US import duty hike: India set to break WTO rules, get protectionist tag

Experts say the country will break its commitments under WTO once higher tariffs against US kicks in on August 4

Despite multiple import duty hikes by New Delhi in the first half of 2018 that attracted criticism from the United States and China as being examples of ‘protectionism’, India hasn't broken the rules of the World Trade Organization (WTO) yet.

As soon as New Delhi's higher import duties against the US kick in on August 4 – effectively breaching WTO mandated 'bound rates' for the first time – India will enter a long list of nations that have broken their commitments to WTO, Abhijit Das, trade expert and head of the Centre for WTO Studies, said.

The country may officially then be open to criticism for being protectionist as under the norms of the WTO, the bound tariff rate is the customs duty rate committed by a country to all other members under the most favoured nation principle. 

This global trade law for the 164 WTO members prohibits discrimination on the basis of tariffs.

India raised basic customs duties on 43 broad categories of goods, including electronics, in this year's Budget. It also raised import tariffs on 76 textile products and announced higher safeguard duties on solar cells imported from China and Malaysia. 

“All the tariff increases that India implemented so far are within the bound rates, unlike US President Donald Trump's global tariffs on steel and aluminium as well as the ongoing tariff measures being taken by Washington DC and Beijing against each other,” Das added.

India, US trying hard to douse tariff flames

On the other hand, the most talked about trade measure has been the raising of import duties on 29 import items (mainly agricultural) from the US. New Delhi's move is in 'retaliation' to Trump hiking tariffs on aluminium and steel. Announced in June, the measure targets high value imports such as apples and almonds, aiming to rake in $240 million worth of duties through higher tax up to 100 per cent.

Trade experts say the move was warranted owing to Donald Trump’s tactics. “India had informed the WTO of its plan to raise tariffs through safeguards measures. But existing norms do not allow a country to take safeguard measures against just one nation, as India has done. The US has not respected the multilateral system recently, but if it feels that the tariffs are unjust, it should go to the WTO,” Biswajit Dhar, a trade expert and professor at the Jawaharlal Nehru University, said.

But others remained cautious. “This increase will be in addition to raising new trade barriers, making domestic manufacturing more attractive as steep increases in customs duties may make imports unaffordable. 

For agri products, such as pulses, which have witnessed an increase from 30 per cent to 70 per cent, this would provide encouragement in increasing the cultivable area, on the back of good pulses production,” M S Mani, indirect tax partner, Deloitte India, said.

While New Delhi has justified the move as a response to the Trump administration's decision to raise import tariffs in steel and aluminium earlier in the year, it is also hopeful of resolving the issue amicably. 

“Implementation of the tariff hike is from August 4 and we are hopeful of resolving the issue before the deadline. 

During the visit of Assistant US Trade Representative Mark Linscott in June, it was decided that both the nations will identify the final list of products in which some announcement can be made by the political leaderships on both sides,” another official said.

Currently, a team of officials from India are camping in Washington DC, trying to secure an exemption from America's aluminium duty hike, following which India may also roll back its own import hike.

Fear of trade deficit and industry pressure

"We have also taken the highest number of measures among major economies to facilitate trade," a senior Commerce Department official added. According to a report released by the WTO earlier this month which tracks trade policy changes by G20 economies, India has been shown to have implemented 28 reforms facilitating trade, much higher than the 2 taken by China.

However, the same report has pointed out that New Delhi has initiated a number of measures that are widely considered to be 'trade restricting' since last year, when the United States and China began locking horns in a global trade war spanning hundreds of billions of dollars. Between mid-October 2017 to mid-May 2018, India led the pack among G20 nations in imposing tariff increases, stricter customs procedures, imposition of taxes and export duties. The report shows it initiated restrictive measures on 16 separate occasions while similar measures from China and the US were just two each.

A majority of these has been argued as necessary due to the growing trade deficit which widened to a whopping 61-month high in June. Led by a sharp rise in the crude oil bill and a possible turnaround in gold imports in the near future, the deficit is set to rise despite sustained growth in engineering and pharmaceutical products that boosted exports by 17.57 per cent.

"The current account deficit is likely to widen to $16-17 billion or around 2.5 per cent of GDP in Q1 FY2019, from US$14 billion in Q1 FY2018, with higher crude oil prices negating the contraction in gold imports," Aditi Nayar, Principal Economist at ICRA said.

On the other hand, domestic industry across varied sectors such as steel, apparel and electronics have complained of foreign goods flooding the market. "A substantial drop in import duty was observed after implementation of GST which has encouraged cheaper imports. Imports in 2017-18 grew at a rate of 16 per cent. Therefore the decision to increase import duties on many apparel items comes as a relief," Sanjay Jain, Chairman, at Confederation of Indian Textile Industries said.