Trade negotiations: How can India strike a strategic balance

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By Murali Kallummal

A trade negotiations strategy for India: Globalisation, liberalisation and privatisation have fundamentally altered and driven international regulations governing cross-border factor movements. Since 1995, much of these transactions in the commercial sphere have been regulated by the World Trade Organisation (WTO). By the early 2000s, there was growing discontent among developing countries due to the WTO agreements’ unbalanced outcomes compared with what had been promised by developed countries. These unbalanced outcomes have resulted from how the multilateral trade negotiations were designed and practised during the last three decades.

Trade between countries is mainly regulated by tariffs and non-tariff barriers (NTBs). The overwhelming emphasis of the WTO and its predecessor GATT has been on tariffs since 1947. However, trade policy formulation has witnessed a radical change since mid-1990s with the increase in non-tariff measures. Therefore, liberalisation and harmonisation of both tariffs and non-tariff measures (NTMs) are necessary to improve export market access for a developing country like India and to protect the domestic production.

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Non-tariff measures loosly regulated

Analysis of the history of trade negotiations under the WTO’s Uruguay Round reveals that tariffs have been disciplined and made largely predictable by putting in legally binding tariff commitments on products on a line-by-line basis (Harmonised System HS codes). Accountability has also been instilled for Member countries by making it a violation to increase tariffs beyond the bound rates in the WTO tariff schedules, which can be brought under the Dispute Settlement Understanding (DSU). However, NTMs, especially the sanitary and phytosanitary (SPS) and technical barriers to trade (TBT) are loosely regulated and lack similar legally binding commitments.

Countries have been abusing this window offered by the lack of predictability and accountability of NTMs at the WTO to refuse products exported by developing countries like India in non-transparent ways. It has resulted in considerable loss of export value for India. On the other side, the Indian economy has also suffered hugely from unwarranted imports due to the lack of strategic application of NTMs focussed on national standards. Both these have negatively impacted employment and livelihood opportunities in the country.

The Covid-19 pandemic has thrust these issues to the forefront of the challenges being faced by the nation, once again emphasising the importance of local solutions (and therefore to be ‘vocal for local’, as Prime Minister Narendra Modi’s tagline goes). There have been some policy reactions from the government to regulate trade in the light of these issues. To quote the Union Commerce and Industry Minister Piyush Goyal:

“The government has been readying to place tighter restrictions on the import of 371 items — ranging from toys and plastic goods to sports gear and furniture — which are worth $127 billion. A large chunk of these originate in China, and for those goods, we will pursue import substitution.”

The government has also identified 12+8 priority sectors with potential for import substitution and export promotion. These are welcome policy efforts. Simultaneously, given that trade policy is one of the primary policy instruments for aiding the country’s development objectives, India’s trade negotiations strategy demands a holistic approach inclusive of NTMs. India’s trade negotiations must focus on a balanced outcome between tariffs and non-tariff measures (NTMs) like SPS and TBT measures to secure India’s development.

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Building capabilities for addressing non-tariff measures

One of the fundamental differences between tariffs and non-tariff measures is that the former are regulated mostly at the national level by the finance ministry and customs authorities. In contrast, NTMs are regulated by multiple authorities internationally (like the UN inter-governmental bodies such as Codex, IPPC, OIE, etc.) and by multiple national authorities. Therefore, the language and grammar used to analyse tariffs cannot be applied to the harmonisation/disciplining of NTMs as the two have different dynamics.

India needs to build capabilities so that the country’s strategy for trade negotiations would address the challenges emerging from such differences, holistically and dynamically. India also should adopt a differential approach while negotiating various types of NTMs like technical regulations (mandatory), standards (non-mandatory), conformity assessment procedures, and private standards — all of these are to be viewed as enablers of desirable structural challenges in the domestic economy.

Fundamentally, the following six principles are required to be kept in mind while formulating NTMs:

  1. Transparency – notifying NTMs, making drafts available, publishing them, and having a nodal agency to provide clarity.
  2. Openness – international standardising bodies should be open to all WTO members’ relevant bodies on a non-discriminatory basis.
  3. Impartiality and Consensus – the standards development process shall not give privilege to, or favour the interests of, a particular supplier/s, country/ies or region/s.
  4. Effectiveness and Relevance –– by adopting a sustainable approach, the international standards need to be relevant and effectively respond to regulatory and market needs and scientific and technological developments across different income group countries’.
  5. Coherence – international standardising bodies should avoid developing conflicting international standards, avoid duplication of, or overlap with each other’s work.
  6. Development Dimension – Constraints on developing countries to effectively participate in standards development should be considered in the standards development process.

In the Indian context, there is a need to factor in the national development priorities when we address some of these principles. At the same time, all NTMs need to adhere to the legal provisions while addressing developmental concerns.

