The US last week asked for consultation with India, the first step in the WTO dispute settlement process.
US president Donald Trump has been violently shaking up trade partners across the globe over the last few weeks in his bid to protect domestic manufacturers. The latest move by the United States Trade Representative (USTR) is directed towards New Delhi, with the United States contending that many schemes in the Foreign Trade Policy of India amount to a subsidy to Indian exporters.
India’s obligations at the WTO bar it from subsidising exports as they can distort global trade. But the US allegation would surely be challenged by India, as the schemes identified by the US for action support a wide range of goods and have been regularly tweaked to keep them WTO-compliant.
Pan-industry impact
While this is not the first dispute the US has raised against India, what is of significance now is that, unlike in the past, the impact is not for just one sector or product but for a range of products covering all sections of the industry—large, medium and small. The outcome of this consultation could, therefore, have wide ramifications for industry that is exporting to not just the US but also the global market.
Importantly, the US has argued that the “benefits” under these export promotion schemes amount to $7 billion. As per DGFT in 2016-17, the outgo on export promotion schemes was around `76,980 crore (over $11 billion at 2016-17 exchange rates).
Important schemes under the scanner
The US last week asked for consultation with India, the first step in the WTO dispute settlement process. The schemes that have been called out for consultation include the Merchandise Exports from India Scheme, the Export Oriented Units Scheme and sector-specific schemes—including Electronics Hardware Technology Parks Scheme, Special Economic Zones, and Export Promotion Capital Goods Scheme—as also a duty-free imports for exporters programme.
The US using the process it undermines
Interestingly, the US has chosen the very system it is trying weaken at the WTO, the dispute settlement mechanism, to protect its domestic industry from “subsidised” Indian exports. The US has been blocking the selection of two members to the Appellate Body of the Dispute Settlement Mechanism of WTO since last year, thereby jeopardising an important component of the multilateral trade rules making body that ensures free and fair trade.
Subsidy or reimbursement of embedded taxes?
Notwithstanding the fact that the US is using a forum in the WTO that it is weakening to further its agenda to protect its domestic industry, this move by the US can have serious ramifications for India’s export strategy and competitiveness. Some schemes identified have been in place primarily to either reimburse or not charge the domestic taxes that may get embedded into an export product. It is an accepted fact globally that exporters have a right to get the domestic taxes embedded in an exportable good reimbursed. Developed countries reimburse up to 99% of domestic taxes embedded in an exported product. However, what the US seems to be contending is that the schemes in India go beyond reimbursing the exact amount of taxes embedded in the exported product.
Questioning maintainability
While some countries have in the past conducted countervailing investigations against products using some of these schemes, this is the first time a trade partner is questioning the very maintainability of these schemes.
If the dispute proceeds beyond the consultation stage then a lot of other countries may join the US in this dispute, thereby putting pressure on India to prove that these schemes do not provide any unfair advantage to Indian exporters. Therefore, it is important for India to ensure that the consultations are stopped before they become a full-fledged dispute with the US.
Does US provide export incentives?
Ostensibly, the US does not provide any export incentives. However, there is one scheme that the US Congress has cleared that can potentially help exporters. US exporters—including, but not limited to, manufacturers—that create an IC-DISC (interest charge domestic international sales corporation) can enjoy potentially large tax-savings with relatively low initial costs.
Reports in the public domain suggest “by incorporating an IC-DISC, exporters can transform at least one-half of their taxable income from qualified export receipts into a qualifying dividend, which could reduce the tax bill on that portion of their income by approximately 40% (and the overall tax bill on exports by approximately 20%).” What requires closer scrutiny is whether this scheme potentially subsidises US exports to other markets. There is also a further need to closely scrutinise the benefits that individual US states may be providing manufacturers that imparts competitive advantage.
The politics behind the move
While India prepares its response to prove that the export schemes do not amount to subsidy, it will be very important to address the politics behind the move. The US move is aimed at protecting domestic jobs and industry and India will have show that the exports from India do not in any way take away jobs from US. India is among the top-10 exporters to the US and main products exported into the US in 2016 include precious metal and stone (diamonds) ($11 billion), pharmaceuticals ($7.4 billion), mineral fuels ($2.4 billion), miscellaneous textile articles ($2.3 billion), and machinery ($2.1 billion). None of these products have a large potential to hurt the employment market in the US.
Given the enormity of the impact that such a dispute can have on India’s exports, commerce secretary Rita Teotia has said that India will engage fully and let the US know India’s position vis-à-vis the export promotion schemes.
What will be important is for the commerce ministry to also have a discussion with industry to consider overhauling India’s export schemes to remove any misplaced perceptions in the minds of India’s trade partners.
While India may eventually convince the US on the genuineness of these schemes, this move will certainly trouble several exporters who depend on these schemes to remain competitive in global markets. Therefore, it may be worthwhile to explore the possibility of a back up scheme that addresses the issue of reimbursing all embedded domestic taxes to exporters.
An institutional mechanism
The US move provides an opportunity for the Central government to set up an institutional mechanism consisting of industry, state government and export promotion bodies to undertake a complete study of existing export schemes and then coming up with a scheme that cannot be challenged due to multiple interpretations by countries on the possible benefits accruing to exporters. Such an institutional platform consisting of state and central government officials can also address the age-old problem of lack of adequate infrastructure available to exporters for meeting the challenges of tapping a competitive global market.
At the same time, this US move to hit manufactured exports from India also calls for the setting up of a strong Track 2 discussion with the US that addresses issues beyond the bilateral strategic partnership at the political level. There is a strong case for deeper engagement at the economic level as a trade war benefits no country.
By TS Vishwanath, Principal adviser, APJ-SLG Law Offices
