The ongoing WTO dispute settlement between the EU and India could encumber India’s efforts to boost the domestic electronic product manufacturing sector
The European Union (EU) has entangled India in a high-stakes standoff at the World Trade Organisation’s (WTO) dispute settlement body (DSB) since 2019, contesting India’s levies, particularly on import duty for several information-communication technology (ICT) products. With an arduous resolution path ahead, India seeks to strike a balance between trade protectionism and multilateralism, given the ongoing India-EU Free Trade Agreement (FTA) negotiations.
EU claims India’s institution of customs and other duties at 7.55 to 20 percent tax rates since 2014 on ICT products such as mobile phones, integrated circuits, and optical instruments has adversely impacted 600 million euros worth of its exports to India. A WTO panel report addressed the dispute in April 2023, observing that India’s tariff norms were inconsistent with global standards, notably the General Agreements on Trade and Tariff (GATT), which require member states to refrain from taxes more excessive than the binding rate upon the goods referred.
India turned to treaty law to invalidate its consent to be bound by the impugned norms on grounds of error of fact; however, the panel adjudged the legal requirement unsatisfied.
The panel enunciated that India could not invoke the Information Technology Agreement (ITA) to escape the commitments made in its WTO schedule nor exclude recent technological products falling under the same tariff line. The panel inferred India’s updated tariff lines’ nomenclature as deliberate, refusing to examine India's request to rectify its tariff commitments, stating that such changes would need negotiations among WTO members. India turned to treaty law to invalidate its consent to be bound by the impugned norms on grounds of error of fact; however, the panel adjudged the legal requirement unsatisfied.
The panel denoted similar findings in parallel India-Japan and India-Taiwan disputes. India contested that some members, including Japan, inappropriately objected to India’s request to rectify technical errors regarding the tariff rates of the items in India’s schedule. However, these objections were not within the panel's terms of reference. India further unsuccessfully contended that the duty-free treatment under the Japan-India Comprehensive Economic Partnership Agreement (CEPA) is conditioned upon meeting the preferential rules of origin and does not grant unconditional duty-free treatment to all Japanese products concerned.
In May 2023, Japan promptly motioned for the WTO to adopt the panel report at the DSB hearing. In contrast, the EU and Taiwan attempted an amicable settlement with India, requesting the DSB a delay in consideration of the panel report. In December 2023, following the inconclusive India-EU talks, the EU moved to DSB to adopt the panel report, much to India’s dismay. In response, India filed its appeal.
India contested that some members, including Japan, inappropriately objected to India’s request to rectify technical errors regarding the tariff rates of the items in India’s schedule.
EU’s demand for concessions
The settlement discussions were unsuccessful as the EU pressed for duty concessions from India going forward. However, India maintained that such concessions would violate global trade norms, as even under a most-favoured-nation (MFN) basis, a WTO member cannot provide import duty concessions of goods only to one member. It argued that they could be discussed only under an FTA, failing which it would mean preferential treatment to the EU.
The WTO appellate body blockade
India has moved for a high-stakes appeal against the panel’s rulings in both EU and Japan cases. However, as things stand, the appellate body, which is the final authority at the WTO DSB, is non-functional because of rifts between member states concerning its composition. With no final authority in sight, the dispute is at a standstill.
Notably, with the United States (US) blocking the appointment of the members at the appellate body, members have often critiqued WTO for structural imbalances in favour of the trade leaders, such as the US, EU, and China. Developed nations advance most disputes, whereas the developing states’ participation across decades shows their lack of confidence in the WTO DSB.
The arbitration alternative: A deferred prospect
While India’s appeal is the right step forward, the EU and Japan have expressed regret for India’s move and pushed for arbitration. EU has repeatedly offered India the arbitration recourse, which India is reluctant to accept, as such interim arbitration agreements undermine the right of states to appeal to a permanent standing body, which is fundamental to the multilateral trading system. EU is also pursuing its ambitious new model of improved investor-state arbitration with India, which includes a commitment by both sides to support a multilateral court.
EU has repeatedly offered India the arbitration recourse, which India is reluctant to accept, as such interim arbitration agreements undermine the right of states to appeal to a permanent standing body, which is fundamental to the multilateral trading system.
EU and India resumed FTA negotiations in 2022, which could be a game-changer for the Indian trade regime. The EU has a share of 10.9 percent of India’s foreign trade and is India’s third-largest trading partner. Favourable developments such as the ‘Roadmap 2025’, adopted in 2020, and the Joint Trade and Technology Council, established in 2022, have expanded India-EU relations and can galvanise the long-anticipated FTA.
India aims to position itself as a robust exporter of its growing industrial production output to the global supply chain, seeking to displace competing Asian suppliers, particularly China. It is anticipated that India’s key export in goods and services will be in the ICT sphere, and a major tariff dispute can stunt this potential.
This ICT standstill raises a few concerns about the ongoing FTA negotiations, given the apprehensions from the first attempt to reach the FTA consensus, which failed in 2013 after seven years of fruitless talks due to irreconcilable differences over content.
To dissolve the dispute, the EU is seeking duty concessions, which, if included in the FTA, would compromise India. Given the rampant shortage of skilled workers, the EU may be also more open to an influx of individuals than in the past.
The discussions entail that the FTA is expected to encompass an investment protection agreement. Though, in principle, such an agreement is favourable, the European Parliament and the Council of the EU must approve this agreement, coupled with ratification requirements from EU member states.
Landmark policies such as the Carbon-Border Adjustment Mechanism (CBAM) may further strain the EU’s exports to India, giving an additional 20 to 35 percent tariffs upon its concrete implementation.
In the near future, differences may emerge between the EU and India. An area where the EU has raised concerns is India’s underwhelming climate record and reluctance to align with global sustainability standards. Landmark policies such as the Carbon-Border Adjustment Mechanism (CBAM) may further strain the EU’s exports to India, giving an additional 20 to 35 percent tariffs upon its concrete implementation.
Presently, the WTO panel ruling does not bind India. The dispute on hand could take years to reach a decision given the uncertainty over the appointment of judges at WTO’s appellate body. However, an interim measure is in force whereby the duties on ICT products concerned have been removed altogether. This prudent step by India caters to global norms and confidence building.
India’s reluctance to compromise has hindered progress in multilateral negotiations at WTO on several occasions—for example, the capping of agricultural subsidies. India is a victim of the WTO imbalance, which can only be overcome by compromise and diplomacy. In June 2023, the US and India dropped six WTO disputes through mutual discussions after India gained bargaining leverage by filing several cases against the US.
The dispute on hand could take years to reach a decision given the uncertainty over the appointment of judges at WTO’s appellate body.
India worries that this dispute could encumber India’s efforts to boost the electronic product manufacturing sector to nullify its reliance on China. The Indian government would be unwilling to reduce duties on ICT products given its “Atmanirbhar Bharat” vision, aiming to upscale domestic manufacturing and reduce imports with production-based incentive schemes to IT hardware manufacturers. India already finds itself in a cumbersome domain regarding Indo-Pacific foreign trade, given the import tariffs from RCEP and CPTPP states resulting in a surge in production costs.
The onus lies on WTO to rectify the fiasco over appointing judges at the appellate body and reforming its DSB towards equitability. Meanwhile, India must attempt to bridge the gap between global standards and India’s policies to protect itself from the EU’s protectionism.
Dharmil Doshi is a Research Intern at the Observer Research Foundation.
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