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Published on Nov 30, 2019
WTO ruling on Indian export subsidies: Tackling contradictions of the agreement on subsidies and countervailing measures

Last month, India’s position regarding trade negotiations with the US suffered another setback. A World Trade Organization (WTO) ruling upheld the US complaint of Indian export subsidies being in violation of free trade norms. This is in line with US President Donald Trump’s policy of undermining India’s line-of-argument of its developing economy status posing limitations on full compliance with free trade.

WTO ruled against the country's domestic export subsidy programme under five sets of measures: Export Oriented Units Scheme and sector-specific schemes, including Electronics Hardware Technology Parks Scheme (EOU/EHTP/BTP); Merchandise Exports from India Scheme (MEIS); Export Promotion Capital Goods Scheme (EPCG); Special Economic Zones (SEZ) and Duty-free Import for Exporters Programme (DFIS).

The US’ position has been that countries like India have been overstaying the initial concessions offered under special treatment as per the provisions of Agreement on Subsidies and Countervailing Measures (ASCM). As the champion of ‘America first’ policy, Trump has been critical of Indian tariffs, which he says are “the in the world and calls for “fair and reciprocal” trade.

ASCM was formed in order to aid the General (GATT) – the precursor to the WTO, with respect to the exceptional subsidies and restrictions permitted for developing nations gradually coming in the fold of international free trade. But the rights and obligations were laid down in broad terms, and concepts like export subsidies were defined in terms susceptible to a wide range of interpretations.

India’s case on limitations posed by developing economy status

The US has claimed that India has moved up fast on economic and social ladders since the formation of the WTO in 1995, and is still unfairly enjoying special and preferential trade treatment by "self-designating" itself as a nation. New Delhi has refuted Washington’s claims  at the WTO, based on key that reflect nation’s true economic status–ranging from per capita income, human development indices (HDI) and the burgeoning population living below the poverty line.

For instance, on HDI, as per latest UNDP figures, India ranks 130th out of 189 countries. The reality of such statistics, however, is ignored in international trade, as it only accounts for the factors that directly affect the GDP such as consumption, employment, and the performance of enterprises.

The gap between India and the rich nations is too stark to miss; the commercial nature and mass-scale production, of say, the agriculture industry in the US will be detrimental to the Indian economy if allowed to flood the market with cheap goods against the highly unorganised Indian sector. Besides, it would be extremely unfair if India would be treated on par with the US at the WTO, given that the per capita income of the US is over 15 times higher.

A strong manufacturing sector is essential to compete globally and can effectively stimulate more growth in other industries with a targeted policy. Without the necessary stimulus, it cannot hold up against its peers, like China who have successfully undergone a manufacturing revolution with state intervention.

Similarly, South Korea has undergone massive growth utilizing its Research and Development potential and is now a major supplier of the world’s technological needs. India has been unsuccessful in shifting focus from an agriculture-based economy into a manufacturing hub utilizing its immense demographic dividend.

Developing nations like India need a lot of support in the form export subsidies to be able to direct their economy and continue the trajectory of growth. WTO, too, allows for preferential treatment to be extended out to them so long as they are still “developing”. It is important to note here that to a certain degree; even developed nations institute subsidies on local products for better competitiveness in the global market.

Moreover, underperformance has stagnated the share of the manufacturing sector to the overall GDP growth in the past decade which is still stuck below 20% while other Asian economies have successfully. Hence, the Indian subsidies against which the WTO recently ruled, aimed to promote exports in industries like processed foods, handicrafts, leather goods, capital goods, and textiles – which are majorly dominated by small manufacturers.

In this context, India’s pullout from RCEP can also be understood as it became necessary to hold out against the possibility of massive influx of cheap goods from better positioned state-controlled economies like China. Therefore, developing nations warrant special treatment

Equitable and reasonable market access can only be provided to countries that are on a level-playing field. Providing export incentives can safeguard local industries to withstand pressure from a highly competitive global market.

Addressing the inherent contradictions under the ASCM

Under Article 3.1 of the ASCM, all developing countries mentioned in the Annex VII, with a gross per capita of $1,000 per annum for three consecutive years, are required to incentives. However, Article 27.1recognises that there must be a degree of flexibility in enacting this prohibition when it comes to developing countries, which provides exclusion of the export subsidy prohibition from applying to “other developing country members for eight years from the date of entry into force of the WTO.”

The ambiguity thus lies in the language of the ASCM; Annex VII (b), which states that once the developing countries graduate to developed economy status, they will be “subject to the provisions which apply to other developed members according to Article 27.2(b).”

India and other Annex VII countries argue that the phrase “from the date of entry into force of the WTO” (Article 27.2(b)) has to be modified instead to mean from the date of graduation of individual Annex VII countries, from developing to developed nation status.

The purpose of creating a category of Annex VII countries was to accord a more liberal treatment on subsidies. However, that purpose is defeated, as once those countries reach $ 1000 GNP and all such countries are immediately put on a par with other developed nations. The date of counting this period as a matter of technicality, therefore, must not be used to take away the substantive right of a nation’s transition period.

Developing nations like India, insist that special provisions like export subsidies “be gradually phased out over a period of eight years.” This would allow the Indian exporters and the respective governmental agencies to prepare accordingly when the country crosses the GNP threshold. In contrast, Article 27.4 of the ASCM calls for the provisions to end immediately.

Thus, a more nuanced approach on such special provisions is needed not only for developing economies, but also for the newly-developed economies.

Making a case for WTO reform

WTO members meet every two years at the Ministerial Conference to negotiate new rules for the multilateral trading system. The consensus mechanism of the WTO has failed to produce any new trade rules since the inception of the WTO in 1995, except the Agreement on Trade Facilitation, which came into force in 2017. This has greatly affected the WTO’s ability to devise new rules to govern the ‘new’ economic order.

One such problem not adequately addressed is the benchmarking of development against gross per capita alone, while ignoring human development. This defeats the purpose of the WTO to help less-developed countries procures concessional terms and incentives. For instance, though India is one of the largest market economies, its social parameters hardly match its economic prowess of absolute terms. Substantial restructuring of provisions is thus required to alter the WTO system, a 25-year old body that is in dire need of revamping to be able to overcome such contradictions.

Also, the US is playing hardball on WTO’s full functioning. For instance, President Trump has blocked appointments to the appellate panel governing the trade disputes and has further plans to shut down funding, effectively killing the organisation.

Even before the recent ruling, India had already taken steps to move away from the aid of export subsidies. New Delhi has already set the ball rolling to replace the Merchandise Exports from India Scheme (MEIS) and has proposed the Remission of Duties or Taxes on Export Product (RoDTEP) scheme which would come into force from 1 January 2020.

However, the appeal filed by India will join the queue of 10 other appeals over pending WTO dispute cases filed since July 2018. Until those appeals are cleared, India will be under no legal compulsion to make the changes recommended in the dispute settlement panel’s recent judgment. However, the US could now use the panel’s findings to put pressure on India to extract greater market access under the partial bilateral trade deal that is being negotiated.

Until then, however, in response to the judgment, India can shed light on the inherent contradictions of the ASCM and make a strong case as to why developing nations like itself need the special provisions to continue. While the gross per capita income has increased, the country is still grappling with widespread poverty and has living conditions that are far below than those of developed nations.

Niranjan Jose is a research intern at ORF Mumbai.

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