Implication of WTO on India's Trade Policy Dr Rajesh Mehta

India is founder member of World Trade Organisation (WTO) and its predecessor - the General Agreement on Tariffs and Trade (GATT) system. The multilateral trading system has significantly affected India's export and import during 1995-2004. India's global export has increased from US$ 30.63 billion during 1995 to US$ 71.79 during 2004 an increase of 10 per cent per annum. India's corresponding import has increased from US$ 34.7 billion during 1995 to US$ 94.1 billion in 2005, i.e. annual growth of around 11.9 per cent. However, it is difficult to say that the growth in India's import and export is mainly due to various decisions in the multilateral trading system of the WTO.

This paper analyses select case studies that have directly affected trade policies of India, due to formation of the WTO. The paper is divided into five sections. Section I deals with removal of quantitative restrictions (QRs) as per dispute settlement of the WTO in 1999. India had bound few important agriculture items in Uruguay Round at zero per cent. After removal of Quantitative Restrictions (QRs), India had to re-negotiate bound tariffs of these items. Re-negotiation process of WTO demands that member country (India) has to give more market access (or compensation in WTO terminology) in lieu for increasing level of bound tariffs of these agriculture items. Section II deals with these renegotiations of agriculture commodities, which were bound at zero per cent till Uruguay Round. Section III deals with anti-dumping and other safeguard duties. The impact of implication of removal of Multi-Fibre Agreement (MFA) on India's textile and clothing sector is analysed in Section IV. Concluding remarks are given in Section V.

I. Removal of Quantitative Restrictions
GATT/WTO does not allow imposition of quantitative restrictions (QRs). However, India (and few other countries) had maintained quantitative restrictions on its imports under provisions of article XVIII:B of GATT system/WTO. This article allows member countries whose economies are in the earlier stage of development to 'apply quantitative restriction for balance of payment position'.

Before the launch of WTO, dispute settlement mechanism of multilateral trading system was loose. India had been maintaining QR regime, despite the fact that Article XVIII:B, relating to Balance of Payment (BOP), mentions that a member country has to publicly announce the time-schedule for elimination of QRs. After the formation of WTO, the U.S. filed a dispute against India that the continued maintenance of QRs on India's import was inconsistent with her obligations under the WTO agreement. A number of other developed countries, Australia, Canada, Japan, the EU, New Zealand, and Switzerland, later joined in this dispute against India.
In November 1997, a panel by the WTO was constituted to examine this U.S. allegation against India's quantitative restriction on imports for agriculture, textile and industrial products. The panel report was not favourable to India; but it challenged the finding of panel, leading to formation of an appellate body. In August 1999, the report of the appellate body1 of WTO ruled that 'India maintains quantitative restriction on agricultural, textile and industrial products falling in 2714 tariff lines' and recommended that 'India bring its balance-of-payments restrictions, which the panel found to be inconsistent with articles… of the GATT… into confirmatory with its obligations under these agreements'. After this report, India had no option but to reach a mutual agreement with the U.S., or face arbitration. India signed an agreement2 with the U.S. on December 28, 1999, for phasing out of quantitative restriction (QRs) on all imported items by March 2001, i.e. within 15 months.

India started its economic reforms in early 1990s. In the pre-reform era, India's import policy was highly protective with different categories of importers, different types of import licences and alternate ways of importing. A number of concrete steps towards liberalisation had been taken during the 1990s within the framework of economic reforms. Table 1 gives the number of tariff lines, which were subject to different types of Non Tariff Barriers (NTBs).

After the removal of QRs, as per India-U.S. agreement under provisions of the WTO, there was panic that India's import of some sensitive products may significantly increase. There were many reasons for this. First, Indian industry was subject to a high level of protection for a long time. Second, India had not bothered to bound its tariffs appropriately in the Uruguay round because it was possible to put restriction on imports through QR. Thirdly, there can be adverse impact of increased import on welfare indicators like employment, out put, etc.

A number of steps were taken by the Government of India to handle sudden and significant increase in import of select items:

(i) Number of tariff lines were identified which were sensitive to imports;
(ii) A control room was set-up to watch sudden increase in import of commodities, for appropriate action;
(iii) Imposition of WTO-consistence Non-Tariff Measures (NTMs), like standards, were stream-lined, and
(iv) Tariffs of sensitive items are not significantly reduced below committed bound levels, mentioned in schedules of the WTO.
An attempt has been made by Mehta (2000)3 to estimate the likely increase in India's imports due to removal of QRs as per mutual agreement between India and the U.S. under provisions of WTO. The likely increase in India's import, due to removal of QRs, has been carried out by using a simple econometric model in static framework. The study shows that India's import will increase by 3.0 per cent due to removal of QRs.

