Trade wars: Difficult to quantify adverse impact

Subrata Majumder

USA President Donald Trump’s initiation of protectionism to insulate America First policy set off a global trade war, and China and India have become the first victims. Both were accused for indulging in unfair trade practices, causing to damage to American industries and employment. President Trump was severe against China on the plea that while the exporting nations treated USA unfairly and reaped the benefits of the open and large American market, these countries were reluctant to reciprocate by opening their own market on equal terms.
But, there is a difference in USA’s actions against China and India. This was reflected in terms of salvos chosen by USA. The Trump administration has chosen high tariff as punitive action against China. In case of India, the action was soft and not punitive. It asked India to submit to multilateral trade rules through negotiations. USA sought legal remedies from WTO against India through consultations under Section 4 of WTO. This shows some faith in multilateral rules. In other words, USA’s reprimand to India’s trade practices does not connote an unfair deal with USA, but blames India for circumventing multilateral rules.
US Trade Representative Ribert Lighthizer challenged India’s exports subsidies as WTO non-compliant. India has exceeded the benchmark of US$1,000 per capita income, as an entitlement to grant export subsidy. Hence, these subsidies were detrimental to fair trade deal practices under the multilateral rules, he said. The subsidy programme includes MEIS (Merchant Export India Scheme), EPCG (Export Promotion Capital Goods Scheme), EOUs, Electronic Hardware Technology Park Scheme, SEZs and Duty Free imports of Export Programme.
In taking punitive actions through high tariff against China, it seems Chinese dumping of steel and aluminium exports of US$50 billion worth of products, using transferred technology and violating the trade related property rights, were considered more damaging to the fair trade practices and American industries and employment than India’s export subsidies. There are three factors, which have catapulted USA‘s severance against China. First: the galloping trade deficit of USA due to China, despite USA’s repeated warning to reduce trade deficit. China accounted for 47 percent of US trade deficit in 2016. Second: Chinese arrogance to initiate tit-for-tat actions, instead of engaging in negotiations to mitigate the trade tiff.
Third: export of US$50 billion technology oriented products allegedly took the benefits of transfer of technology under force. According to Peterson Institute for International Economics, China acquires technology mostly through forced technology transfer from MNCs, which were investing in China and amounted to outright theft. Chinese Premier Li Keqiang vowed to wean away this mandatory obligation in exchange for market access in China.
Article 4 of the SCM (Agreement on Subsidies and Countervailing Measures) specifies the consultations and India asked for consultation. It says “Whenever a Member has reason to believe that a prohibited subsidy is being granted or maintained by another Member, such Member may request consultations with such other Member”. If USA and India fail to resolve the issue mutually agreed for within a stipulated period, the matter will be referred to WTO DSB (Dispute Settlement Body).
If India loses in DSB, which is, however, certain, a loss would be incurred on India’s export as USA is one of the major destinations of India’s exports. India’s major items of exports to USA are garments, textile (without garment), gems and jewelry, especially diamond, drugs and pharmaceuticals and iron and steel products. Exports of these products to USA account for one-fifth or more of India’s total exports.
Tough competition will be posed to India’s garment sectors, if India loses in DSB. In 2017-18, USA accounted for 23 percent of India’s export of garments. Bangladesh will pitch for a tough challenge to India’s garment exports to US. Benefiting under WTO rules, which grant exemptions to Bangladesh to provide export subsidies as its per capita income is under US $1,000 per year, Bangladesh is certain to reap the benefits from USA-India trade tiff by cutting a pie from India’s share in the US garment market. So will Vietnam, a major competitor to Indian garment industry, posing a big challenge to India in USA garment market. Vietnam has already adopted a subsidy-banned export policy to be WTO compliant.
This will be the second time when Indian garment makers will be jolted after the setback with the abrogation of MFA (Multi-Fibre Agreement) in 2005. To this end, resorting to subsidy on services will act as a new safeguard to Indian garment exporters. Services do not come under the purview of rule base WTO subsidies
Despite cheap labour and low cost of inputs, India’s garment exports are hamstrung by high logistics cost. According to analysis, logistics cost for garment export in India is three times more than China and two times more than Sri Lanka.
As regards exports of gems and jewelry to USA, which comprised mainly diamond, withdrawal of subsidy is unlikely to make any major dent to India’s exports. This is because of the nature of the product, market characteristics of USA and the stakeholders of competitors. Diamond is a high value item and the buyers’ segments of diamond in USA are rich. From these perspectives, stripping of export subsidy will not mark any major impact on India’s export of diamond to USA. Besides, there are few competitors to India in exporting diamond to USA. India is the biggest exporter of diamond to USA. More than one-third of USA’s import of diamond comes from India.
As a matter of fact, challenges by USA should prove a blessing for the errant policy makers in India. It would have been a tough task for them to adopt subsidy-less export promotion measures to be WTO compliant by themselves. They can now pass the buck to USA. (IPA)

Sunday, 1 July, 2018