Trump is talking about India again. On January 24, he said India charges a high 150 per cent import tariff on US whiskey which is bad as the US charges no tariff on Indian whiskey. In October last year, he dubbed India the ‘tariff king’. He hopes to stop countries from taking advantage of America and, thereby, solve the $800 billion US trade deficit problem through the United States Reciprocal Trade Act (US-RTA).
Let us understand how far Trump is justified in calling India the tariff king. And the impact of the US-RTA on the already fragile world trade.
Sure enough, India imposes high duties on many items — 150 per cent on whiskey and wines; 60-75 per cent on automobiles; 50 per cent on mango juice; and 40 per cent on marble blocks. But is India the only one doing so?
‘World Tariff Profiles 2018’, published by the WTO, lists the data on the highest tariffs charged by countries. Sample the highest tariffs of a few countries: Japan, 736 per cent; Korea, 807 per cent; the US, 350 per cent; Australia, 163 per cent; India, 150 per cent. So India is not alone.
Next, let us see the examples of high tariff items. First the US. It charges very high tariffs on several items: 350 per cent on tobacco; 163.4 per cent on peanuts; 24-48 per cent on footwear, 25 per cent on textiles; 32 per cent on sweaters; 28 per cent on trousers; and 25 per cent on trucks. A few duties are a nightmare to calculate or implement. Wristwatch is a case in point. For every wristwatch the tariff is 93 cents plus 4.8 per cent on the value of the case plus 2.2 per cent on the value of strap, band, and bracelet. One needs to know the values of each component separately.
Japan places high restrictions on the import of rice, footwear, dairy products, and processed food, to name a few. It, for instance, levies a tariff of 38.5 per cent on buffalo meat; 30 per cent or 4,300 yen/pair on shoes; 29.8 per cent plus 99-1,023 yen/kg on most dairy products; and 29.8 per cent on processed food.
South Korea also has an equally complex import duty structure in place: 360 per cent or 1,800 won/kg on garlic; 243 per cent or 206w/kg on honey; 630 per cent or 666 w/kg on sesame seed; 51.7 per cent or 17,215 won/kg on almonds; 50 per cent on oranges; and 36 per cent on cheese.
Most countries have a reason for charging high tariffs on a few items. Japan may like to protect its rice farmers, the US its tobacco farmers, and India its growing wine industry. Yet high tariff items do not represent the tariffs at which actual trade happens for most items. Average tariff and trade-weighted tariff better represent a country’s tariff profile.
India’s average tariff, at 13.8 per cent, is higher than the US’s average tariff of 3.4 per cent. India is nearer to South Korea (13.7 per cent) and China (9.8 per cent). India’s average tariff for industrial products, which account for over 90 per cent of India’s imports, is 10.7 per cent. And trade-weighted average tariffs, which are arrived by dividing all trade with all duties collected, is just 5.5 per cent for industrial products. Trump should have talked about the prevailing average tariffs. But that would not have much news value because of the low number. The tariff king label for India does not stick as most countries, including the US, levy higher duties on some products.
Impact of the US-RTA
The US had surrendered its flexibility to increase tariffs at the WTO in 1995 when it agreed to bind its tariffs at a very low level. Any tariff increase now falls foul of its WTO commitments. This is why Trump had to invoke the rarely used national-security clause of the WTO to increase duties on steel, aluminium, and other items last year. Fearing the US will lose the WTO dispute on this issue, Trump is blocking the appointment of panel judges for the WTO appellate body .
The WTO rules do not allow a country to levy tariff on a bilateral basis. The US-RTA intends to do this and hence will fall foul of the WTO rules. The WTO MFN principle says a country must charge the same rate from all WTO members, except for those it signs an FTA. In that case, lower and not higher duties are allowed. Tariffs can only be increased on the grounds of dumping, but dumping needs to be investigated and proven.
The US-RTA will focus on both tariff and non-tariff measures (NTMs). NTMs are imposed to ensure minimum health and safety standards. If the US does not like the NTMs imposed by a country, it may dub these as non-tariff barriers and force a country to withdraw them. This will create chaos in an already fragile trading situation.
Countries, while negotiating a trade agreement, bargain for all tariff lines together without seeking product-level reciprocity. But Trump says two countries should have the same tariff on a product. If implemented, this will bring much grief to US exporters as well. For example, the US sells motorcycles to India while India sells jewellery to America. Low US tariff on India-made motorcycles are of little use to India as it may not export motorcycles to the US.
Similarly, low Indian tariff on the US made jewellery may of little use to the US which does not export jewellery to India.
A Republican senator introduced the Bill on the US-RTA in the US Congress on January 24. If the Bill is passed, the world may as well go back to the pre-world war era of bilateral tariffs. While the US Congress is dominated by Democrats who do not want to give Trump more power, even many Republicans oppose the Bill as it would restrict trade.
The writer is from the Indian Trade Service. The views are personal.