The idea of an international trade organization which will set the rules of international trade and nudge countries towards reduction in tariffs, evolved after the second world war. It was agreed that this was critical for growth of trade. The General Agreement on Tariffs and Trade (GATT) came into being and later evolved into the World Trade Organization (WTO). America was at the forefront as a champion of free and fair trade. The 166 members of WTO are permitted to impose tariffs on imports depending on the item-but are not expected to discriminate for the same item between nations.
Thus, if motorcycles are subject to a 100% tariff in India it is the rate which is applied uniformly to all such imports from all countries. This is the MFN concept which determines all international trade. The exceptions to this are the free trade agreements (which Jagdish Bhagwati has scathingly termed as ‘termites in the trading system!) where two or more nations can agree to a different set of rules.
The ’Fair and Reciprocal Plan’ issued on February 13, even as Prime Minister Modi was confabulating with US leaders is high on rhetoric. The Reciprocal Plan states that America will no longer be taken advantage of and seeks to correct longstanding imbalances in international trade. Among the examples given of trading partners who have not extended reciprocal treatment is that of India, which is said to apply an average Most Favoured Nation (MFN) tariff on agricultural goods of 39% while the US charges only 5% and of motorcycles where India is said to be charging 100% while the US charges only 2.4%.
The Plan suggests reciprocal tariffs and states that the trade deficit of over US $ 1 Trillion has been accumulated because of the lack of reciprocity. The Plan glowingly talks of the Art of the International Deal -the simple mantra being ‘If they charge us, we charge them’. This includes Value Added Tax (VAT) (or in our case it would be the Goods & Services Tax (GST)) and non-tariff barriers.
Obviously, President Trump has convinced himself that the path to ‘Making America Great Again’ is through protectionism; that US Trade deficit is because of unfair trade practices of other countries. The solution being to review all existing trade agreements and currency exchange rates, create an ‘External Revenue Service’, relook at the de-minimis rule among other things. The victim card is being played-the fact that US consumers benefited because of low tariffs is forgotten, that if an Apple or a Tesla chose to put their manufacturing facilities in other countries it was because of the advantages these countries offer.
US which has an average tariff structure of about 3.3% undoubtedly charges lesser than most countries. US is well within its right to increase tariffs-but the principle of reciprocity will violate well-established MFN rules of WTO. It is also not clear how reciprocity will work; the profile of India’s exports to US are very different from its imports from that country. As has been pointed out India charges 50% on pistachios with America being the major source; US is welcome to impose 50%.
We do not export any pistachios. As The Economist has mentioned reciprocity would lead to similar absurdities- US has about 13000 items in its tariff. The principle of reciprocity with each of the trading partners of US will lead to a situation where the US tariff may well have more than 2.3 million individual tariffs! Or the US may choose to go for a weighted average principle with each country. Either way it will increase complexities and the unleashing of a trade war. The argument that VAT/GST is also discriminatory is patently wrong-VAT is imposed on domestic industry as much as on imports and exports are zero-rated.
US is India’s major export destination; it is the fourth largest source of imports. There is no doubt that the balance of trade is in India’s favour with a US$ 49 billion trade positive. It is not clear how other nations will respond to the reciprocity challenge, but India should view this as an opportunity to make their exports more competitive by focusing on costs and quality. This would cushion the possible impact of reciprocal tariffs. India has started to reduce tariffs — while US obviously believes it is negotiating from a position of strength, India should make it clear that reduction in tariffs is part of India’s long-time commitment towards a gradual reduction. India should do this without violating the time-tested principle of MFN.
And this will not be a bad thing for Indian industry which has had tariff protections for long. Even in the latest Budget while there are apparent basic customs duty (BCD) reductions (the overall impact has not reduced since a cess has been imposed) there are proposals in line with our ‘Make in India’ policy to increase BCD on specific products. Our government has over the years invested heavily in infrastructure, in providing export benefits and in making processes simpler. Industry should rely less on tariffs as a means of making their goods competitive.
The Joint Statements issued after PM’s visit mentions ‘Mission 500’ aiming to increase bilateral trade to US$ 500 billion and to set in motion the ‘first tranche of mutually beneficent multi-sector Bilateral Trade Agreement by fall of 2025’. India should not be bullied into reducing tariffs unilaterally but should pursue a Bilateral Trade Agreement vigorously — this is the solution going forward. This could also well be the path to a MEGA partnership which the PM spoke of.
— The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs. The views expressed are personal.
Read his previous articles here
