Why India shouldn’t sign on to more free trade agreements, except on really favourable terms

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By Ajay Srivastava

New Delhi : Imposing high import duties was the most repeated poll promise of President Donald Trump. A 45% import duty on products from China would reduce the trade deficit, promote manufacturing and create jobs in the US, Trump argued. But while team Trump has taken action against H1B visas and the like, one might wonder why nothing tangible has been done on the import duty issue so far.

The answer is straightforward: the US has already surrendered its flexibility to increase import duty at the WTO. Any duty increase now will fall foul of WTO commitments. Water shortage is the most fundamental trade policy problem faced by the Trump administration. Water is a standard WTO term that signifies the flexibility available with the countries to increase import duty on a product. It is the difference between bound and applied duty of a product.

Bound duty can be understood as the ceiling duty, crossing which would violate WTO commitments. So, if the bound duty for a product is 40% and applied duty is 10%, water will be 30% and the country has flexibility to raise the applied duty from 10% to 40%.

Higher the water, greater the flexibility available to a country to raise duty. Now, for the US, the water or the difference between bound and applied duty is less than 1% on most items. The EU, Japan, and most other developed countries have less than 2% water. China, a late entrant at the WTO, is the only developing country forced by the US to have an average of 0.1% water.

Most developing countries, however, retain more water. For example, water is more than 30% for India on most industrial products.

The number of products on which a country notifies bound duties is called the binding coverage. The more products under binding coverage, the less flexibility there is on increasing duty. India has bound only 75% of tariff lines. For the remaining lines, it can raise tariffs to any level without violating WTO commitments.

Its water problem made the Trump administration realise that it cannot impose high duties within the WTO framework. So an alternate strategy of bypassing the WTO if its rulings do not suit US interests is mooted. However, this would force other countries to do the same.

Even though Trump blames China, Mexico, and South Korea for the large US trade deficit and loss of jobs, business realities may force team Trump to change its stand again. The US consumer is critically dependent on China for the supply of most daily use products. Most Chinese goods will be cheaper even after the imposition of 45% tariffs because of high American wages. Duty increase will not lead to local manufacturing.

Till last year, it looked almost certain that the three mega free trade agreements (FTAs) under negotiation would gradually morph into WTO-like institutions. With the US withdrawal under Trump two of these, the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP) are already dead. Regional Comprehensive Economic Partnership (RCEP) remains the only remaining mega FTA under negotiation.

India is a high water country while China and Japan, the major RCEP countries, are low water countries. So today India can increase import duty on a product without violating WTO commitments, but China or Japan cannot. Signing of an FTA will take away our flexibility to raise duties on imports from these countries. This is because the import duties once reduced under an FTA cannot be increased, even if they are below the bound rates. Our other FTA partners like EU and Switzerland are also low water countries.

In the coming months, we can expect the US to stop many imports on some pretext such as labour law violation and pressurise countries to reduce duties on products of interest to the US. For most developing countries, this may be the time to rejoice at the water advantage they have and not squander it by signing FTAs, unless quantifiable benefits are available.

Source: Times of India (blog)

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