Economist
Recommends cutting MFN Tariff to Effective Tariff
He
has made many valuation suggestions to GOI which have been accepted. These
include multiple tariff on same item and removable of Cesses.
·
Under
Trump 1.0 and Trump 2.0, there have been many trade/tariff wars and conflicts,
like the US-EU chicken wars, US-Europe Pasta war, etc.
·
The
trade war between the US and China resulted in several rounds of retaliatory
tariffs. As per an UNCTAD study, this led to fall in exports of both the
countries of the tariffed products. This also had trade diversion effects, with
Taiwan, Mexico, the EU, Vietnam and even India benefitting in their exports to
the US of these items.
·
A
global tariff on the US steel imports of 25% and additional tariffs on the US Aluminium imports of 10 % under section 232 of US Trade
Expansion Act 1962.This was not exclusively against India and was directed on
all countries.
·
GSP
benefits were withdrawn from India on June 5,2019 automatically resulting in
MFN tariffs for these items formerly under GSP in imports from India, It also triggered a 25% duty on solar cells which India was
exempted from as long as it was a GSP beneficiary.
·
US
even took India out of Developing Countries’ list citing India’s share in World
Trade above 0,5% and on account of India being a G-20 member. As a result , India was no longer eligible for special
preferences under the methodology for CVD investigations.
·
India had 252 distinct MFN duty rates in 2018.
·
69.2%
of the tariff lines covering around 79.1 imports in the non-agricultural sector
have less than 10% MFN applied tariffs
·
Import
values and tariff lines are more concentrated in the lower end of the tariff
range
·
Effective
tariffs taking into account India’s preferential tariffs to different
countries, is much lower with simple average Effective tariffs at 8.7% and
weighted average Effective tariffs at 4.9% in 2018
·
MFN
tariffs should be rationalized closer to effective tariff levels.
·
Bridge
this gap between Realized Tariffs and MFN applied tariffs.
·
Non-agricultural tariff lines with BCD above 10%
should be examined for rationalization. Even items at the borderline of 10% can be considered for rationalization.
·
Will WTO be
irrelevant and Bilateral Agreements be the order of the day.
·
Will Trade Wars be
only tariff wars or will they assume different forms like STRs (Services Trade
Restrictions) or enter other areas like IPRs and trade related investments,
etc.
[ABS News
Service/29.03.2025]
During
Trump 1.0, we did a major study in collaboration with India Exim Bank on
‘Relooking India’s Tariff Policy Framework’. Now Trump 2.0 presidency is seeing
an ascendancy of tariff conflicts. Whether it will be of serious proportions,
one has to wait and watch!
Since the
US passing the Smoot-Hawley Tariff Act in 1930 raising
import tariffs to protect American businesses from foreign competition which
resulted in the Great Depression to the recent Tariff Conflicts/Wars under
Trump 1.0 and Trump 2.0, there have been many trade/tariff wars and conflicts,
like the US-EU chicken wars, US-Europe Pasta war, etc.
Tariff
Wars under Trump 1.0
In
2018/2019, the trade war between the US and China resulted
in several rounds of retaliatory tariffs. As per an UNCTAD study, this led to
fall in exports of both the countries of the tariffed products. This also had
trade diversion effects, with Taiwan, Mexico, the EU, Vietnam and even India
benefitting in their exports to the US of these items.
In
2018/2019, there was also trade conflict between the US and India. The
simmering trade tensions between India and the US came to the open when two
policies of the US triggered the Indo-US Tariff conflict. The first was the
imposition of a global tariff on the US steel imports
of 25% and additional tariffs on the US Aluminium imports of 10 % under section 232 of US
Trade Expansion Act 1962.This was not exclusively against India and was
directed on all countries. The second phase of Tariff Conflict between the US
and India was more direct on India when GSP benefits were withdrawn from India
on June 5,2019 automatically resulting in MFN tariffs for these items formerly
under GSP in imports from India, It also triggered a
25% duty on solar cells which India was exempted from as long as it was a GSP
beneficiary.
