As a member of the World Trade Organisation (WTO), India is permitted to use trade remedial measures (TRMs) such as anti-dumping, anti-subsidy countervailing and safeguards duties to block low-priced imports to protect competing domestic industries. However, excessive use of TRMs can harm downstream industries and limit the overall growth of India’s manufacturing sector, especially if applied to key industrial inputs. That calls for using TRMs sensibly to avoid their adverse side effects. They should be used only when a competing domestic industry is truly threatened or facing certain closure.
The membership of the global trade body not only helps open up the global markets for Indian exports but also allows India to protect its competing domestic industries from low-priced imports, whether dumped or subsidised if they’re causing or threatening to cause serious harm or injury to them.
Protecting Domestic Industry
In fact, the WTO allows an importing country to impose safeguard duties even if there are no instances of any unfair trade practices by exporters, but there is a surge in imports that might be threatening a competing domestic business. In other words, the WTO empowers member countries to resort to TRMs even if there is no foul play on the part of exporters who are able to supply at lower prices, simply because of their comparative cost advantage arising from either access to cheaper raw material or economies of scale that help them minimise production cost.
Thus, the power to restrict imports through TRMs is too broad and excessively expansive, which has the potential to be misused, resulting in the creation of non-tariff barriers. This is especially so with respect to China, a country that many WTO members, including India, have not accorded a market economy status.
Hurts Downstream Industries
However, indiscriminate use of TRMs will be damaging for downstream industries, and in turn, will cap the growth of the manufacturing sector that the Modi government has been trying hard to push. End-use consumers will also suffer from the increased cost of production that would aid cost-push inflation. Besides, it runs counter to the objective of export promotion.
Many trade officials believe that import duties on inputs don’t affect exports as exporters could easily avail of duty-free import authorisation or remission of duties and taxes on export products (RoDTEP) following the maxim that duties shouldn’t be exported. This is not incorrect. Most Indian companies are not 100 percent export-oriented where it might work. Thus, for a textile major like Raymond, domestic sales that offer higher profit margins, form the bulk of the business (about 80-85 percent of the total sales) and often cross-subsidise exports that give lower margins, sometimes as low as zero percent. A similar story plays out in other industries, for instance, surfactants. The domestic sales that bring in better margins enable Galaxy Surfactant to tolerate lower margins in exports, which are seen as incremental sales that involve additional expenses on marketing and outbound shipments leading to lower profit margins.
Low Margin Exports
For such companies, exports (mostly undifferentiated commodities, the kind of merchandise that dominates India’s export basket) are a low-margin affair that serves only one purpose — it helps in achieving economies of scale or lowering the average cost of production. Obviously, in such cases, duty-free import authorisation is of little help, and import duty by raising production costs lowers domestic demand and profit margins, and in turn disadvantages exports. As Raymond's case is not a one-off or an aberration, import duties on inputs whatever their justification is, tend to adversely impact the country’s export performance.
To make matters worse, TRMs are excessively being relied upon by large producers of industrial raw materials such as viscose staple fibre or intermediates such as steel (a common industrial input for multiple downstream industries including automotive and capital goods), or saturated fatty alcohol, a key ingredient for surfactant industry that further feeds thousands of home and personal care industries, among others. Increased import duty on fatty alcohol induces import of more downstream products such as alcohol ethoxylate (which has risen from $652 million in 2020-21 to $943.11 in 2021-22, and $829.76 million in April-January period of 2022-23) thereby hurts valued added manufacturing within India. As downstream manufacturers can’t escape the impact of increased import duties on their basic inputs, their domestic sales and profit margins suffer, and in turn, manufacturing and exports of value-added products also suffer.
Adverse For Beneficiaries
Eventually, the beneficiaries of protectionist import duties and TRMs suffer too. Thus, India’s excessive raw material protectionism leading to the incidence of inverted duties (higher duties on raw materials than those on finished goods) in the textile sector has prevented this labour-intensive sector from taking off for a long period of time. A little wonder that India is an insignificant player vis-a-vis China in the global clothing market. That, in turn, caps the domestic demand for textile fibres such as VSF (viscose staple fibre) from downstream processors such as yarn, fabrics and apparel makers. The same applies to producers of aluminium, fatty alcohol or steel.
One can argue that producers of these raw materials/intermediates can always export to overcome the limitations of smaller domestic markets. However, if these companies can't compete in a protected domestic market (that is why they seek protection from competitively priced imports, in the first place), they can't compete in far tougher export markets. Besides, selling at higher prices in the domestic market and at lower prices in the export market is tantamount to dumping, and may invite anti-dumping duties in the export markets.
Thus, TRMs shouldn't be used as a non-tariff tool to block imports, at the behest of lobby pressures. The government must have a bigger picture in mind while contemplating to restrict imports, for instance, the number of jobs, output and exports in say steel industry that could be threatened by imports versus the combined potential losses of output, jobs and exports in multiple downstream industries. Saving one large raw material producer, and often an inefficient one, should not happen at the cost of hundreds of downstream manufacturers.
They should be applied more sensibly than we are used to, at present i.e., only when a competing domestic supplier is really threatened or closure looks imminent. Merely because WTO allows the use of TRMs doesn’t mean we must use them. We should rather use them sparingly.
Ritesh Kumar Singh is a business economist and CEO, Indonomics Consulting Private Limited, a policy research and advisory startup. He tweets @RiteshEconomist. Views are personal and do not represent the stand of this publication.
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