II. Re-negotiating Bound Tariffs of Agriculture Commodities
It is well known that the Uruguay Round led to the tariffication of all agriculture items, by removing all types of other barriers. India also bound all its agriculture items4. India had bound select agriculture commodities at rounds earlier than the Uruguay Round. Under Article 28 of GATT, India had agreed to keep its import duty on some agriculture items at 0 per cent, as India was a food deficit country when the pact was signed. India had not bothered to change the rate of import duties of these commodities in the Uruguay Round, probably because it was following the QR regime. Some of these agriculture items were rice, split wheat, skimmed milk powder, sorghum, Jawar (or Millet), maize, etc.

After the removal of the QR regime, tariff was one of the most important policy instruments for India's import. India's import of number of agriculture items increased sharply in QR-removed and zero-tariff regime. To quote an example, India's import of skimmed milk powder increased from 2000-3000 tonnes between April to October 1998, to around 18,000 tonnes during the same period in 1999. Keeping these factors in view India had no option but to re-negotiate these zero bindings with its principal trading partners.

The re-negotiation process of the WTO is cumbersome5. It is well known that each WTO member has the obligation not to raise its tariff rate above the bound level. However, there are a number of exceptions to this rule, tariffs may be raised above the bound level. In the course of safeguard actions like anti-dumping and countervailing duties, action such as increase in level of tariffs are take for temporary action. In such temporary cases, the member country obligations of bound tariffs contained in the WTO schedules remain unchanged.

During 1999/2000, India has successfully renegotiated the binding rates under the WTO framework on select agriculture products (with zero bound tariffs) with its principal trading partners. The negotiations have been conducted mainly for those agriculture commodities whose bindings have been made at rounds earlier than the Uruguay Round. Under Article XXVIII of GATT, the renegotiated agreement would enable the country to change the import duty on 17 items such as sorghum, jawar6, maize, rice, split wheat, skimmed milk powder, etc. The deal was a part of a trade-off with agriculture exporting countries under which India has given more access on other items by decline/restructure in tariff bindings like groundnut oil. As mentioned earlier India had to begin renegotiations of the bound rates with principal suppliers of the commodities in the light of removal of QRs. As a part of these renegotiations, India will impose a custom duty of 15 per cent on import of skimmed milk/whole milk up to 10000 tonnes under the tariff-quota deal. Imports above 10000 tonnes would attract a 60 per cent duty. Similarly, the bound rate for inquota of maize is 15 per cent up to 3,50,000 metric tonnes, while the corresponding rate for outquota is 60 per cent.

III. Safeguard Measures and Anti-Dumping Duties7
The WTO agreement allows for imposition of trade restrictions for a temporary period under certain circumstances. These restrictions can be in the form of additional custom duties, which can be classified in the form of safeguard duties or anti-dumping duty, etc.

Safeguard duties can be imposed under article XIX of GATT 1994 on a particular product if there is a significant increase in its imports, which can cause or threaten to cause domestic products on directly competitive products.

In WTO terminology, dumping means exporting product in a foreign market below the price at which goods under consideration are sold in the domestic market of originating country. This may be due to many factors like capturing market share in other countries' markets by selling products at price which is lower than cost of production. Anti-dumping duties can be imposed on such products under WTO, to remove this unfair trade practice. Such practice certainly threatens domestic industry.
A large number of WTO member countries have been using such temporary safeguard measures. The process has accelerated after formation of WTO.

During 1st January,1995-30th June, 2005, 2743 cases of anti-dumping have been initiated in WTO. 47 member countries of WTO, against different exporting countries, have initiated all of these. The initiative was taken against 98 countries. Out of these 98 countries, maximum initiatives were taken against China, P.R. (434 cases), followed by Korea, Rep. (212), United States (158), Chinese Taipei (155), Japan (121) and India (115). Hence, India was the sixth largest exporting country facing maximum number of anti-dumping duties (Figure I).

During January 1, 1995-June 30, 2005, anti-dumping duties on India's export were imposed by 17 importing countries/regions. The following paragraphs give some information from Indian sources.

Indian exports are facing a number of antidumping and anti-subsidy cases against them from other countries. Almost all the anti-dumping and anti-subsidy cases against Indian exports were initiated in the latter half of the 1990s. This follows from the data given in Table 2. In the following paragraphs we give product-wise and country-wise analysis of these cases8.

First, a country-wise analysis of the cited cases is given in Table 3. Out of a total of 82 Anti-dumping cases initiated against exports from India, the highest numbers of cases are seen to have been filed by EU (33 per cent), followed by USA (17 per cent), South Africa (13 per cent), Indonesia (7 per cent), Canada (6 per cent), and Brazil (5 per cent).

