Most government actions are mindboggling. But some are more mindboggling than others. For instance, what could possibly explain the finance ministrys decision to invoke the potentially harmful safeguard measure" listed under General Agreement on Tariffs and Trade (GATT) in order to protect a certain domestic industry (Acetylene Black, in this case), instead of going in for a fairly simple import duty hike?
To be sure, safeguard measures" clause is a major exception to the tariff schedule prescribed in GATT, as it allows a country to raise trade barriers if increased quantities of a certain imported product can cause or threaten serious injury to the domestic producers. In that sense, safeguard measures" do appear appealing; but what is less well known is that they necessarily entail compensatory punishment in terms of lowering of customs duty in some other product category!
In this light, the finance ministrys decision appears irrational as it had the choice of simply going in for an import duty hike without taking recourse to such a costly option. The present level of import duty in case of Acetylene Black (35 per cent) is far below the level prescribed in GATT (77.5 per cent). Raising the duty therefore could not have attracted retaliatory measures by exporting countries.
Was the overly liberal use of safeguard measures" then justified? To understand the issues involved, it would be instructive to look at the various provisions, binding schedules and escape clauses enunciated in GATT.
Under GATT, each contracting party is required to accord Most Favourable Nation (MFN) treatment to the commerce of the contracting nations. Part I of the schedule annexed to the Agreement gives the rates which each member country has agreed to comply with. Part II of the schedule covers the preferential rates of duties. These schedules are commonly referred to as the binding schedules".
But there are some exceptions" under which a country can impose duties on imports in excess of the binding rates. Para 2 of Article II of GATT 94 provides for the following main exceptions:
n a charge equivalent to an internal tax imposed on like domestic product in the home country
n any anti-dumping or countervailing duty applied in consistence with the provisions of Article VI.
Although their rampant misuse does spark off frequent controversies and bitter bickering among trading partners, the reasons behind these exceptions are reasonable and logical. In the first case, since imposition of this duty is equivalent to the internal charges on like domestic product, this duty will not put any extra burden on the imported product. Hence, it will not put the latter into any comparatively disadvantageous position. Therefore, GATT permits the imposition of such taxes.
Anti-dumping duties are resorted to in order to counteract the practice of dumping". Dumping, in the WTO parlance, is defined as sale at an export price below the normal price" prevailing in the domestic market of the exporting country. Countervailing duties, on the other hand, can be imposed if the government of the exporting country, directly or indirectly, subsidizes the exports from that country.
For both these measures, it is a necessary that there should be injury to the domestic industry, which has to be demonstrated on the basis of economic and financial factors. Further, there should be a causal link between the dumping or subsidy, as the case may be, and the injury caused to the domestic industry. In other words, no anti-dumping or countervailing duties can be imposed if the injury to the domestic industry is caused by any other extraneous factor.
In addition to the exceptions provided under Article II of GATT 1994, there is one more major exception to the bound tariffs in the form of safeguard measures". Article XIX of GATT provides for safeguard measures if any product is being imported into the territory of any country or contracting party in such increased quantities and under such conditions so as to cause or threaten serious injury to the domestic producers of like or directly competitive products.
This Article specifically provides that under the circumstances mentioned above, the contracting party shall be free, in respect of such product and to the extent and for such time as may be necessary, to prevent or remedy such injury, to suspend any obligation under GATT 1994 in whole or in part, or to withdraw or modify the concession.
In simple words, it gives the authority for imposition of safeguard measures which can take the form of tariff increases or quantitative restrictions to protect the domestic industries. Safeguards duties can also be in excess of the binding rates.
To be sure, safeguard measures do not involve any unfair trade practice on the part of the exporters or the exporting country. In fact, it is a frank admission of the domestic industrys failure to withstand the competition from imports. For this, a price which is commonly known as compensation" must be paid by the home country seeking refuge in safeguard measures. This compensation can take the form of lower tariff duties on some other products or even increased market access into the country.
The deterrent to the use of safeguard measures is that the affected trading partners (the exporting countries) are free to take appropriate unilateral action against the importing country if no agreement is reached after the process of consultations.
This provision is the price the home country must pay for trying to protect a particular industry, a protection which is necessarily at the cost of another industry in the home country.
This takes us to the basic issue of whether safeguard as a trade protection measure is necessary at all. Why cant the home country simply increase the customs duty and protect the concerned domestic industry ?
The legal position is that so long as the effective tariff is lower than the binding rate, there is no bar on the government to increase the effective tariff up to the level of binding rate without going through the costly process of safeguards. If there is a scope to increase the tariff within the binding rates, there is no need to pay any compensation" on any other item. Safeguard duty, whenever used, is relevant only when the applicable duties are already close to or equal to the bindings for that particular tariff line.
Worse, a lot of hype has been generated of late about safeguard measures as the panacea for all the problems of the domestic industry vis-a-vis competition from imports. This has the potential of making safeguard the favourite protectionist tool in the hands of trigger-happy politicians, and ultimately the pressure-wielding domestic businessmen.
The first case of safeguard duty in India has recently been initiated by the Director General (Safeguards) for possible protection to the Acetylene Black industry. Let us analyse some of the fundamental issues involved here. The bindings in the GATT schedule of India for Acetylene Black are as follows:
As on 1.3.1995 "" 102.5 per cent; as on 1.3.1996 "" 90.0 per cent; as on 1.3.1997 "" 77.5 per cent; as on 1.3.1998 "" 65.0 per cent; as on 1.3.1999"" 52.5 per cent; as on 1.3.2000 "" 40.0 per cent.
The current level of customs duty on Acetylene Black is 30 per cent plus 5 per cent special custom duty. As against this, the present level of bindings is 77.5 per cent which has to be brought down to 40 per cent in the next three years. Considering that three years is a long enough period for any industry to make structural adjustments to face fair competition from imports, the government is in a position to increase the duties without adopting the arduous process of safeguards. There is no need to pay any compensation at all.
Then why go down the safeguard route? There seem to be no logical answer. The recent liberalization has resulted in Indian import duties becoming much lower than the binding rates committed to the WTO. We have the opportunity to raise our existing duties without attracting any retaliatory actions or the need for compensatory steps. This is the route which must to be considered before we run down the path of safeguards.
Since it is only our first case of safeguard, it is hoped that the government will tread down this path with care and circumspection, and terminate the so-called on-going investigations" without any loss of time.
(The author is a Delhi-based lawyer specialising in trade policy and telecommunication issues)