US trade

Trump Must Avoid Trade Wars to Make America Great Again

After the Iran oil waiver controversy, it has become even more important for Washington to opt for less damaging diplomatic means to resolve its president’s trade concerns.

The relationship between India and the US has, for some time, been delicate on the trade front.

On Monday, the Trump administration removed the waiver it had granted India to buy Iranian oil, a decision that will send our local fuel prices northwards. The US wishes to freeze the Iranian economy because it fears that Iran is continuing its nuclear weapons programme.

Be that as it may, the refusal to renew the Iran waiver comes on the heels of the decision to stop benefits under the Generalised System of Preferences to India – a decision that will harm the American economy much more than it will affect New Delhi.

The India situation is merely a microcosm of how the US’s economy is suffering due to Trump’s tariff wars with countries like China and others.

The battle started with President Donald Trump imposing tariffs on a series of imports from China, other than on Canada, Mexico and the European Union. The US alleged that Beijing and these countries had been exploiting its markets without being reciprocal. The repercussions ought to be massive when such economic powerhouses exchange sudden or retaliatory tariffs worth “billions of dollars” on each other’s products. In the process, the US harms its own economy substantially, but that fact has not really filtered into the policy calculus.

If America has to be great again, as Trump has promised, then it would need to continue its open market policies and avoid getting into all sorts of trade and trade-related skirmishes.

Also Read: Explained: Impact of Donald Trump’s Attack on Preferential Trade With India

Other than the domestic impact, the negative consequences are also global because every economy is tied in with the other in an interdependent world. In 2018, global output was impacted negatively by a 3.6% change, while slated to decline further by 3.3% and 3.6% in 2019 and 2020, respectively. Businesses and policy makers worldwide are bewildered by these measures. Supply and value chains are disrupted, productivity has come down and profit margins have been shrinking.

This is not to say that Trump’s intentions were unfair but that the way he has gone about in redressing America’s grievances is quite wrong. It has not only put major economies of the world at risk – the impact on the US’s economy when its national debt stands at $21 trillion could be very serious.

Was it a failure on the part of the Trump administration to understand and preempt the fact that US tariffs would invite retaliatory action and other counter-moves? And that these kind of trade policies, among other things, might aggravate a political backlash against the government?

US President Donald Trump holds a signed memorandum on intellectual property tariffs on high-tech goods from China, at the White House in Washington on March 22, 2018. Credit: Reuters/Jonathan Ernst/Files

A dent in President Trump’s trade policy goals

Contrary to Trump’s musings, the overall goods trade deficit of the US in 2018 hit a historic low. It reached to $891.3 billion, which was 10.4% more than that in 2017. With China, the deficit even grew more, at 11.6% to $419.2 billion in 2018.

In fact, it is the US businesses and enterprises with global production and supply linkages that are forced to pay higher input costs or manoeuvre through disruptions. Also, US consumers are forced to buy products at inflated rates. According to some pundits, last year, tariffs and counter tariffs dented the savings of American consumers to the tune of at least $6.9 billion.

Reflections from US mid-term elections

In a previous article for The Wire, the authors cautioned that the public mandate of the US mid-term elections last year could act as a referendum on Trump’s economic policies. Seeing Democrats take control of the House of Representatives was a setback for Trump and his fellow Republicans.

Many of the same set of voters who were earlier compelled by Trump’s call for great power surge turned him down. Voters who swung away from Trump’s electoral base during the mid-term elections comprised farmers, consumers, and manufacturers, among others. This group of voters is more concerned about immediate challenges from high tariffs than promised gains in the long term.

Also Read: Trump’s Trade Wars Are Starting to Backfire

Above all, the mid-term mandate seemed to disapprove protectionism over a liberal economic order wherein businesses and consumers interact with each other on a global scale. This order has been led by the US over the past several decades. The US being a birthplace of several Fortune 500 companies with transnational and multinational linkages is a testimony to this fact.