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Among the various disconnects in trade policy making, one of the major ones is that while trade agreements are negotiated and executed between two countries or group of countries, it is the firm (and other stakeholders) which are the ones who need to follow and conduct the rules of the agreements. Countries with formal structures with well organised economic agents across the agricultural, industrial, and service sectors are found to be gainers in this process.

The increase in notifications of SPS and TBT measures to the WTO and an increase in the use of standards deviating from international standards have hurt many developing countries with a large presence of micro, small and medium enterprises (MSMEs). Although mutual recognition agreements (MRAs) can bring about de-facto harmonisation or a condition of equivalence and lead to trade facilitation, it may be too onerous for MSMEs within the informal sector cost associated for the same to be adopted. In the Indian case, with a mostly unorganised sector and a very high share of SMEs, trade negotiations and implementation of trade agreements should therefore reflect livelihood concerns by incorporating production and livelihood linkages, substitutability versus complementarity etc.

Fundamental sectoral realities do not change depending upon whether the trade negotiations are multilateral or bilateral. Therefore, bringing in transparency and predictability into the different kinds of trade negotiations is critical to take care of sectoral and economy-wide considerations. If the need arises, there should be concerted efforts to amend the legal provisions. The negotiating strategy should be nuanced to address certain core principles like continuity/dynamism, sectoral balance, and strategic considerations, and therefore, all agreements should have a mechanism of review compulsorily to assimilate newer empirical evidence.

All these require building up the capabilities of negotiators. While domestic capabilities need to be built-up at the sectoral levels, in the accelerated pace of digitalisation across sectors, sectoral analysis and negotiations capabilities must involve taking cognisance of cross-sectoral and economy-wide impacts due to cyber/national security and livelihood concerns.

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India’s strategy on NTMs should also be flexible to accommodate an element of regulatory dynamism. The trade policy measures must be validated by an up-to-date empirical assessment of the impact of NTMs.

Therefore, research and analysis are fundamental to a dynamic and strategic national strategy to understand the nuances of the trends in the application of NTMs, changes in the political economy of trade policy-making underlying these trends, and their impact on altering demand patterns for India’s exports and imports for different industries.

Commerce ministry aided by autonomous bodies should develop a network among industrial bodies/institutions/research bodies/educational institutions and international experts to develop the necessary technical support and representation from across the country. Recording and disseminating the research output is vital for building coalitions at the multilateral forums, and such efforts should be made in a calibrated manner—identifying friends and foes is an integral part of this exercise.

Considering all the identified issues and features of trade negotiations, India should bring a coherent national strategy to its negotiations. The strategy should incorporate flexibility across the short and medium-term phases, with continuous participation of stakeholders and with periodic outputs for dissemination.

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Short-term negotiation strategy

India should urgently address the imbalance between tariffs and NTMs in trade negotiations, as given below.

  1. Alter applied tariffs (within the flexibility of the WTO’s ceiling bound levels) on products with the following characteristics:
    a. identify tariff lines and countries with surges in imports which violate the ‘non-preferential Rules of Origin (NP-RoO)’, which was initially conceived in the Uruguay Round to be applicable on MFN tariffs ;
    b. tariff lines faced with inverted duty structure (mostly ITA-1 and others under the various FTAs); and
    c. modify tariff sectorally to support the tariff escalation principle and provide a support for the value addition process.
  2. To deal with standards (SPS and TBT measures), follow the broad recommendations of the Indian National Strategy for Standards (INSS) released by the Department of Commerce, Government of India in 2018.
  3. Re-orient and adapt some of the existing international standards developed by ISO, ITU, etc., to suit Indian conditions and requirements. While doing so, India should keep itself abreast with technological changes to identify the new and emerging barriers, and raise objections and make necessary modifications based on domestic realities.
  4. Identify a list of sectors with defensive and offensive interests and prioritise them from national concerns like employment, livelihood, cybersecurity, environment, etc.
  5. Develop specific trade concerns, particularly in SPS and TBT, based on the draft notifications to the WTO.
  6. Build institutional networks (industry clusters, universities and research bodies) which have the working understanding of the application of NTMs in the identified sectors.

Materialising such an integrated strategy will mean that India takes activities must be closely aligned with the negotiating developments at the WTO in the Committees on SPS and TBT and the market access negotiations. This will involve: building up and strengthening research and analysis based on empirical evidence; building coalitions with relevant stakeholders and institutions already working (on the comments on SPS and TBT notifications); etc.

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Medium-term trade negotiations strategies

Building capacities in the priority sectors and providing continuity in addressing the imbalances in trade negotiations that were identified under the short-term strategy should be calibrated towards efforts that may create a sense of continuity. In the medium term, we should work on solutions to address the concerns related to the SPS and TBT barriers already notified by members, mostly taking a sectoral approach keeping the earlier caveats into account.

