19th February 2020 : The Hindu Editorials Notes : Mains Sure Shot
Question – The United States officially designated developing and least-developed countries for the purposes of implementing the countervailing measures provided by the Agreement on Subsidies and Countervailing Measures (ASCM). In this context critically analyse what is ASCM and what impact will it have on the Indian economy.
Context – Designating India as a developed nation by the U.S.
Why in news?
- Last week, the United States officially published a list of developing and least-developed countries for the purposes of implementing the countervailing measures provided by the Agreement on Subsidies and Countervailing Measures (ASCM) of the World Trade Organisation (WTO).
- This is an annual routine of the U.S. to prepare this list of developing, and least developed countries. But this has assumed importance for India this year because it has been dropped from the list of developing countries.
- In other words, in its future countervailing duty investigations, the U.S. would treat India as a developed country.
What does this mean for India?
To understand in details we need to understand from the basics:
What are countervailing duties?
- Countervailing duties (CVDs) are a key regulation meant to neutralize the negative effects that subsidies of the production of a good in one country have on that same industry in another country, in which the production of that good is not subsidized.
- If left unchecked, such subsidized imports can have a severe effect on the domestic industry, forcing factory closures and causing huge job losses.
- As export subsidies are considered to be an unfair trade practice, the World Trade Organization (WTO) – which deals with the global rules of trade between nations – has detailed procedures in place to establish the circumstances under which countervailing duties can be imposed by an importing nation.
- For example, Assume Country A provides an export subsidy to widget makers in the nation, who export widgets en masse to Country B at $8 per widget. Country B has its own widget industry and domestic widgets are available at $10 per widget. If Country B determines that its domestic widget industry is being hurt by unrestrained imports of subsidized widgets, it may impose a 25% countervailing duty on widgets imported from Country A, so that the resulting cost of the imported widgets is also $10. This eliminates the unfair price advantage that widget makers in Country A have due to the export subsidy from their government.
How does the ASCM come here?
- The WTO’s “Agreement on Subsidies and Countervailing Measures,” defines when and how an export subsidy can be given by a country to any of its products.
- It also suggests and oversees the measures that the affected nation can take to offset the effect of such subsidies on its domestic products.
- The affected nation has two options – 1) to follow the WTO’s dispute settlement procedure to seek withdrawal of the subsidy, or 2) impose by itself countervailing duties on subsidized imports that are hurting domestic producers.
So what designating India as a developed nation means?
- It means that now India can give less subsidy to its products being exported to the U.S.
- This will mean that if a businessman was producing a good for 10 Rupees and the government was giving him a subsidy of 3 Rupees to promote export. He was selling the good for 7 Rupees in the U.S.
- The developing nations are allowed to give more subsidies to their goods compared to the limit of developed countries.
- Hence now since India has been designated as a developed nation in the list, the government can give very less subsidy to its goods compared to what it was giving before.
- So now the Indian goods will be costlier in the U.S. thereby impacting
- The Indian economy is already experiencing a slowdown.
- India has to demonstrate its diplomatic skills and portray its strategic importance to the U.S. to restore its place in the list of developing nations.
Question – Analyse in detail the trade disputes that are affecting India – U.S. relations.
Context – The designation of India as a developed nation by the U.S.
The following are a list of other trade disputes between India and the U.S.:
- India’s economy began to take off in the mid-1990s and its information technology sector shot to prominence in the early 2000s. India is now the United States’ eighth-largest trading partner in goods and services and is among the world’s largest economies.
- But as trade flourished, there also increased tensions between the two also increased between the two. U.S. and Indian officials have disagreed for years on tariffs and foreign investment limitations, but also on other complicated issues, particularly within agricultural trade. Concern for intellectual property rights has preoccupied the United States for thirty years, while issues concerning medical devices and the fast-growing digital economy have more recently emerged.
The ten ongoing issues of trade between India and the U.S. are:
- Bilateral trade deficit – Previously not a top U.S. trade concern, these became a major focus when Trump issued an executive order in 2017 requiring a study of the United States’ most significant trade deficits. India has slightly narrowed the trade deficit in goods with the United States, which went from $24.3 billion in 2016, the tenth-largest that year, to $23.3 billion in 2019, the eleventh-largest. Indian negotiators have proposed reducing the deficit via major purchases of products including liquefied natural gas and aircraft.
- Tariffs – The Trump administration began applying new tariffs in 2018 on steel and aluminum imports from dozens of countries, including India, using a national security exemption in U.S. trade law. In response, New Delhi drew up a list of retaliatory tariffs and filed it with the World Trade Organization (WTO), but held off on applying them.
- Generalised system of preferences (GSP) – Following a public review process, the Trump administration removed India from the GSP program, a special trade treatment for developing countries. One qualification of the program is “equitable and reasonable” access to that country’s markets for U.S. goods and services, and the administration noted still-significant trade barriers in India. Shortly after the Trump administration pulled India from the GSP, India pulled the trigger on its retaliatory tariffs, after which the United States filed a dispute at the WTO. These retaliatory tariffs remain in place.