Furthermore, an essential economic rationale of globalisation is about sourcing quality inputs at competitive rates from across the world for domestic value addition, supply or sale and/or exports of final products. From a consumer’s angle, it is about increasing their purchasing power by providing better access to varieties and high quality imports. And, it is the US who has been an ardent proponent of increasing consumer and producer welfare through international trade.

But in current times, Trump seems to be defying these principles.

The result is evident. Trade irritants are deriding American businesses of their competitive edge. US-based multinational companies are struggling to neutralise the impact of trade irritants by re-orienting their sourcing strategies or shifting their bases to a third country. Furthermore, in multiple cases, huge sums of investments planned in a pre-trade war scenario are either scrapped or delayed until the on-going trade imbroglio is over.

Be it large, small or medium enterprises, farmers, consumers, manufactures, ranchers and technology companies, all in the US have experienced a blow to their pockets. More than 2.6 million export dependent American jobs are at stake. The situation is even worse in case of small and medium enterprises. They have no option but to either shut or increase their production costs and pass it on to American consumers.

The American business community is aggrieved and annoyed with this fact. They hold the view that imposition of tariffs to demand free and fair deals with “countries in conflict’” is proving to be counter-productive to American economic interests.

Also, farmers producing soybeans, corn, apples, wheat, among others are badly affected. They feel resentful of their farm produces, losing access to markets in China and other countries as a result of counter tariffs. Farm distress is further exacerbated as recent floods from the Mississippi delta to the Dakotas have submerged the fields of Midwestern farmers.

Farm distress is further exacerbated as recent floods from the Mississippi delta to the Dakotas have submerged the fields of Midwestern farmers. Credit: Reuters

Raison d’être of restoring faith and legitimacy

President Trump’s claims that “some countries particularly China has exploited US markets in an unreasonable, non-reciprocal and unfair manner” seems fair. But the Trump administration should assess how far imposing and attracting counter tariffs from China and others has undermined the interests of American businesses, enterprises and consumers before it is battered further.

However, it is a great sign that the US and China are in the course of working out a deal with the latter willing to address US concerns around industrial subsidies, intellectual property rights and forced technology transfer from foreign companies, among others.

But continuing the same approach of threatening and imposing tariffs on countries to demand free and fair deals could prove to be disastrous. For example, Trump threatened the European Union with imposition of $11 billion worth of auto tariffs if the EU does not forgo its manufacturing subsidies for aircraft produced by Airbus. If this threat materialises, it could derail the prospects of global economic recovery that is already slow on output.

Gita Gopinath, the chief economist at the International Monetary Fund, has recently stated that the current global economic atmosphere is experiencing a delicate moment. She cautioned that there are many downside risks including proposed US tariffs on auto parts. If rolled out, it will drastically exacerbate the slowdown of global economic growth.

It is a fact that American businesses and consumers are ones who have championed the liberal economic order. Any further tariff escalation will hurt them more and America’s own economic resurgence. Trump can definitely ‘Make American Great Again’ but surely not by playing with the liberal economic order which Americans have enshrined.

He should opt for other less damaging diplomatic means to resolve his concerns around non-reciprocal, unreasonable and unfair market access with the alleged countries.

Pradeep S. Mehta and Prashant Sharma work for CUTS International, a global public policy research and advocacy group with centres in Washington DC, USA and India among other global capitals.

Trump Cancels US Delegation to World Economic Forum at Davos Amid Shutdown

Last week, Trump cancelled his planned trip to the WEF meeting, citing the “intransigence” of the Democrats on his funding request to build a controversial wall along the US-Mexico border.

Washington: President Donald Trump has cancelled the US delegation’s trip to the annual meeting of the World Economic Forum (WEF) at Davos, Switzerland, due to the partial government shutdown.

The announcement comes as the shutdown entered its 27th day on Thursday.

Last week, Trump cancelled his planned trip to the WEF meeting, citing the “intransigence” of the Democrats on his funding request to build a controversial wall along the US-Mexico border.

The five-day summit is slated to begin at the Swiss resort town of Davos from January 21.

