Last week, 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) of the World Trade Organisation (WTO). According to the ASCM, developing countries are allowed to grant higher levels of subsidies as compared to the developed countries before countervailing duties (CVD) can be imposed.
The agreement stipulates that any countervailing duty investigation for a developing country must be terminated if the subsidies granted are found to be de minimis, which is defined as less than 2% of the value of imports of the product being investigated. For a developed country the de minimis is 1% of the import value of the investigated product. The United States’s annual exercise of designating developing, and least developed countries has assumed importance for India this year: 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.
India as target
Under the WTO rules, any country can “self-designate” itself as a developing country. In fact, the WTO does not lay down any specific criteria for making a distinction between a developed and a developing country member, unlike in the World Bank where per capita incomes are used to classify countries. But despite this clearly laid down criteria in the WTO rules for making a distinction between developing and developed countries, the United States Trade Representative (USTR) employed an arbitrary methodology that took into consideration “economic, trade, and other factors, including the level of economic development of a country (based on a review of the country’s per capita GNI) and a country’s share of world trade” to exclude India from list of designated developing countries.
This is the second instance in less than a year, when the U.S. has refused to extend to India the benefits enjoyed by developing countries under the multilateral trade rules. On May 31, 2019, U.S. President Donald Trump announced that India would be taken off the list of beneficiary-developing countries under its scheme of Generalised System of Preferences (GSP). The GSP is a special window provided by the U.S. and several other developed countries, through which they import identified products from developing countries at concessional rates of duties. Importantly, GSP confers non-reciprocal benefits, implying that the developed countries cannot expect reciprocal market access from the beneficiary developing countries. Yet, the U.S. denied GSP benefits to India arguing that India was unwilling to offer better market access to its products.
Excluding India from the lists of developing countries for the purposes of using countervailing measures or denying benefits of GSP are but two of the more recent initiatives that the U.S. has taken to challenge India’s status as a developing country in the WTO. Over the past years, the U.S. has been arguing that the emerging economies, especially Brazil, China and India, have performed much better that those in the developed world and therefore they should no longer enjoy the slew of benefits that they have as developing country members of the organisation.
The impact
What are the benefits that developing countries enjoy in the WTO and what could the potential impact of the exertions that the U.S. is making to deny India the status of a developing country be? Potentially very large, for India would then lose the ability to use the special and differential treatment (S&DT) to which every developing country member of the WTO has a right. In short, S&DT lessens the burden of adjustment that developing countries have to make while acceding to the various agreements under the WTO. Besides, when the WTO finalises an agreement in a specific area, developing countries are allowed longer implementation periods. This measure helps developing countries to introduce a new agreement in phases and are thus required to deploy resources beyond their capacities. S&DT has been particularly beneficial for India in two critical areas: one, implementation of the disciplines on agricultural subsidies and, two, opening up the markets for both agricultural and non-agricultural products.
The WTO Agreement on Agriculture (AoA) provides an elaborate discipline on subsidies. Subsidies are classified in three categories; but two of these are virtually outside the discipline since the WTO does not limit spending on these categories of subsidies. The discipline exists in case of price support measures (minimum support price) and input subsidies which is the more common form of subsidies for most developing countries, including in India. For developing countries, spending on price support measures and input subsides taken together cannot exceed 10% of the total value of agricultural production. In contrast, developed countries are allowed to spend only 5% of their value of agricultural production.
Shifting to DBT
India is a major user of price support measures and input subsidies, and given the constraints imposed by the AoA, the government has spoken about its intention to move into the system of direct benefit transfer (DBT) for supporting farmers. A shift to DBT is attractive for India since there are no limits on spending, unlike in case of price support measures and input subsidies. Further, faced with on-going farm distress, the government has had to rework its subsidies’ programme in order to extend greater benefits, especially to small and marginal farmers.
However, implementation of DBT in agriculture has several insurmountable problems. Targeting potential beneficiaries of DBT seems difficult at this juncture for a number of reasons, including inadequate records of ownership of agricultural land on the one hand, and the presence of agricultural labour and tenants on the other. This implies that in the foreseeable future, India would continue to depend on price support measures and input subsidies. Given this scenario, the government needs the policy space to provide adequate levels of subsidies to a crisis-ridden agricultural sector, and therefore it is imperative that continues to enjoy the benefits as a developing country member of the WTO.
Issue of tariffs
The issue of market access, or the use of import tariffs, is one of the important trade policy instruments. It has some key provisions on S&DT, which the developing countries can benefit from. The most important among these is the undertaking from the developed countries that they would not demand reciprocal tariff cuts, and this reads as follows: “The developed contracting parties do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of less-developed contracting parties.”
Over the past two years, the government of India has been extensively using import tariffs for protecting Indian businesses from import competition. With increasing use of tariffs, almost across the board, India’s average tariffs have increased from about 13% in 2017-18 to above 17% at present. The 2020-21 Budget has enhanced the level of protection of the domestic players in several key sectors, thus pushing the average tariffs even higher. Developed country members of the WTO have generally maintained very low levels of tariffs, and, therefore, India’s interests of maintaining a reasonable level of tariff protection would be well served through its continued access to S&DT, by remaining as a developing country member of the WTO.
Biswajit Dhar is Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi