Themes > Current Issues
22.06.2002
Tariff Challenge at the WTO
C. Rammanohar
Reddy
An Unusual set of
circumstances formed the backdrop for the World Trade Organisation' 2002
review of India' trade policies. A new surge of protectionism has surfaced
in the United States, the world' largest economy which is also the biggest
trader. Then there is the Doha round of trade talks at the WTO which has
begun to falter as the realisation sinks in that the liberalisation agenda
that has been drawn up is much more than what the member-countries can
chew. And at home, one year has just ended with a small contraction in
exports, though that has not prevented the Commerce Ministry from drawing
up a target of 12 per cent growth in 2002-03, a goal which is more
unrealistic than ambitious.
The review of India' trade policies which was conducted at the WTO this week is the third since the Trade Policy Review (TPR) Mechanism was instituted in 1989. This periodic examination of each country' policies is not restricted to its policies on exports and imports. It looks at the entire gamut of macro and micro-economic policies which are supposed to have an impact on the degree of openness and competitiveness in the economy. These are only reviews and not negotiations; they therefore do not result in any mandated changes in a Government' policies. But by turning the spotlight on a country — first through a detailed review report prepared by the WTO Secretariat, accompanied by the Government' own assessment of its trade policies, and then with discussions among all the WTO members — a certain picture is drawn about what is right and wrong with a country' trade policies. This then becomes the setting for demands that the other Governments make during trade negotiations at the WTO. This is one reason why the TPRs have had their share of controversy. The WTO reports have on occasion been faulted for treating the major trading powers (e.g. the 2000 review of the European Union) with kid gloves even as they critically dissect the policies of the smaller trading nations.
There is both a continuity and change in emphasis in the latest WTO review of India' policies. A common strand running through the reviews of 1993, 1998 and 2002 is the highlighting of large fiscal deficits, the need for privatisation and the removal of obstacles to competition. These perspectives are not particularly novel; they have been talked about both domestically and by a number of other external agencies. It is the details in the reviews that have changed with the times. In 1993, trade liberalisation had just begun and while India' position on the eve of the completion of the Uruguay Round of talks was still one of maintaining trade barriers, the then GATT was optimistic that in the new era the Government would hasten the dismantling of trade and non-trade barriers. In 1998, the TPR could point to more rapid export and GDP growth as showing the fruits of greater integration with the world market. But that was also the height of the imbroglio over India' maintenance of quantitative restrictions (QRs) and the WTO had to point out that non-tariff barriers of this kind were harmful to the economy. Now, in 2002, export growth has decelerated and so too has overall GDP growth. While there is some attempt to link this with the larger global slowdown, there are enough faults to find in India' trade policies. The QRs may have gone, but other non-tariff restrictions remain. If there is one central point in the WTO Secretariat review, it is India' high tariffs on industrial and agricultural goods. Tariffs are also an important item on the agenda of the ongoing Doha round.
It is well known that India' import tariffs are among the highest in the world (the exceptions being the customs duties imposed by the smaller developing and least developed countries). India did commit itself to a reduction during the Uruguay Round. And rates have come down during the 1990s; but the reduction has not been smooth and lately not very substantial either. The WTO now points out that India has bound its import duties in 72 per cent of the tariff lines. That is, the Government has committed itself not to raise duties above certain levels in a little under three-quarters of the product categories; it is free to set whatever rate it wants in the remaining tariff lines. These bound rates in 2005 (the last year of implementation of the Uruguay Round agreement) will on an average be as high as 51 per cent, with an average of 116 per cent for agricultural products and 38 per cent for industrial products. On the other hand, the average applied (actual) import duty, as noted by the WTO, which was 35 per cent in 1997-98 fell marginally to 32 per cent in 2001-02 and is scheduled to come down to 29 per cent in 2002-03.
These features of India' import duty structure flag three challenges before India at the WTO — during the ongoing Doha round of talks. First, India will be asked to `bind' tariff ceilings in an even higher proportion of tariff lines, perhaps close to 100 per cent. Second, it will asked to set lower bound rates, both for industrial products and agricultural goods. And, third but just as important, it will be asked to close the gap between bound and applied tariffs. Bound tariffs, which are much higher than the applied rates (as they are now in many cases), give India sufficient cushion to protect itself from import competition. Hence, the demand to close the gap and therefore the room for manoeuvrability. (India used this cushion in 2000 when it raised tariffs on a number of agricultural products such as oilseeds and vegetable oils.) The WTO is aware that even after a decade of tariff reductions, customs duties still provide the Government of India with 20 per cent of gross tax revenue. This, as much as the concerns of domestic industry and agriculture, makes a hasty reduction in duties quite difficult to achieve. But the Government has announced it will move to a two-duty (10 and 20 per cent) structure by 2004-05. However, this commitment is not going to persuade India' trading partners to go easy during the Doha negotiations.
Indeed, during the discussions in Geneva this week on the TPR of India' policies, tariff levels and the gap between the applied and bound rates were brought up by India' more important trading partners. On another track, there have been attempts to paint India as a villain of the slowdown in the Doha round negotiations on industrial tariffs. Efforts to accelerate the talks on tariffs and de-link these negotiations from the overall agenda have been questioned by India. The pressure to make substantial concessions is bound to build up in the coming months.