“Out of consideration for the 800,000 great American workers not receiving pay and to ensure his team can assist as needed, President Trump has cancelled his delegation’s trip to the World Economic Forum in Davos, Switzerland, White House Press Secretary Sarah Sanders said in a statement on Thursday.

The cancellation of the US delegation visit to the WEF meeting came on a day Trump postponed House Speaker Nancy Pelosi’s trip to Brussels, Egypt and Afghanistan, citing the shutdown.

Also Read: US Government Shutdown Breaks Record, No End in Sight

Treasury Secretary Steve Mnuchin was due to lead the five-member presidential delegation to Davos which also included Secretary of State Mike Pompeo and Secretary of Commerce Wilbur Ross.

The other members of the presidential delegation to Davos are US Trade Representative Robert Lighthizer and Assistant to the President and Deputy Chief of Staff for Policy Coordination Chris Liddell.

The longest-ever shutdown in US history has rendered over 800,000 federal employees without work, crippling the functioning of several key wings of the government including Security and State department.

The shutdown is a result of the bitter political divided over border security issue as the Democrats who now enjoy a majority in the House have refused to approve legislation approving USD 5.7 billion in federal funding to construct a wall across the US-Mexico border.

President Trump insists that building a wall is the only solution to protect the nation from a large flow of illegal immigrants and drug smuggling.

The Democrats are opposed to any such funding. After Trump walked out of a meeting at the White House last week, Democrats have refused to come to the negotiation table.

The ongoing shutdown on January 12 broke the previous record of 21 days of US government shutdown under the Bill Clinton administration from December 16, 1995, to January 5, 1996.

(PTI)

From Coolies to Patrons and Partners: The Chinese Paradigm Shift in Latin America

As the US markets lose importance for Latin American countries, China has become the most important investor and creditor. Their trade shares a symbiotic relationship.

In the second half of the 19th century, after the abolition of slavery, Latin America trafficked Chinese as coolies – indentured labourers. Between 1847 and 1874, Peru and Cuba trafficked over quarter million Chinese coolies. The Peruvian Congress passed a law to oversee the coolie system. It provided a subsidy of 30 pesos to the shipping company which brought in the coolies from China. The coolies had to be between 10 and 40 years of age and were obliged to work for eight years, after which they were free to go back or continue to live in the country. The law also had provisions for “management of the coolie”, which included teaching the Bible. It specified the number of lashes to be handed out to coolies for disobedience or indiscipline. In practice, the employers’s exploitation of coolies, was similar to slavery. Employers could auction, buy and sell the coolies.

Chinese coolies worked in plantations and mines and dug up the guano pits in Peru, then loading the fertilizer on to ships headed for the US and Europe. The strong stench of guano – droppings of birds and bats – was so nauseating that ships used for its transportation could not be used for any other purpose and had to be retired. Thousands of coolies fell sick and died due to the miserable conditions of work.

Also Read: Global Economy Will Pay the Price of Escalating US-China Trade War

Chinese coolie. Credit: Wikimedia

In 1874, the Chinese government signed an agreement with the government of Peru to enquire into the conditions of the coolies. A commission was formed to interview coolies.

In Mexico too, Chinese people were trafficked to work in the arid northern areas. Some were even employed as barbers and domestic help. After the end of their bondage, the entrepreneurial Chinese started their own businesses and flourished. But this attracted a backlash from the Mexicans, who accused the Chinese of “stealing Mexican jobs and businesses”. The anti-Chinese movement, which erupted in the early 20th century, saw Chinese people harassed in several ways. Shops and houses belonging to Chinese people were burnt and ransacked by civilian mobs.

The paradigm shift

Today, the Chinese have become Latin America’s single most important investor, creditor and its second largest trading partner. Chinese companies now own the mines where coolies once worked. China is now creating jobs and wealth for Latin Americans. Latin America’s mines supply ores and minerals to China, helping it continue as the global manufacturing power.

