TCS Daily


Policymaking and Protectionism

By Bibek Debroy - September 12, 2003 12:00 AM

CANCUN, Mexico -- Tariffs and non-tariff barriers (NTBs) on industrial products had historically been the focus of GATT negotiations. In today's Cancun jargon, these are market access negotiations on non-agricultural products. At the plenary session to the Fifth Ministerial Meeting this week, India's Commerce and Industry Minister stated the following: "The suggestion for mandatory tariff harmonization and elimination would be most iniquitous to developing countries because substantial, if not the entire, contribution would then be made by developing countries. On sectoral proposal, we believe that not all the seven sectors are of export interest to all developing countries. Being at different stages of development, they do not have the capacity to undertake binding obligations in all the seven sectors."

 

The seven-sector reference is to the Chairman's proposal for zero tariffs in seven sectors -- electronics and electrical goods, fish and fish products, footwear, leather goods, motor vehicles parts and components, stones, gems and precious metals and textiles and garments. The formula for tariff reduction in other industrial products is yet undecided.


The Indian Commerce Minister's statement is largely public posturing. Arguments for unilateral tariff reduction have been floating around since 1991 reforms started, and last year's Kelkar Task Force recommendations on indirect taxes also propose further reductions.


Tariff reductions on industrial products are thus generally accepted as desirable, although suggestions about tariff reductions on agricultural products run into political economy problems. Tariff calculations are certainly difficult, because there is a basic customs duty, a countervailing duty equal to domestic excise, a special duty, equivalent duty equal to domestic sales taxes and possible anti-dumping, anti-subsidy and safeguard duties as well. There are also differences between applied tariff rates and bindings. India's bound rates are 25 percent or 40 percent for industrial products, with some sectors (like consumer goods) unbound.

 

The WTO gives a simple average non-agricultural tariff rate for India of 30.5 percent. This is on the basic customs duty alone and is for 2001. Tariffs have dropped since 2001 and today's weighted non-agricultural tariff rate should be marginally less than 20 percent. Even 20 percent is pretty high. Not only the Kelkar Task Force, but other committees have also recommended further tariff cuts. By 2010, which is roughly when DDA (Doha Development Agenda) commitments should begin to bite for a developing country like India, tariffs will presumably have already dropped far below what DDA will require. What is the Indian government's problem, then, with electronics and electrical goods and motor vehicles parts and components, although the Indian Commerce Minister didn't directly mention these?

There are probably three related reasons. First, consumer goods are still perceived to be elitist, despite economists arguing that it doesn't make sense to differentiate consumer and non-consumer goods, just as it doesn't make sense to differentiate raw materials, intermediates and finished goods. That's the reason many government-appointed commitments leave out consumer goods from suggested tariff reductions.

 

Second, there are strong producer lobbies in electronics, electricals and motor vehicle parts, many of whom have officially accompanied the Indian Commerce Minister to Cancun.

 

Third, there is a strategic dimension. Unlike agriculture, industrial tariffs in the developed world are indeed low, thanks to earlier rounds of GATT negotiations. Historically, developing countries have often been exempt (or faced reduced commitments) thanks to the special and differential (S&D) clause. That's the reason developing countries have to make substantial contributions today. However, largely because of fish and fish products, footwear, leather goods, textiles and garments, average import duties in developed countries on imports from developing countries are higher than average import duties on imports from developed countries. Sometimes, there are specific duties that convert to high ad valorem equivalents. There are peak tariffs and tariff escalation, the last deterring value addition in developing country exports.

 

All these, barring specific duties, have been explicitly mentioned in the Doha Ministerial Declaration. There are also non-tariff barriers (NTBs) since protectionism surfaces through other guises through policy substitution, once disciplines are imposed on tariffs. Examples are unreasonable standards, anti-dumping and anti-subsidy investigations and even rules of origin. There is enough documentation and one doesn't need to belabour the point. NTBs have to be addressed separately. But on tariffs, the strategic intent presumably is to obtain concessions from developed countries, before agreeing on reduction commitments. As a strategic intent, this is fine, as long as one doesn't lose sight of welfare gains that come even from unilateral tariff reductions.

 

Historically, India has always been opposed to everything proposed at the WTO. There is a case for India being more aggressive on industrial tariffs in Cancun. This includes tariff barriers that developing countries impose among themselves, such as within South Asia. There is nothing wrong with a Swiss formula rather than a Uruguay Round one, with linear reductions in the latter and proportionately higher reductions in the former. Yes, one should extract the quid pro quo. But one needn't protest and scream too much.

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