The global mood at this point is not exactly in favour of further trade liberalisation. The biggest forces in this direction — the U.S. and the E.U. — are either squabbling about their disputes or building barricades around particular sectors. In the latter, we have had the U.S. make moves to protect its steel industry, enact legislation which would see a huge increase in support for its agriculture and its Congress place many protectionist riders on its grant of negotiating powers to the President, George W. Bush. But this will not provide India any respite. As the final denouement at the Doha WTO ministerial meeting last November showed, when it comes to the crunch gaps can be closed and immense pressure applied on recalcitrant countries such as India.
The review of India' trade policies which was conducted at the WTO this week is the third since the Trade Policy Review (TPR) Mechanism was instituted in 1989. This periodic examination of each country' policies is not restricted to its policies on exports and imports. It looks at the entire gamut of macro and micro-economic policies which are supposed to have an impact on the degree of openness and competitiveness in the economy. These are only reviews and not negotiations; they therefore do not result in any mandated changes in a Government' policies. But by turning the spotlight on a country — first through a detailed review report prepared by the WTO Secretariat, accompanied by the Government' own assessment of its trade policies, and then with discussions among all the WTO members — a certain picture is drawn about what is right and wrong with a country' trade policies. This then becomes the setting for demands that the other Governments make during trade negotiations at the WTO. This is one reason why the TPRs have had their share of controversy. The WTO reports have on occasion been faulted for treating the major trading powers (e.g. the 2000 review of the European Union) with kid gloves even as they critically dissect the policies of the smaller trading nations.
There is both a continuity and change in emphasis in the latest WTO review of India' policies. A common strand running through the reviews of 1993, 1998 and 2002 is the highlighting of large fiscal deficits, the need for privatisation and the removal of obstacles to competition. These perspectives are not particularly novel; they have been talked about both domestically and by a number of other external agencies. It is the details in the reviews that have changed with the times. In 1993, trade liberalisation had just begun and while India' position on the eve of the completion of the Uruguay Round of talks was still one of maintaining trade barriers, the then GATT was optimistic that in the new era the Government would hasten the dismantling of trade and non-trade barriers. In 1998, the TPR could point to more rapid export and GDP growth as showing the fruits of greater integration with the world market. But that was also the height of the imbroglio over India' maintenance of quantitative restrictions (QRs) and the WTO had to point out that non-tariff barriers of this kind were harmful to the economy. Now, in 2002, export growth has decelerated and so too has overall GDP growth. While there is some attempt to link this with the larger global slowdown, there are enough faults to find in India' trade policies. The QRs may have gone, but other non-tariff restrictions remain. If there is one central point in the WTO Secretariat review, it is India' high tariffs on industrial and agricultural goods. Tariffs are also an important item on the agenda of the ongoing Doha round.
It is well known that India' import tariffs are among the highest in the world (the exceptions being the customs duties imposed by the smaller developing and least developed countries). India did commit itself to a reduction during the Uruguay Round. And rates have come down during the 1990s; but the reduction has not been smooth and lately not very substantial either. The WTO now points out that India has bound its import duties in 72 per cent of the tariff lines. That is, the Government has committed itself not to raise duties above certain levels in a little under three-quarters of the product categories; it is free to set whatever rate it wants in the remaining tariff lines. These bound rates in 2005 (the last year of implementation of the Uruguay Round agreement) will on an average be as high as 51 per cent, with an average of 116 per cent for agricultural products and 38 per cent for industrial products. On the other hand, the average applied (actual) import duty, as noted by the WTO, which was 35 per cent in 1997-98 fell marginally to 32 per cent in 2001-02 and is scheduled to come down to 29 per cent in 2002-03.
These features of India' import duty structure flag three challenges before India at the WTO — during the ongoing Doha round of talks. First, India will be asked to `bind' tariff ceilings in an even higher proportion of tariff lines, perhaps close to 100 per cent. Second, it will asked to set lower bound rates, both for industrial products and agricultural goods. And, third but just as important, it will be asked to close the gap between bound and applied tariffs. Bound tariffs, which are much higher than the applied rates (as they are now in many cases), give India sufficient cushion to protect itself from import competition. Hence, the demand to close the gap and therefore the room for manoeuvrability. (India used this cushion in 2000 when it raised tariffs on a number of agricultural products such as oilseeds and vegetable oils.) The WTO is aware that even after a decade of tariff reductions, customs duties still provide the Government of India with 20 per cent of gross tax revenue. This, as much as the concerns of domestic industry and agriculture, makes a hasty reduction in duties quite difficult to achieve. But the Government has announced it will move to a two-duty (10 and 20 per cent) structure by 2004-05. However, this commitment is not going to persuade India' trading partners to go easy during the Doha negotiations.
Indeed, during the discussions in Geneva this week on the TPR of India' policies, tariff levels and the gap between the applied and bound rates were brought up by India' more important trading partners. On another track, there have been attempts to paint India as a villain of the slowdown in the Doha round negotiations on industrial tariffs. Efforts to accelerate the talks on tariffs and de-link these negotiations from the overall agenda have been questioned by India. The pressure to make substantial concessions is bound to build up in the coming months.
The global mood at this point is not exactly in favour of further trade liberalisation. The biggest forces in this direction — the U.S. and the E.U. — are either squabbling about their disputes or building barricades around particular sectors. In the latter, we have had the U.S. make moves to protect its steel industry, enact legislation which would see a huge increase in support for its agriculture and its Congress place many protectionist riders on its grant of negotiating powers to the President, George W. Bush. But this will not provide India any respite. As the final denouement at the Doha WTO ministerial meeting last November showed, when it comes to the crunch gaps can be closed and immense pressure applied on recalcitrant countries such as India.
© MACROSCAN 2002