Dealing with tariff complaints

WTO's India review shows protectionism has alienated partners

The recently released minutes of the meeting at the World Trade Organization (WTO) to discuss India’s latest trade policy clearly show that concerns about its recent turn towards protectionism and import substitution are rife among its trading partners. What is worth noting is that many of these concerns were raised by countries with which India shares close, even strategic, economic and political relationships.

Australia and New Zealand highlighted India’s agricultural policy in general, and foodgrain policy in particular, as requiring further explanation. Brazil made similar complaints about the lack of reform in sugar procurement, which, it said, cost its producers hundreds of millions of dollars a year. The South Korean government expressed concern at India’s use of anti-dumping and safeguard measures, noting that South Korean goods were the second-most targeted by India in spite of a bilateral free trade agreement. Japan highlighted India’s progressively rising duties on smart phones, and expressed worries that assistance for domestic producers in sectors like steel might be “administered in an improper manner”. Taiwan complained that frequent tariff changes had “caused disruption of market order and even led to the failure of some well-planned investment projects”. The European Union summed up these concerns by saying “we are concerned about the overall direction of India’s trade and investment policies, notably regarding the extent of its trade openness and its willingness to integrate truly into global value chains … These developments are a source of concern and uncertainty for foreign economic operators and investors, which the sheer size of the Indian market might not be enough to balance it out”.

Such concerns are understandable. As the delegate from the United States pointed out, the WTO itself had said that “India’s simple average MFN applied tariff rate has increased from 13.5 per cent in 2015 to 17.6 per cent in 2019”. Of course, this does not take into account the changes in India’s internal tax structure in that period, which also saw the introduction of goods and services tax. But it is clear that, even by the standards of relatively protected emerging economies, India is now moving into the zone occupied by countries with the highest tariffs, surpassing by some measure historically closed economies like Brazil. Some of India’s changes are certainly justifiable in terms of economic policy; others might be less so, but still defensible under WTO protocols. Either way, the government must communicate its concerns better, and also seek to reassure its partners that some worrying clauses are not permanent.

More broadly, however, India must take into account the friction that its new protectionism will have on its bilateral relationships with its close partners, including the United States. This policy review took place under the administration of Donald Trump, though the minutes were released only last week. The arrival of a new trade policy establishment in Washington will provide India an opportunity to reset its economic relationship, allowing it to insulate the larger Indo-US relationship from disagreements over tariffs and non-tariff barriers. The widespread concern, now on the record, that tariff changes and other barriers cause uncertainty among global investors in India must be taken on board.