A dispute lost

Electronics tariffs must be temporary at best

India has received an unfavourable ruling at the World Trade Organization (WTO) in a case brought by several of its trading partners about Customs duties imposed by the government on the import of telecommunications equipment, including mobile phone handsets. India was originally taken to the dispute resolution panel of the WTO by the European Union (EU) after Brussels determined that the duties of 20 per cent on mobile phones, for example, breached existing agreements. Other major partners and participants in the supply chain, including Japan and Taiwan, subsequently joined the EU in its complaint. The WTO tribunal determined that the ordinary Customs duties were above those “set forth and provided in India’s WTO Schedule”. India’s case rested on various technical grounds about the updating of the product designations in the various schedules. However, there is little doubt — especially given the timing of complaints about this updating, and other statements from India’s trade bureaucracy — that these are basic protectionist measures.

There is no immediate impact on Indian policy since the government will appeal this ruling, and the WTO appellate body has been rendered dysfunctional by the United States’ decision to veto any nominees. Loopholes in international trade law are not unheard of. Yet, even so, the government’s determination to keep tariffs high at the cost of alienating its closest economic and geopolitical partners is odd. After all, in political discourse, these tariffs are targeted not at the EU or Japan but at China. It is also claimed that tariffs have directly led to an increase in investment and the growth of the electronics manufacturing sector. It is true that mobile phone production and exports have grown in recent years. But value addition has been low, barely crossing the 10 per cent level, according to most estimates. As a consequence, the electronics sector continues to be a major component of India’s trade deficit. Also, growth, wage level and job creation in the sector will remain below India’s competitors unless it introduces more open policies that do not rely on tariffs and protectionism.

Efficiency improvements and coherent policies in this area that embed India in global value chains will do far more to benefit the sector than tariffs that are allowed only because of the temporary dysfunction of multilateral dispute resolution. The electronics sector is not an infant industry in India that must be protected; it is one that has to be given the right competitive pressure and policy environment to become world-class. And in all this, the fact that tariffs are a tax paid by Indian consumers should not be lost sight of either. Mobile phones and other electronics equipment that are now the subject of tariffs are bought by Indians who now have to pay higher costs. In Digital India, this equipment is also input into basic economic value addition by many Indians.

Tariffs thus do not just reduce the welfare of consumers, but also help contribute to India becoming a high-cost and uncompetitive economy across the board. Indian policymakers should not be pleased that this adverse ruling cannot be implemented; they should see this as a wake-up call about the need for more economically sound, pro-manufacturing policies.