- Agricultural products – Although agricultural products are not the largest component of U.S.-India trade, tensions over them are long-standing and remain among the most difficult to resolve. The United States exported around $1.5 billion worth of agricultural products to India in 2018 and imported $2.7 billion. Exports to India include fruit, nuts, legumes, cotton, and dairy products, which are important to the economies of California, Montana, and Washington. Spices, rice, and essential oils are the top agricultural items imported from India to the United States.
- India’s 2019 retaliatory tariffs included U.S. almonds, walnuts, cashews, apples, chickpeas, wheat, and peas—and came on top of globally applied tariff hikes by New Delhi. India imposed a retaliatory tariff of 20 percent on in-shell walnuts, added to a 2018 global duty hike to 100 percent. Chickpeas, of which India is one of the world’s largest buyers, were hit with [PDF] a 10 percent tariff on top of a 2017 globally applied tariff of 60 percent. The USA Dry Pea & Lentil Council described pulse exports as “devastated” by trade wars underway since 2017.
- Negotiations over U.S. dairy products have gone on for years. It is difficult for U.S. dairy farmers to sell their products in India, because India requires that dairy products are “derived from a dairy cow that has been fed a vegetarian diet for its entire life.” India defends its position on religious and cultural grounds, whereas the association calls these requirements “scientifically unwarranted.”
- India rejected U.S. proposals in 2015 and 2018 for consumer labels indicating the diet of dairy animals. Frustrated, the National Milk Producers Federation and the U.S. Dairy Export Council sought India’s removal from the GSP program.
- Intellectual property rights – Intellectual property rights in India have been a chief U.S. concern since at least 1989, the year of the first “Special 301 report” mandated by Congress to identify intellectual property issues in trade. Concerns include piracy of software, film, and music and weak patent protections, among others. In that first report, India was one of eight countries placed on a priority watch list.
- India has remained on the watch list, despite some progress. To comply with its obligations as part of the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights, India amended its patent act to recognize product rather than process patents, meaning that replicating a product using a different process would qualify as an infringement. This came into force in 2005. However, the United States has sought further improvements. By 2018, Washington still cited [PDF] insufficient patent protections, restrictive standards for patents, and threats of compulsory licensing. Other U.S. concerns include India’s copyright regime and whether current approaches can deliver “pro-innovation and -creativity growth policies.”
- Investment barriers – India has limited foreign investment in sectors such as insurance and banking for decades. While India has substantially liberalized foreign direct investment (FDI) procedures, issues remain.
- Harley-davidson motorcycles – President Trump has often bemoaned India’s high tariffs on motorcycles—they stand at 50 percent for some Harley-Davidson models. When Trump raised the issue of India’s motorcycle duties in 2017, tariffs were at 75 percent for the largest engine imports. Harley-Davidson sold fewer than 3,700 units in India that year, and most were cheaper models assembled in India. The tariffs on these more expensive, larger motorcycles fell to 50 percent after Trump discussed the issue with Modi in 2018, but Trump has said that 50 percent is “still unacceptable.”
- Medical devices – The Office of the U.S. Trade Representative (USTR) expressed concern for years about customs duties on medical equipment and devices, and tensions were exacerbated when the Indian government applied new price controls on coronary stents and knee implants. AdvaMed, a trade association of medical device manufacturers, petitioned for the United States to review India’s eligibility for the GSP program and testified at the public hearing on the matter, like the dairy groups.
- Digital economy – With the rise of the digital economy, and with India’s growing heft as a hub for information technology services and for digital businesses, new frictions have emerged over data localization, data privacy, and e-commerce. Unlike China, which largely operates on its own digital systems, India uses many U.S. platforms, and many U.S. companies have back-office operations in India. These platforms, enjoyed by India’s half a billion internet users, generate enormous data flows, and Indian leaders are well aware of the tremendous value of this data. Prime Minister Modi has called it the “new oil” and “new gold.”
- But the United States is concerned about how India has handled this new resource. In 2018, India’s central bank ordered companies “that operate a payment system in India”—meaning credit card companies and digital payment platforms such as PayPal—to store all data on local servers. This at first led to confusion about jurisdiction for cross-border transactions, and then a clarification that such data could be processed abroad but must ultimately be stored in India.
- Finally, India is developing a comprehensive data protection policy.
- Issuing Visas – Due to its large pool of highly skilled workers, India is extremely competitive in services, and its professionals work around the world. Of the top ten companies with H1B-approved petitions in 2018, four are Indian firms, three of which are at the very top. Over the past fifteen years, the proportion of approved H1B petitions from India went from just under 40 percent to more than 70 percent.
- The Indian government continues to object to U.S. laws passed in 2010 and 2015 that apply higher fees on companies with more than fifty employees if more than half of those employees are in the United States as nonimmigrants. In 2016, India filed a trade dispute at the WTO over these visa fees, arguing that the higher fees “raised the overall barriers for service suppliers from India.” The WTO dispute is ongoing. India has also expressed concerns over visa processing delays, including more requests for evidence, which prolong review times, and increased rejection rates under the Trump administration.