After multiple
pauses, India imposed retaliatory tariffs on 28
items imported from the US, from June 2019.The main items in this list were
Agricultural items like Almonds, Apple fresh,Iron
and Steel and Chemicals. The US even took India out of
Developing Countries’ list citing India’s share in World Trade above 0,5% and
on account of India being a G-20 member. As a result , India was no longer eligible for special
preferences under the methodology for CVD investigations, Our study
shows that both the US and India were affected by these tariff measures
Tariff
Wars under Trump 2.0
While a
trade conflict between the US and India is in the offing, there are also
efforts to resolve or reduce escalation of tariff wars.
Steps
taken
Some steps were taken in
India’s Budget 2025-26 which could facilitate India’s tariff negotiations with
the US. The
immediate impact making trade related measures in the Budget related to India’s
Tariffs are the following.
Removing seven tariff rates over and above the seven removed in 2023-24 budget resulting in only
eight tariff rates remaining including “zero “rate. We had pointed out
the need to reduce multiple tariff rates as in 2019 there were 24 ad valorem
tariff rates including the zero duty rate covering
11839 tariff lines. If NAVs (Non-Ad Valorem) tariffs as given in WTO data, are
also considered, then India had 252 distinct MFN duty
rates in 2018.
Levying not more than one cess or surcharge. Therefore, exempting Social Welfare Surcharge(SWS) on 82 tariff lines that are subject to a cess.(Removing
SWS also suggested by us).
Tariffs for motorcycles with engine capacity not exceeding 1600cc has
been reduced from 50% to 40% and those with 1600cc and above reduced from 50%
to 30% making Harley Davidson and Ducati more affordable which could help in avoiding the tariff ire
of Uncle Sam and please our Italian friends
The Way Ahead
There is a need to first fight the Perception War while undertaking tariff reforms to tackle the Tariff
Wars. The US is repeatedly stating that India is a high tariff country and
threatening countries including India with Reciprocal Tariffs.
India’s simple average applied MFN tariffs (as per WTO
data) is 17.0% in 2023 and trade weighted average applied MFN tariffs is at
12.0 % in 2023. For Non-Agricultural sector it is 13.5% and 9.0% respectively
and for Agricultural sector it is 39.0% and 65.0% respectively. Thus, India’s
simple average MFN applied tariffs is not below 10% for Total and
non-agricultural items and not below 30% for agricultural items. Thus, at first instance
India’s tariffs seem to be relatively higher than many other countries
including the ASEAN countries.
This however is not the real picture as around 69.2% of the tariff lines covering around 79.1 imports in
the non-agricultural sector have less than 10% MFN applied tariffs in 2023.
In
the non-agricultural sector, import values and tariff
lines are more concentrated in the lower end of the tariff range, while in
the case of agricultural items they are more concentrated in the higher end of
the tariff range.
Further, Effective
tariffs taking into account India’s preferential tariffs to different
countries, is much lower with simple average Effective
tariffs at 8.7% and weighted average Effective tariffs at 4.9% in 2018 (as per TRAINS data). This
shows that India’s import tariffs are not as high as it is believed to be.
If this be the case, then there is a need for
India to dispel the belief that India is a high tariff country by highlighting
these facts
Meanwhile, wherever
possible MFN tariffs should be rationalized closer to
effective tariff levels. While there is a need to
bridge the gap between perception and reality, a careful rationalization of
tariffs is also needed to bridge this gap between
Realized Tariffs and MFN applied tariffs. But tariff rationalization has to be done cautiously as
there are many sensitive items and items having livelihood concerns and
Agriculture items are the ones which receive huge subsidies in the US,
resulting in unfair competition with Indian Agricultural sector.
To
begin with non-agricultural tariff lines with BCD above
10% should be examined for rationalization. Even items at the borderline of 10% can be considered for
rationalization.
Thus, there is scope for rationalizing tariffs
at least upto or near the Effective tariff level. This can be done
under the proposed Bilateral Agreement between the US and India (which was also
suggested by us earlier).
Some important issues which need to be examined in the context of Tariff
Wars
These are the following,
·
How will the
Tariff wars which are unfolding affect Globalisation
and the Global value chains.
·
With the
supposedly most Open countries leading tariff wars, will globalization be
furthered or reversed
·
Will WTO be
irrelevant and Bilateral Agreements be the order of the day.