Table 4 reports country-wise break up of anti-subsidy cases. An inspection of this table shows that the maximum number of cases are filed by EU (44 per cent). This is followed by South Africa (19 per cent), USA (19 per cent), Canada (16 per cent) and Brazil (3 per cent).

 

A product-wise analysis of cases facing Indian exporters (table 5) indicates that the highest number of anti-dumping cases for a product are engineering products (including steel products), which account for 32 per cent of the total cases, followed by textiles and articles (19 per cent) thereof, drugs and pharmaceuticals (18 per cent), rubber/plastics and articles thereof (13 per cent), and consumer industrial goods (12 per cent). In the anti-subsidy cases again engineering products (including steel products) account for 38 per cent of the total cases, followed by rubber/plastic articles (25 per cent) and textiles/articles and drugs (13 per cent each).

 

IV. Removal of MFA for Textiles and Apparel Industry
Up to the end of the Uruguay Round, a major portion of textile and clothing exports from India and other developing countries to the developed countries was subject to quotas. These quotas were negotiated on bilateral basis at regular intervals, and governed by the rules of multi-fibre agreement (MFA). The multi-fibre agreement was adopted in the mid-1970s. This agreement allows selected quantitative restrictions when there was surge in import of particular product cause, or threatened to cause, to the textile industry of the importing developed country. MFA was a major departure from basic GATT rules of most favoured nation (MFN). On January 1, 1995, MFA was replaced by the WTO agreement on textiles and clothing (ATC), which set out the process for ultimate removal of these quotas by December 31, 2004. This WTO agreement can be summarised as 'The ACT is transitional instrument, built on the following key elements: (a) the product coverage, basically encompassing yarns, fabrics, made-up textile products and clothing; (b) a programme for the progressive integration of these textile and clothing products into GATT 1994 rules; (c) a liberalisation process to progressively enlarge existing quotas (until they are removed) by increasing annual growth rates at each stage; (d) a special safeguard mechanism to deal with new cases of serious damage or threat thereof to domestic producers during the transition period; (e) establishment of a Textiles Monitoring Body ('TMB') to supervise the implementation of the Agreement and ensure that the rules are faithfully followed; and (f) other provisions, including rules on circumvention of the quotas, their administration, treatment of non-MFA restrictions, and commitments undertaken elsewhere under the WTO's agreements and procedures affecting this sector'. (c.f. web: www.wto.org).

Textile and clothing is an important sector in developing economies like India. It has played a developmental role on several dimensions. India's export has a substantial share in global trade of textile and clothing. It ranks seventh in world export of textile, and corresponding rank of apparel is 6th. In terms of India's global export by commodity groups, textiles and clothing constitute around 20 per cent. In this context it is worth noting that China is top exporter of textile and clothing in world market.

Countries like India have been waiting for 40 years for removal of multi-fibre agreement (MFA) to enhance its export in developed countries. The main objective of this section is to understand the implication of removal of MFA on India's textile and clothing industry, in one of major exporting countries, i.e. the U.S. market. It has been carried out through trend analysis. Import statistics of the U.S. for first eight months (Jan.-Aug. 2005) of 2005 have been collected and compared with corresponding period of 2004. January to August 2005 is called post-MFA period in this sub-section. U.S. global import of textile and clothing (as defined by Harmonised System of trade classification system, i.e. HS chapters 50-63) during Jan.-Aug. 2005, was US $ 61.7 billion an increase of more than 9 per cent over Jan.-Aug. 2004. US total import of the textiles has increased by 6.4 per cent during Jan.-Aug. 2005 as compared to Jan.-Aug. 2004; while corresponding US import of clothing has noticed growth of 9.4 per cent (Table 6).

U.S. import of textile and clothing from India increased from US$ 2.6 billion during Jan.-Aug. 2004 to 3.3 billion during Jan.-Aug. 2005, i.e. increase of 26.5 per cent in post-MFA period. Most of this increase was noticed in apparel sector. The biggest winner in the U.S. market (by countries) during post-MFA regime was China. US import from China increased from 9.6 billion $ during Jan.-Aug. 2004 to 15.5 billion $ - a big jump of 62.1 per cent in post-MFA regime (Fig. II).

Significant growth of India and China in U.S. market shows that they have not only captured increased import demand of US, but also market of other countries (in the US). It is due to this reason that the share of China in the US global import of textile and clothing has increased from 17 per cent during Jan.-Aug. 2004 to 25 per cent during Jan.-Aug. 2005. Similarly, India's share in US market has increased from 4.7 per cent in Jan.-Aug. 2004 to 5.4 per cent in Jan.-Aug. 2005 (Fig. III).

