Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Opinion | India is standing still as global trade changes

New Delhi would be better served by focusing on structural reforms, such as rationalizing India's tariff structure

Donald Trump, Nitin Gadkari and Suresh Prabhu have vastly different remits. Between them, however, they summed up India’s trade dilemmas last week. It makes for a worrying scenario.

On 7 September, the US President signalled his intention to go all in in his trade war with China. If he goes ahead with the tariffs on an additional $267 billion worth of Chinese goods, in addition to previous tariffs that have been put in place or proposed, it will cover the entirety of imports from China. Admittedly, there is no certainty this will play out as Trump might want. The previous tranche of tariffs on $200 billion worth of Chinese goods is still in the ether because of the pressure brought by US companies alarmed at the prospective hit to their investments and value chains.

That said, the implications for the World Trade Organization (WTO) are not encouraging. Trump’s earlier steel and aluminium tariffs were imposed under Section 232, a provision of the Trade Expansion Act of 1962. This piece of US legislation allows national security exceptions to WTO free trade obligations, invoked under Article XXI of the General Agreement on Tariffs and Trade. The targeted countries have lodged a complaint at the WTO. There is no good end to this. If the WTO allows the tariff, similar tariffs on the ostensible basis of national security are bound to mushroom among its members. If it disallows the tariff, it challenges a country’s sovereign right to define its national security, a sure path to irrelevance.

The proposed $200 billion tariffs, meanwhile, are even more likely to run into heavy weather at the WTO. They have been imposed under Section 301 of the 1974 Trade Act, which allows for unilateral measures. However, the US had agreed in 2000 to impose punitive tariffs only after a WTO ruling. It has not done so here. The tariffs Trump mooted on 7 September will doubtless face the same problem. All of which is to say that bilateral and plurilateral trade agreements might get even more of a push. They have become increasingly important as the Doha Development Agenda deadlock has stalled progress at the WTO. Little wonder the number of regional trading agreements (RTAs) has exploded over the past decade.

Potentially one of the highest value RTAs is the Regional Comprehensive Economic Partnership (RCEP), accounting for 25% of global gross domestic product and 30% of global trade. Last week, Union minister for commerce and industry Suresh Prabhu revealed that RCEP members have agreed to New Delhi’s long-standing demand that liberalization in services accompany trade liberalization in the negotiations. But that doesn’t mean an end to India’s coyness about signing on the dotted line, as Prabhu made clear.

The pushback against the RCEP within the government and from Indian industry is not entirely baseless. The steel and pharma industries, for instance, have reason to be worried about being swamped by Chinese imports. It isn’t the only one. However, some perspective is useful. RCEP’s detractors point to the free trade agreements (FTAs) with Japan and Korea. After signing on them, India’s trade deficit with both countries has risen over the past few years. True enough. But, as Naushad Forbes has pointed out in Business Standard, the deficit with China, with which India has no FTA, has risen much more sharply over the same period. Plainly, the problem goes beyond FTAs. For one, the rupee’s real effective rate has appreciated by 20% over the past four years. More broadly, as the NITI Aayog put it in its April note cautioning against the RCEP, opening the Indian market would be dangerous because “proper standards and processes are not in place in India." The nature of India’s export basket doesn’t help, dominated as it is by goods of relatively low sophistication. This prevents it from developing dense “clusters" of exports, which typically accrete around more sophisticated goods, and, in turn, from gaining the competitive edge required to boost export numbers.

Union minister for road transport, highways and shipping Nitin Gadkari’s statement last week that the government is working on an import substitution policy for industrialization is exactly the wrong way to address these problems. We have seen how this story ends in the decades before 1991. It is also a violation of the basic economic truth that a tariff on imports is an equivalent tax on exports. Unfortunately, the Narendra Modi government has been moving in a protectionist direction since at least 2016. The Union budget this year brought that shift front and centre.

In the past, this newspaper has advocated playing hardball on the RCEP when it comes to liberalizing services. It seems New Delhi is gaining ground on that front. Doubtless, it still has tough negotiating ahead of it when it comes to deciding what percentage of tariff lines to cut duties on—the RCEP wants 92% while New Delhi is holding firm at 86%—and lower market access for China.

That is not, however, reason enough to give in to the increasingly loud domestic constituency advocating trade protectionism. New Delhi would be better served by focusing on structural reforms, such as rationalizing India’s tariff structure, as recommended by the Chelliah Committee back in 1993, and plugging the many gaps in the Foreign Trade Policy 2015-2020. Global trade is changing, and swiftly. New Delhi must keep up.

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