TARIFFS ARE IMPOSED by countries to protect domestic industry and, to a lesser extent, raise revenue. Protectionism comes at a price―tariffs add to the cost the domestic consumer pays and does not necessarily reduce trade deficits or bring in investments.
The reciprocal tariffs operate on the simple mantra that ‘If they charge us, we charge them’. This includes value added tax or goods & services tax and non-tariff barriers. Donald Trump believes that the US trade deficit of over $1 trillion has been accumulated because of the lack of reciprocity. The US, at an average tariff structure of about 3.3 per cent, undoubtedly charges less than most countries and is well within its right to increase tariffs. But reciprocity will violate the well-established Most Favoured Nation (MFN) rule of the World Trade Organization (WTO). The MFN rule, in effect, stipulates that the 166 members of WTO should not discriminate for the same item between nations.
Strange as it may seem, nobody is clear what this means. As The Economist has mentioned, reciprocity would lead to absurdities―the US has about 13,000 items in its tariff. The principle of reciprocity with each of the trading partners will lead to a situation where the US tariff may well have more than 2.3 million individual rates! 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.
Undoubtedly, India’s average tariffs are high. But does reciprocity mean an increase on all exports from here? As Global Trade Research Institute has pointed out, this would mean an additional tariff of 4.9 per cent over the current 2.8 per cent across the board. Does it mean sector level? In that case agriculture, an important sector of export to the US, will be badly hit―by as much as 38 per cent. Does it mean industrial goods? In that case pharmaceuticals, diamonds and jewellery, engineering goods, plastics and electronics would be impacted. Obviously, the higher the difference in the tariffs between the US and India, the higher would be the impact. What this will mean is that Indian goods will become expensive, and the US consumer will pay the price. It also means that the US consumer will look at cheaper alternatives and that will impact Indian exports adversely.
There are many scenarios that can play out. If India agrees to reduce tariffs without disturbing the MFN principle, Indian exporters will not be impacted. However, Indian manufactures would face the challenge of cheaper imports and will have to cope with less protection. But the greater danger will be the possibility of dumping of goods.
The other possibility would be India negotiating a bilateral trade agreement―reductions in tariff would follow, but would be restricted only to the US. There is a possibility of the US pressing for much more than just reduction in tariffs in this scenario. The whole range of free-trade agreement issues would be on the table―environment, labour, investment. India may not be prepared for this.
And finally, India can pick and choose those commodities with serious export potential and reduce tariffs only for them without disturbing the MFN principle. Obviously, this will mean loss of revenue, but given that the US is a major export destination, it is a possible way forward. While the US 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.
Every crisis is an opportunity. The 1991 crisis saw the economic reforms that transformed the country. Even as we negotiate with the US, we should look at other markets more closely. The EU, South America and Africa offer opportunities that have not yet been fully exploited. India’s share of global exports is just about 1.5 per cent―we could increase that by exploiting the current crisis. Also, Indian exporters and industry have enjoyed protection for too long and they must brace up to face the challenges of global competition.
The writer is former chairman of CentralBoard of Indirect Taxes & Customs.