China’s investment in Latin America is estimated to be around $120 billion. Brazil has received the bulk of the investment with $61 billion, followed by Peru ($18 billion), Mexico ($6 billion), Argentina ($5 billion) and Venezuela ($2 billion). Of the investment, $27 billion has gone into mining, $25 billion into oil and $13 billion into the electricity sector. During a visit in 2015, Chinese President Xi Jingping announced that by 2025, the country would invest $250 billion in Latin America.

Chinese companies now own the mines where coolies once worked. China is now creating jobs and wealth for Latin Americans.

The estimated Chinese credit to Latin America is $150 billion dollars. Of this, Venezuela has received $62 billion, Brazil $42 billion, Argentina $18 billion and Ecuador $17 billion. Much of the earlier credit flowed into mining and oil, but recent focus has been on infrastructure and services.

The China-Latin America trade in 2017 was $257 billion, of which Chinese exports were $130 billion. China wants the trade to be $500 billion by 2025. It has overtaken the European Union as the second largest trading partner of Latin America. China is Brazil, Peru and Chile’s leading trade partner.

Trade between China and Latin America is a win-win for both parties. Latin America’s top global exports are crude oil, minerals and agro products. China is the leading importer of these items and will continue to be so. Latin America is well endowed with oil and minerals and has arable land with abundant water reserves. The region has the potential to increase the production and exports of oil, minerals and agricultural products. In contrast, China is losing millions of acres of agricultural land to urbanisation and industrialisation. The country’s water and pollution problems are also well documented. China and Latin America can share a symbiotic relationship.

Chinese President Xi Jinping has promised more investment in Latin American countries. Credit: Andy Wong/Pool/Reuters

Reducing importance of US markets

In contrast, the US has become a less important market for South America. The US was the principal market for Latin American crude oil exports. But thanks to the shale revolution, the US has become the largest producer of crude in the world, drastically reducing imports. The US does not need minerals as it has shifted its manufacturing to less expensive countries, including China. In the case of exporting agro products such as soybeans and maize, the US is a competitor to Mercosur countries.

In the 1980s, the US authorites and IMF had imposed the neo-liberalistic Washington Consensus policies on Latin American countries that were transitioning from military dictatorship to a democracy. These policies ruined the economies and pushed millions of people into poverty. The Latin Americans bitterly remember this period as the “lost decade”. In contrast, the Latin Americans celebrated the first ten years of the new millennium as the “growth decade”, thanks to the prosperity resulting from the large scale Chinese demand for commodities. The Latin American governments used the windfall from these profits for pro-poor policies, which are estimated to have pulled out 70 million people from below poverty line into middle class.

Also Read: On the Verge of a US-China Trade War

The US had exploited Latin America as its “backyard” since the Monroe Doctrine of 1823. In the name of its wars on communism, drugs, corruption and immigration, the US has destabilised the region and undermined democracies, created and supported military dictatorships. The drug business is consumer driven. Millions of Americans pay top dollars to continue their habit of drug consumption. If this is stopped, no outsider will find any profit in supplies. But the US government wrongly blames the producers of coca and the traffickers from Latin America. The US is destroying agricultural fields in Latin America with chemical sprays in the name of eradication of coca plants.

On the other hand, the US is responsible for the killings of thousands of Latin Americans every day, using guns smuggled from or supplied by the US. Latin Americans are frustrated with this hypocrisy and the destructive and negative agenda of the US. In contrast, the Chinese agenda for Latin America is constructive and positive. The Chinese construct railways, roads, ports and power stations in the region. Latin America needs massive investment in infrastructure for its development, which China provides.

Wall Street’s vulture funds

While Washington DC politically destabilises Latin America, Wall Street and its vulture funds systematically cause havoc in Latin American markets. Wall Street brings in hot money to take advantage of the high interest rates in Latin America and make a quick buck. The money is pulled out suddenly when the interest rate goes up in the US or when other avenues open up for higher profit margins. Such large scale withdrawals cause devaluation and foreign exchange crisis in countries which have been forced to remove capital controls by the Washington Consensus.

Wall Street firms encourage and advise Latin American governments to issue dollar bonds and oversell them outside the region. When the bond issuing countries have difficulty in servicing the debt, Wall Street and Washington DC bring in IMF as rescue. IMF funds are used primarily to pay the creditors while governments are forced to cut down budgets for social welfare, education and infrastructure.