A. Identifying and targeting non-compatible measures

  1. Based on the example of the SPS-based maximum residual limits (MRLs), it could be argued that most of the earlier notifications by the WTO developed members escaped whatever limited scrutiny the NTM agreement mandated. Further, it has been accentuated by the lack of institutional capacities (informal structures and lack of capabilities to catch-up with newer methods and approaches) across the developing and least-developed countries.
  2. Therefore, some of the past notifications could be subjected to scrutiny as non-compatible measures using the WTO’s Dispute Settlement Understanding. Difference between protection and protectionism is fragile and tricky. There is a need to check for WTO compatibility, and it is still one of the biggest challenges faced by SME exporters.
  3. The whole process requires three sets of accurate information that are dynamic and legalistic. The first question is to check for the WTO notification of the national barrier and then analyse the stringency level. There are steps that need to be followed for an effective solution to refusals.
  4. Some of these efforts need to be addressed at the sectoral level as the problems are unique in nature and also because an inspection of the measure/regulation for “compatibility” is largely sectoral in approach. For example checking the stringency of SPS measures in terms of maximum residual limits (MRLs) based on the risk assessment approach most often needs a sectoral approach. These measures are adopted largely by developed countries at regular intervals. Once adopted by a country, such measures should be tracked to check whether they are relaxed in subsequent notifications.
  5. Analysis of the WTO compatibility of all notified NTMs within the draft stage must also become a part of building up negotiation capabilities so that they do not become a non-tariff barrier (NTB) for Indian exporters. This process is particularly challenging because the SPS and TBT notifications most often do not have trade linkage (HS codes). The work undertaken by the Centre (CRIT) must complement and improve upon the existing institutions under the Department of Commerce. There is a need to keep a close tab on the following developments:
    a) Tracking any new NTMs, particularly SPS measures being introduced. These would have to be mapped with existing internationally harmonised standards in order to establish whether the measure is national or international. Therefore, keeping track of the notifications issued by India’s prominent trading partners, and in general, all the WTO members, becomes critical.
    b)Counter-intelligence and surveillance of sales to partner markets become another integral part of this exercise. This is carried out to make an assessment on exported goods as to whether importers meet the SPS measures directives on national treatment (NT) and most favoured nation (MFN) principles. Especially if there are no records on export refusals, these would have to be mapped with the results that are obtained by the process of market surveillance. Trade officer posted at the Indian Embassy should be contacted for the same. Checking and testing for nearly all the products in the major partners’ markets will become a primary concern for any exporting country.
    c)These would have to be done through laboratory testing and checking. In case of export refusals, these would have to be carried out keeping the information of the refusal intact. This becomes essential for the exporter to access DSU for violation of the WTO’s national treatment and MFN principles.

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B. Other Aspects of trade negotiations strategy

Production processes must be facilitated to follow either an adaption or adoption of international standards of good manufacturing and acceptable agricultural practices to avoid the situation of export refusals. Risk assessment-based deviations can be introduced in technology-intensive sectors with completed dossiers.

The following should be components of this strategy.

  1.  Build a closer network with domestic producers
    a) Identification of sectors and products with falling exporting intensity (firms withdrawing from the exporting activity needs a longer terms analysis)
    b) Identify the top priority products and those within strategic sectors;
    c) Propose an India-centric approach for re-defining clusters for application of SPS-based measures
    d) Create a format for firms to lodge a complaint – it should be web-based with specific response timelines.
  2. Build sectoral strategies for increased participation
    a. provide policy inputs and anchor stakeholder consultations
    b. increase participation at the international standards bodies
  3. Build a national database on SPS-based MRL measures with access to Indian exporters to avoid information asymmetry issues.
  4. Address NTM concerns at the WTO SPS and TBT Committees
    a. deviations and information asymmetries
    b. segregation of countries based on preferred usage (TBT Vs SPS) – Industrial innovators (EU) and market-oriented economies (US)
    c. deal with WTO compatibility concerns – challenge new measures within 60 days period announcing them.
  5. Identify formal and informal channels of exports and imports at the product-level.

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The Overall Framework for trade negotiations

It is critical for the country to build a coherent strategy for trade negotiations based on the knowledge and insights deriving from empirical analysis and the Government should become an integral partner in building the capabilities for the same. Data and information gathering and analysis are the most fundamental components at the core of this. The trade ministry should conduct training programmes on international economic policy to strengthen and enrich the skills and awareness of Indian public and private institutions in India and outside.

Across all trade agreements, there is a need to push for the harmonisation of SPS and TBT measures with international standards or negotiate for the acceptance of certificates granted by International Laboratory Accreditation Cooperation (ILAC) laboratories. Overall, mainstreaming the recommendations in pillars one to four of the Indian National Strategy for Standardisation (INSS) has to be an integral part of a coherent strategy for trade negotiations.

(Murali Kallummal is Professor, Centre for WTO Studies (CWS), CRIT, IIFT, New Delhi. Views are personal.)

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