India in a tight corner over trade policies

The Modi government’s second term in office has begun with the country’s foreign trade policy facing multiple challenges. The day the government took office, President Donald Trump announced his decision to withdraw the benefits of Generalised System of Preferences (GSP), effective from June 5.

The US administration has also questioned India’s subsidies to both industry and agriculture. Several other countries, including Brazil, Australia have also challenged India’s agricultural subsidies, they argue, are inconsistent with the WTO’s Agreement on Agriculture (AoA). At the same forum, the European Union (EU) and Japan have questioned the government’s decision to increase tariffs on mobile phones.

Finally, India is also under considerable pressure to undertake extensive trade liberalisation via the Regional Comprehensive Economic Partnership (RCEP). This regional trade agreement seeks across-the-board tariff elimination, including agriculture, which is among India’s most sensitive sectors. China’s presence among the 16 RCEP participating countries has left India’s manufacturing industry worried.

The US’s removal of India from its GSP-beneficiary list was not unexpected. In early March, President Trump notified to the Congress his decision to remove India from the list of countries, which enjoy duty-free access to the US market in 3,700 products.

President Trump has often argued that US’s trade deficit with India must be reduced by “curbing” India’s “unfair trading practices”. Withdrawal of GSP benefits is, therefore, one further step taken by the US to whittle down India’s trade surplus with the US; the first was the increase in tariffs on steel and aluminium in 2018.

The challenge for the new government is to prepare an effective strategy to deal with a resolute US trying to pry open India’s market. The US could target sectors with high tariffs; a few in the manufacturing sector and agriculture and allied sectors. During the consultations after India was put on notice in March 2019, the US had demanded that India allow imports of agriculture, milk, and poultry products. It is difficult to perceive how India can relent, given its domestic compulsions.

Retaliatory tariffs

The first response from the new government has already been announced; retaliatory tariffs on 29 products. This list was drawn up after the US imposed tariffs on steel and aluminium. India’s expectation was that it was providing room for dialogue by not retaliating. This gesture has clearly not worked, as the Trump administration has relentlessly pressured India, by removing India from its GSP-list, among others. It was, therefore, necessary for India to respond appropriately. India has now put its cards on the table with which it can now negotiate with the US.

The challenges that India faces in the WTO are more formidable since the issues that have been raised could affect several sectors, not the least, agriculture. At stake are three issues: export subsidies for non-agricultural products, agricultural subsidies, and India’s recent tariff increases for mobile phones.

In 2018, the US complained to WTO’s Dispute Settlement Body (DSB) against India’s major export subsidies, namely, Merchandise Exports from India Scheme (MEIS), Export Oriented Units Scheme and support extended to Special Economic Zones. India could use these subsidies so long as its per capita GNP was below $1,000. With India’s GNP having exceeded this threshold, export subsidies came under the scanner. The initial response of the government on the issue of export subsidies is forward looking.

The new Commerce and Industry minister gave an unambiguous message in his first meeting of the Board of Trade on June 6, that industry would have to think beyond subsidies and to seek ways of improving efficiency.

Farm subsidies

Several countries have targeted India’s agriculture subsidies. They argued that these subsidies are well above the limit set by the AoA, which is 10 per cent of the value of production for every product. The US has questioned subsidies provided to rice and wheat, while Brazil, Australia and Guatemala have gone a step further and have initiated disputes against India’s sugarcane subsidies.

Three more countries, Thailand, Costa Rica and the Russian Federation have joined the dispute as third parties. The complainants argue that India has substantially increased production-related subsidies for sugarcane provided by both the Central and State governments and, as a result, the country has breached its commitment to limit sugarcane subsidies.

The complainants also argue that the Central and State governments provide subsidies for exporting sugar, which it cannot under the AoA rules, since these subsidies were notified to the WTO. Thus, the politically sensitive sugarcane faces testing times.

In his 2018-19 Budget Speech, the then Finance Minister announced the government’s decision to increase import tariffs on mobile phones to encourage domestic manufacturing. The EU and Japan have challenged this decision, complaining to the DSB that India had agreed not to impose tariffs on these products. Six other countries, Thailand, Canada, China, Chinese Taipei, the US and Singapore, have joined the dispute as third parties. The disputes challenge the government’s policy to use import tariffs to not only provide protection to the domestic producers from import competition, but to also indirectly incentivise domestic production.

The most significant of the challenges awaiting the government is the future course of RCEP negotiations. The negotiations were on hold for the past few months as the governments in two of the largest economies, India and Indonesia, were seeking fresh mandates from their electorates. Countries driving the RCEP negotiations have been seeking deep cuts in import tariffs in almost all sectors.

While this is the most immediate challenge from the RCEP, inclusion of areas like e-commerce and investment could bring commitments that conflict with the policies of the government. For instance, India has firmly stated its position on data localisation, which several RPCs (RCEP participating countries) do not support. Also, India has its model investment protection law that is different from the one that is backed by RPCs.

After nearly three decades of its tryst with globalisation, India’s trade policy faces formidable challenges.

Most of the challenges stem from structural infirmities in the domestic economy, which require a medium-term perspective. The government must recognise that it has obtained the political mandate to develop such a perspective.

The writer is Professor at the Centre for Economic Studies and Planning, JNU, New Delhi