor supply chain crisis has signalled a structural retreat from Ricardian globalisation towards strategic techno-sovereignty. Discuss recent developments in international trade policy.
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