Wall Street and its vulture funds systematically cause havoc in Latin American markets.

When Argentina rejected the IMF formula and successfully restructured on its own in 2002, Wall Street and Washington DC excommunicated Argentina from the international capital market and cut off all Fund-Bank resources. The vulture funds which held out against the debt restructuring kept harassing and blackmailing the Argentine government and even threatened to seize the bank accounts of Argentine embassies. They managed to seize a prestigious Argentine naval vessel in Ghana through a fraudulent local court order. The naval ship was on a world good will tour and its seizure was a grave embarrassment for the country. President Cristina Fernandez could not travel to the US and Europe in an official Argentine plane due to the risk of the aircraft being seized.

The Chinese had come to the rescue of Argentina, Venezuela, Ecuador and Venezuela when the Washington-Wall Street nexus blocked out international capital. The Chinese provided emergency short term funds and currency swaps. But for the timely rescue, these countries might have slipped into serious economic crises.

US President Donald Trump has been known to use less than flattering words to describe Latin Americans. To add insult to this injury, the US has criticised El Salvador, Dominican Republic and Panama for their decision to recognise China in place of Taiwan. The US state department has recalled its ambassadors to the three countries to show its displeasure, threatened aid cut and has advised the other countries in the region (such as Paraguay and Nicaragua) to keep up diplomatic relations with Taiwan. This has bewildered the Latin Americans since the US, UN and over 180 countries of the world have cut off diplomatic relations with Taiwan and recognised China. These countries see this as yet another attempt to make a fool of them.

Given the historic exploitation and hegemony of the US, Latin Americans welcome China as a relief to counter the US domination, to a limited extent. They like to play the China card against the US to get the best from both. In the past, Latin American presidents craved to be invited to the White House. Now, they queue up to make pilgrimage to Beijing with business delegations to promote trade and investment.

US President Donald Trump’s derogatory comments about Latin American countries has antagonised the US. Credit: Reuters/Mike Theiler

Limitations of partnership with China

Latin America is conscious of the limitations of a partnership with China. Firstly, they see it as a purely commercial transactional partner and nothing more. They detest the communist dictatorship of China, having overcome dictatorships themselves. They are suspicious of the non-transparent nature of Chinese activities and the overwhelming role of Chinese state companies and financial organisations. There is an enormous cultural and communication gap. They are also hurt by the flooding of cheaper Chinese products in their markets, which have adversely affected the domestic manufacturing sector.

But the Latin Americans see China as a manageable risk unlike the US, whose actions are beyond control. While the US has repeatedly invaded Latin American countries and changed regimes, the Chinese are unlikely to do the same. Latin Americans have the option to stop, reduce or reject Chinese credit and investment and manage Chinese activities smartly. For example, when the Chinese wanted to buy large areas of agricultural land, the governments of Brazil, Argentina and Uruguay imposed restrictions on acquisition of agricultural land by foreigners. The Chinese backed out. It may be noted here that these restrictions are only against new investors. They do not affect large tracts of South American farmland already owned by Europeans and Americans.

Also Read: Why It’s Important for India to Trade With Latin America

The Latin Americans would love to see an end to the unipolar world and welcome the rise of other powers to challenge the US and minimise its harm and domination. At the same time, they would also like to reduce their overdependence on China and diversify their economic partnerships. In this context, they welcome more trade, investment and involvement of India in the region.

Unfortunately, India has no plan, vision or trade target for Latin America, despite the region’s emergence as a large market for its exports and its contribution to India’s energy and food security through supply of petroleum, vegetable oil and pulses. India’s exports of $12 billion in 2017 could be increased to $25 billion by 2022.

India’s credit to the region is just barely $200 million, a tiny fraction of China’s $150 billion. India’s total trade with Latin America is just about the same as China’s trade with Chile ($36 billion). Latin Americans hope that India takes advantage of the opportunities for business in the large and growing middle-income market of Latin America.