There is a significant change in category-wise import basket of US textile and clothing sector during post-MFA period. Table 7 gives US import in Jan.-Aug. 2004 and Jan.-Aug., 2005 for top 10 imports segments of overall textile and clothing from (i) world, (ii) India, and (iii) China. The main object is to test whether India' export growth has been noticed in all the important segments of the US. The following observations can be made from this table:
1. All top 10 import segments of the U.S. belong to the apparel industry (Table 7).

2. U.S. global import demand for all these segments (except women and girls' blouses, shirts, etc. not knit or crocheted) has increased in post-MFA regime.
3. U.S. import from India has increased in all these top 10 segments in post-MFA regime. Similarly US import from China has also increased in all 10 segments. The percentage increase in US import from China was higher than that of India in all top 10 segments.
4. Higher growth of India and China in U.S. import for all top 10 segments show that the percentage share of these two countries has substantially increased in the post-MFA regime. However, level and growth of China in the U.S. market was significantly higher than that of India.

The impact of the ATC on India's export of textile and clothing has been positive and increasing. This increase has been due to (i) increased import demand, and (ii) trade diversion of 'other countries' in destination (developed) countries. Further, the increase has not been restricted to a few commodities, but almost all commodities.

V. Conclusion
In the Uruguay Round, India and other developing countries took part in the multilateral trade negotiations in a comprehensive way. The impact of the WTO on India's trade policy has been very significant. Some concluding observations based on the findings of this paper are:

1. India's imports of almost all quantities were subject to QRs for more than fifty years. In the WTO regime, India was forced to remove all types of quantitative restrictions on its imports. In other words, any importer in India, without any restriction, can import any commodity. It is all due to QR removal as per US dispute settlement with India under provisions of the WTO.
2. The negotiation process in WTO is not simple or easy. In the Uruguay Round India had bound number of important agriculture items like rice, maize, millet and sorghum etc., at zero per cent. Sudden sharp increase in import of these select items in QR-removal and zero-tariff regime made it necessary for India to re-negotiate (zero) bound tariffs of these items. India learned the negotiation tactics through such processes. India has been taking part in the present process of negotiations carefully with a pro-active agenda.
3. India's exports and imports have been consistently and sharply increasing since the past two decades. However, its export has been subject to large number of non-tariff barriers, by its principal trading partners. More than 40 per cent of India's exports to the U.S. has been subject to at least one type of non-tariff barrier9. This has been illustrated by number of anti-dumping cases against India's exports in major destination partners. India has also imposed anti-dumping duties against number of imports/commodities10.
4. The removal of MFA has provided opportunities and challenges to India's exports of textile and clothing sector. The results show that the removal of MFA has been advantageous to India's exports. India's export of textile and apparel has significantly improved in the post-MFA regime. It has not only captured increased import demand of developed countries, but has also captured market share of other countries in destination markets of developed economies.

(Dr Mehta is Senior Fellow, Research and Information System for Developing Countries (RIS), New Delhi. He may be reached at: drmehtarajesh@gmail.com)

End Notes
1. WTO, India-Quantitative Restrictions on Imports of Agricultural, Textile and Industrial products, Report of the Appellate Body, WT/DS90/AB/R, August 23, 1999
2. Announced on December 28, 1999.
3. R. Mehta, 'Removal of QRs and Impact on India's Import', Economic and Political Weekly, Vol. XXXV No. 19, (May 6, 2000), pp.1667.
4. See, among others, R. Mehta, et al., Demystifying Agriculture Market Access Formula: A Developing Country Perspective After Cancún Setback, ( Jaipur: CUTS Centre for International Trade, Economics & Environment, July 2004).
5. See, Anwarul Hoda, Tariff Negotiations and Renegotiations under the GATT and WTO: Procedures and Practices, (Cambridge: Cambridge University Press, 2001), for procedures of re-negotiation. India has also changed its bound tariffs for large number of items of textiles & clothing, information technology, after the formation of the WTO. See R. Mehta, , 'India's Industrial Tariffs: Toward WTO Development Round Negotiations', (New Delhi: RIS, 2005)
6. Also known as 'great millet'.
7. This section draws from R. Mehta, R. 'Non Tariff Barriers Affecting India's Exports', RIS Discussion Paper No. 97, June 2005.
8. India has also initiated anti-dumping cases against many countries. See, S. Datta, (2003), 'Bringing Objectivity to Anti-Dumping Investigations -- The India Model', (mimeo), (ALG India, www.alg-india.com; and Datta, S. (2004), 'Discussion paper on the Use of 'Facts Available' in Anti-dumping investigations', paper presented at the national seminar Negotiations on WTO Rules, organized by Government of India, Ministry of Commerce, New Delhi, Sept. 21-22, 2004, among others.
9. Mehta (2005), ibid.
10. Mehta (2003), 'Indian Industrial Tariffs: Towards WTO Development Round Negotiations', (New Delhi: RIS, 2003).