India: Are multilateral trading rules worth preserving?

Last Updated: 21 September 2018
Article by RV Anuradha
  • It is a gross misunderstanding to consider that the WTO and multilateral trading rules curtail the policy space for incentivising the domestic industry.
  • India can no longer avail of specific exemptions from the treatment of its export subsidies under WTO rules.

There is never a boring day at the President Trump's White House or for the rest of the world reading about Trump. In the fairly sedate world of trade law and policy, he has ensured that businesses and industry are talking more about WTO, trade and trade rules than ever before. The most recent development in this regard is the "United States Fair and Reciprocal Tariff Act," (reported widely by its acronym as "FART") which would give the U.S. President unilateral power to ignore the basic principle of "Most-Favoured Nation" (MFN) treatment, and instead set different tariff rates for different countries. The draft law also proposes that the President would have powers to impose tariffs higher than the "bound tariff rates" agreed at the WTO. The latter, in fact, is the situation with regard to the U.S.' imposition of the additional tariffs of 25% and 10% on imports of steel and aluminium articles, with regard to which India and several other countries have initiated dispute settlement proceedings at the WTO.

This comes close on the heels of another report which suggested that President Trump was seriously considering withdrawing from the WTO entirely.

The Trump shenanigans have had some ironic consequences as well. For instance, one of his biggest grouses against India, EU and several other countries is the high import tariffs on the Harley Davidson motor-cycles. As a retaliation against Trump's unilateral tariffs on aluminium and steel, when the EU threatened even higher tariffs against the motorcycles, Harley Davidson announced that it would shift its manufacturing outside of the U.S. to avoid tariffs and thereby maintain sales. Trump then thundered that Harley will be "taxed like never before."

The US aluminium and steel industry, who were supposed to be the beneficiaries of Trump's tariffs, have also started registering their concerns concern on the adverse impact of the tariffs on American jobs in aluminium processing and across the supply chain. And the American Institute for International Steel, Inc. along with other US based entities have challenged the constitutionality of section 232 of the US Trade Expansion Act- which is the provision under which President Trump had imposed the high tariffs on aluminium and steel in the first place.

What can possibly be done to signal a vote of confidence in multilateral trade rules?

Irony aside, all of this raises serious questions about the relevance and benefits of multilateral trading rules; and more importantly- should other countries continue to play by the rules in the face of such blatant violation by the government of one of the largest markets? And is the WTO's set of multilateral trading rules worth preserving?

I will go with a simple assumption- yes, it is, since businesses like the certainty and predictability that rules can offer. With that basic premise, it stands to reason that governments including that of India, need to consider options and strategies for signalling compatibility with multilateral trading rules.

No country has perfected the system of complete compatibility with the rules of trade, and it is so with India as well. India should therefore first develop an inward-looking strategy to address our vulnerabilities. High tariffs and domestic industry protectionism are the two of the tools most frequently used by India. Another aspect where India is on a weak footing is its export subsidies, against which the US has raised a WTO dispute.

Four possible issues are worth considering:

  • While the high tariffs within WTO bound rates are legitimate tools for protecting the domestic industry, the sudden spike in a range of tariffs in December 2017, followed by the Budget 2018 announcements earlier this year, sent a signal of rising barriers and drew much criticism from India's trading partners. Perhaps it is time for a reassessment, more as a symbolic gesture on India's approach to the value of trade liberalization.
  • Second, it is a gross misunderstanding to consider that the WTO and multilateral trading  rules curtail the policy space for incentivising the domestic industry. On the contrary, the WTO offers spaces for maintaining specific policies for encouraging the domestic industry and attracting investments. These need to be explored in full. Some ideas for this have been addressed in an earlier article for this platform. A careful exercise of WTO compatible ways to protect domestic industry needs to be undertaken prior to framing policies and schemes, and not as an afterthought. Likewise, the Government mantra of "Make in India" needs to have an inbuilt WTO-compatibility assessment which can reassure investors that the underlying premise is to attract investments and not to give preferential treatment to domestic production over imports.
  • With the increase in per capita income of over USD 1,000, India can no longer avail of specific exemptions from the treatment of its export subsidies under WTO rules. But this does not mean that subsidies can no longer be offered. The WTO offers enough policy space to design compatible schemes. This is another action point that needs to be taken up quickly.
  • India's agricultural support programmes have also been under increased scrutiny at the WTO. A careful analysis to address vulnerabilities, and design policies and schemes that are compatible, should be undertaken.

What the world needs is a vote of confidence in the rules for trade. India should consider these small, but deliberate steps towards the same.

Originally published by CNBC TV18, July 2018

RV Anuradhai s partner, Clarus Law Associates, New Delhi, and specialises in international trade and investment laws.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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