Widening protectionism

Quality control should not be made a non-tariff barrier

Once a government gives in to protectionism, its control of trade and manufacturing inevitably tends to increase. The government views the trade deficit and in particular the trade deficit with China as a major problem, but has chosen to address this problem not through competitiveness-enhancing reform but through protectionist acts. Where high tariff walls are no longer advisable, non-tariff barriers of various sorts are being introduced. The latest such instrument is quality control orders, or QCOs. It has now been reported that 58 such regulations would be issued in the next six months. This follows some QCOs on items such as footwear, some varieties of steel, and especially toys. The government is comparing this number to the 34 QCOs issued since 1987. But this is not a good thing, since this supposedly low number reflected India’s greater integration into the world economy to the benefit of consumers.
 

There is no doubt that a certain minimum quality would be useful for various consumers. Yet it is also true that the Bureau of Indian Standards and other such regulatory bodies hardly have the capacity to seamlessly and transparently ramp up inspections to such a scale. The effect of QCOs in the absence of capacity is not necessarily to improve the quality of goods on offer but to reduce consumer choice and raise costs all round. This is the natural consequence of such licence raj-type ideas. Officials have been quoted as being pleased that a QCO for toys issued two years ago has sharply cut imports from China. Yet it has also raised the level of compliance required for smaller manufacturers, and questions have been raised by other Indian trading partners about its compliance with standards set by the World Trade Organization. For example, as introduced in 2020, it required a bank guarantee of $10,000 from foreign manufacturers of toys, while not imposing any such sum on Indian producers. The nature of the QCO is also vague and expansionary, including not just final products but large-scale factory audits and certification for each component. These are constructed, as most such certifications were in the past, to make it impossible to comply while staying in business. The power then shifts from the consumer to the regulator and bureaucrat.

Harmonising regulations in these tradable sectors is of paramount importance. The question that should be asked is whether these QCOs are in line with the equivalent regulatory standards elsewhere, and whether mutual recognition of standards with reliable trading partners is possible. Such harmonisation would allow Indian toy manufacturers to produce for export as well. The effect of the toy QCO may have been to reduce imports — but it has also sharply reduced the attractiveness of India as a manufacturing destination for export. This will be the case for all such tradable commodities with the new QCOs. Given that even components meant to go into products that may be exported are subject to QCOs, the administrative and logistical costs have become prohibitive. Regulations structured to improve quality would not have this effect; but these seem to have been designed first of all as non-tariff barriers meant to discourage import. The consequence will hamper Indian growth and reduce the welfare of consumers and producers in the country.