Should India ease trade restrictions further?

DEBATE

T K Bhaumik
Senior advisor,
CII

For trade policy negotiators from developed economies such as the US and the European Union (EU), it is customary to remark that India should ease trade restrictions. They, it appears, have little else to say. Their visits to India are not complete unless they make this observation.

However, there is no doubt that India needs to ease trade restrictions. Our government also understands the imperative of trade liberalisation.

In fact, it is going about removing trade restrictions in a unilateral and systematic way. But why India alone? The US, the EU and the rest of the world should commit themselves to easing trade restrictions.

In order to facilitate free flow of goods and in the interest of fair trade, easing trade restrictions should be seen as a multilateral responsibility to be shared by all. But the developed countries have to take the lead.

In the context of the ongoing Doha negotiations and resolving the deadlock, it is important that developed economies like the US and the EU commit themselves to greater liberalisation by eliminating all trade restrictions against products from developing economies, especially in the way of trade in agricultural commodities and services.

In my view, developed economies maintain far greater trade restrictions compared to developing economies such as India. The latter cannot even afford to meet the costs that are usually associated with trade restrictions.

The developing economies should not be excepted to go as far as developed countries can to reduce their trade restrictions. This is one reason the Doha mandate for trade negotiations had a special thrust on the principle of less-than-full reciprocity, besides keeping in view the special needs and interests of developing economies.

Of course, we need to reduce our tariff barriers, but before we do that, we need to be assured that the US and the EU will open up their markets to a substantial extent to enable us to access them.

I am talking particularly about market access for agricultural commodities, where developed economies have erected huge walls to protect their own markets.

Coming to the services sector, developed economies have hardly removed any restriction that could facilitate greater access to their markets. On the contrary, more barriers are being mounted in the name of protecting jobs, security concerns and public interest.

Regarding non-tariff barriers (NTBs), one wonders what developed countries want; I am not aware of any major NTBs that India maintains.

On the contrary, it is developed economies that are benefiting most from the existing World Trade Organisation (WTO) agreements relating to NTBs and trade defence measures such as subsidies and countervailing measures, safeguard duties and so on. The Doha agenda has mandated negotiation for elimination of NTBs.

India is actively participating in the negotiation and will commit itself to implement the results of the negotiation. In the absence of any final conclusion to the negotiation, India should not make any extra effort. There can be no question of unilateral elimination of NTBs.

India needs no preaching on the imperative of eliminating trade restrictions, but this exercise has to be undertaken on the basis of proportional reciprocity. Developing economies cannot be oblivious to the needs of the vulnerable sections of their populace and their development.

Just as the US, the EU and Japan are not ready to expose their farming community to open competition from outside, we cannot expose millions of our small and marginal farmers to cheaper imports from other countries.

The current deadlock in negotiations on agriculture is on this issue. It is not for us to bend over and ease trade restrictions just because the Cancun impasse has to be resolved. It is also not incumbent on India to sign a blank cheque for the sake of multilateralism.

To conclude, on the allegation that India maintains stiff tariff barriers, I want to point out two things. First, the absolute tariff level cannot be a true measure of tariff barrier. Let us talk of the effective rate of protection.

Second, while developed economies maintain peak tariffs on products from developing countries, we do not maintain any such discrimination. In any case, our government has been consistently reducing tariff barriers, irrespective of whether the industry can bear it or not.

Nagesh Kumar
Director-general,
RIS

India's trade policy should be determined by domestic compulsions and should be driven solely by national interest and not by what the US trade representative Robert Zoelick wants.

If American companies import something more from India, it is because that they find it cheaper to import from India. Otherwise, they would have sourced the item from somewhere else. If this leads to a trade surplus for India, it is no reason to change the country's trade policies.

Besides, the US argument on trade liberalisation lacks conviction, given its own recent actions "" antidumping duties on steel and legislations banning business process outsourcing.

Developed countries like the US tend to champion the cause of free trade but their own trade policies have been turning highly protectionist over the past decade.

While tutoring the virtues of free trade and multilateralism to developing countries, they themselves are creating strong regional trading blocs bound by common external tariffs and strong rules of origin such as the North American Free Trade Agreement (NAFTA) and now Free Trade Area of the Americas (FTAA).

Accounting for more than 60 per cent of world trade conducted on a preferential basis now, these trade blocs are diverting trade and investments away from developing countries.

In general, the average tariffs and other trade barriers are low in industrialised countries. However, their tariffs and trade barriers remain much higher on many products exported by developing countries.

Low average tariff rates tend to mask the wide-ranging variation: between 0 and 350 per cent, for instance, in the case of the US. A startling example is the fact that tariffs collected by the US on $ 2 billion worth of imports from Bangladesh are higher than those imposed on imports worth $ 30 billon from France.

There has been a continued resort to quotas and other non-tariff barriers (NTBs). As many as 30 per cent tariff lines in basic metal industries in the US, for instance, are subject to core NTBs.

There has been a proliferation of NTBs in the form of environmental and food safety standards, which are higher than the internationally-agreed norms.

There seems to be a protectionist backlash in the developed countries inspired from the strategic trade policy aiming to strengthen the competitiveness of their champions at the cost of equitable growth of world trade.

While heavy subsidisation of developed country agriculture is well-known, the continued and rising subsidisation of the industrial sector remains virtually unnoticed.

Not only have developed countries exploited the grey areas in multilateral rules, they have included exceptions for the kind of policies and practices of which they wish to make use.

This includes R&D subsidies and huge financial incentives for investment, which are as distorting as other actionable subsidies.

The US has been giving $ 4 billion in subsidies to the exporting enterprises under the Foreign Sales Corporations (FSC) later deemed illegal by the World Trade Organisation (WTO).

Agricultural subsidies, too, are growing despite the promises of reduction made in the Uruguay Round and the Doha Declaration. The US has announced the most generous farm subsidy package in history in its Farm Bill 2002.

Arguments like multifunctionality are made to justify the ever-increasing agricultural subsidies. Even export subsidies (called export credits in the US) are not reduced. Agriculture trade liberalisation in developed countries has been undermined by dirty tariffication.

Compared to industrial goods, in the US the average applied tariff rates for agricultural products have been 100 per cent higher. On the other hand, India's trade policies have been virtually transformed since 1991 as part of a policy of progressive autonomous liberalisation.

Tariffs have been brought down from the peak of 350 per cent to about 20 per cent on average recently. All quantitative restrictions have been phased out, except on certain products that need to be regulated for security and environmental considerations.

This liberalisation has been affected in a gradual and sequential manner keeping in mind the compulsions of competitiveness while safeguarding the infant industries that may need such protection.

This calibrated liberalisation has produced positive outcomes and has helped strengthen the external competitiveness of Indian industry as reflected by its improved "" although still marginal "" share in global exports.

(The views expressed by the writer are personal)