While the US-China trade war opens up an opportunity for India to boost its exports to the US, increasing domestic production in the short run and competition from other economies is a challenge.
While the US-China trade war opens up an opportunity for India to boost its exports to the US, increasing domestic production in the short run and competition from other economies is a challenge.

India faces difficult trade test amid US-China row, rising protectionism

  • India must make its trade policy architecture more proactive, driven by trade specialists rather than bureaucrats
  • India’s burgeoning trade deficit with China at over $60 billion has already become a policy challenge for the economy

New Delhi: India’s trade policy is going through a flux and the Narendra Modi government in its second innings in office needs to take bold and assertive steps. India’s merchandise exports have been hovering around $300 billion for last five to six years and have not been able to give a boost to economic growth. Despite China moving out of low-value manufacturing, India has not been able to capture that space. With intensifying trade war between the US and China, and rising protectionism, India’s preparedness and competitiveness in the world market will be further tested in coming days.

Negotiations for the 16-member Regional Comprehensive Economic Partnership (RCEP) trade deal is entering its final leg with pressure to conclude negotiations by the year-end. India, so far, has been a reluctant participant, with the industry bodies opposing the trade deal. The Modi administration has an unenviable task of negotiating a deal that is balanced and does not go against the long term interest of Indian industry.

India also has to quickly finalize its national e-commerce policy, including taking a stand on contentious issues such as data localization and source code sharing while keeping a closer watch on the ongoing negotiations on e-commerce by 76 members of the World Trade Organization (WTO) including the European Union, US, Japan and China. India has opposed the move to set e-commerce rules outside the ambit of WTO and has insisted that the current multilateral programme on e-commerce under WTO should be taken to its logical conclusion.

While the US-China trade war opens up an opportunity for India to boost its exports of electrical and chemical items to the US, boosting domestic production in the short run and competition from other well-oiled economies is a challenge. Dumping of steel and aluminium items by China in India as its exporters face the hit in the US may further strain the domestic metal sector. India’s burgeoning trade deficit with China at over $60 billion has already become a policy challenge for the economy.

A high-level advisory group set up by the commerce ministry has advocated reducing India’s overall tariffs to benefit from the US-China trade war. “A knee-jerk, tit-for-tat approach on tariffs may not be the soundest one to pursue without greater examination if India faces greater tariffs. It would not be sensible for India to raise tariffs in a US-China trade war. In fact, reducing own tariffs would be a wiser step," the report said. India’s average tariff is 13.8%.

The panel said that after gradually reducing customs tariffs for two decades, India’s average tariffs were increased in 2017. “This was followed by a further tariff increase, both as announced in the Union Budget 2018-19 and later again in 2018. This trend needs to be arrested and reversed, with a return to a strategy of generally lower and simplified tariffs to improve the ability of Indian exporters to link up with rapidly evolving global value chains," it added.

It recommended that India’s upper range of tariffs and the number of tariff rates should be reduced over a five-year period. “The so-called nuisance tariffs (up to 2-3%) should be reduced to zero over a three-year period. In certain, very limited number of cases, particularly new technology products, basic customs duties may need to be temporarily increased to provide domestic industry with a pre-announced specified time to become competitive, and the tariff rates decreasing each year towards a lower rate before the increase," the report said.

India’s trade relationship with the US under the Trump administration has deteriorated . The US has refused to grant a waiver to India on its duty hikes on aluminium and steel products on national security grounds. India has retaliated by proposing to hike duties on 29 products imported from the US but has time and again postponed its implementation. The US has also dragged India to the WTO challenging its export subsidies regime. Trump has also decided to withdraw duty-free benefits to Indian exporters, but has held back, waiting for an Indian government to take charge in New Delhi.

To make its subsidy regime WTO compliant, the commerce ministry is preparing for a new export promotion scheme along with a production based support scheme as part of its 100-day action plan for the second innings of Narendra Modi government.

The new export promotion scheme may replace the Merchandise Export from India Scheme (MEIS), which has been challenged by the US at WTO. “The scheme will be on nature of refund of all un-rebated central and state taxes and levies scheme on inputs consumed in exports," a commerce ministry official said seeking anonymity.

The production-based support scheme will also aid Indian exporters in the absence of an export subsidy scheme and promote Make In India. “Promotion of certain high potential sectors like electronics and telecom, hi-tech engineering products, medical devices, pharmaceuticals, technical textiles is very essential. We are consulting stakeholders to propose a production-based government assistance. We will finalize the architecture of the scheme very soon," the official said.

The US’ war against “unfair trade" has extended to the WTO. It has refused to appoint judges to the appellate body which is the highest dispute settlement body of the multilateral trading system. The appellate body is set to become defunct by December with only one member left in the panel. The US is also insisting that large economies like China and India should voluntarily give up benefits of special and differential (S&D) treatment available to developing countries under WTO rules.

“Special and differential Treatment is one of the main defining features of the multilateral trading system and is essential to integrating developing members into global trade. Special and differential treatment provisions are rights of developing members that must be preserved and strengthened in both current and future WTO agreements, with priority attention to outstanding LDC issues," a joint statement after an informal WTO ministerial meeting of developing countries in New Delhi said earlier this month. Any adverse decision on appellate body and S&D treatment could impact India’s domestic policy space.

India needs to make its trade policy architecture nimbler and more proactive, driven by career trade specialists rather than bureaucrats. India’s commercial interest should dominate its trade policy moves in an increasingly protectionist world. The Modi administration also needs to undertake domestic policy reforms to help Indian exporters become more competitive in the global market.

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