R. Viswanathan is a Latin America expert and former ambassador to Latin American countries.

India Enters the Trade War Game, but Leaves Harley Flame Alive for Peace Talks

These moves come ahead of assistant US Trade Representative Mark Linscott’s trip to India next week.

New Delhi: India has joined the European Union and China in hitting back at the United States with the announcement of additional tariffs on 29 American products including apples, almonds, walnuts, pulses and shrimp as a retaliatory move against President Donald Trump’s decision to unilaterally hike import duties on steel and aluminium.

New import duties will hit US exports worth $235 million when they come into effect on August 4, government sources said.

The move comes after the Modi government failed to secure an exemption from US duty hikes for steel and aluminium products.

But, in a change from its earlier decision, India has exempted Harley Davidson motorcycles from punitive duty. Earlier, it had indicated its plan to impose 50% additional duty on the iconic US bikes as a retaliatory measure.

Trump has publicly raised concerns over what he believes is the high import duty that these motorcycles attract in India.

Sources said India’s decision not to raise duties with immediate effect and exempt Harley Davidson bikes are goodwill gestures aimed at keeping alive the possibility of negotiating trade disputes when assistant US Trade Representative Mark Linscott visits India next week.

Last week, India had submitted a list of 30 items to the World Trade Organisation on which it proposed to raise import duty by up to 50% as retaliation against the unilateral US move to hike duty on steel and aluminium products.

As per the finance ministry notification, the import duty on chickpeas, Bengal gram (chana) and masur dal has been increased to 70% from 30% earlier. Lentils will attract 40% instead of 30%.

Shelled almonds imported from the US will now attract import duty at Rs 120/kg as against Rs 100/kg earlier. Almonds in shell will attract import duty at the rate of Rs 42/kg as against Rs 35/kg.

Import duty on ‘walnut-in-shell’ will attract customs duty at the rate of 120% as against 30% earlier. Apples have been subjected to import duty of 75% as against 50% earlier.

The duty on boric acid has been hiked to 17.50%, while it has been doubled to 20% on phosphoric acid.

Import duty on diagnostic reagents has been doubled to 20%. Duty on flat-rolled steel products has been hiked to 27.50% from 15% earlier, while certain flat-rolled products of stainless steel will now attract 22.50% duty instead of 15% earlier.

Meanwhile, the exemption provided by the US to steel and aluminium imports from allies like the EU, Mexico and Canada expired on June 1. Following that, the EU has slapped 25% retaliatory tariff on US goods worth 2.8 billion euros including Harley Davidson bikes. European Commission president Jean-Claude Juncker said duties imposed by the US on the EU go against “all logic and history”.

Mexico too imposed additional tariff on US products worth $3 billion as retaliation. Canada has also vowed to retaliate against the unilateral US move.

In April, China implemented retaliatory tariffs of up to 25% on $3 billion in food imports from the US against the latter’s decision to hike duties on steel and aluminium products.

Trump had announced plans for tariffs on foreign steel and aluminium in March, justifying them on national security grounds. He argued that global oversupply of steel and aluminium, driven by China, threatened American steel and aluminium producers, vital to the US.

After the announcement, South Korea, Argentina, Australia and Brazil had agreed to put limits on the volume of metals they could ship to the US in lieu of tariffs.

The US granted temporary exemptions to the EU, Canada and Mexico amid negotiations over limits. The extended deadline of June 1 has expired.

India had asked the US government to exempt it from the 25% steel tariff and 10% aluminium tariff imposed by Trump on grounds of national security. But the latter rejected India’s request. India has also moved the WTO against the US move.

India’s commerce minister, Suresh Prabhu, visited the US recently to sort out bilateral trade issues. However, he failed to achieve a breakthrough.

The US gave those allies a reprieve from the duties, but the exemptions were set to expire Friday. The Trump administration will place quotas or volume limits on other countries such as South Korea, Argentina, Australia and Brazil instead of tariffs, he said.

Addressing media at the conclusion of the recent G7 summit in Canada’s Quebec City, Trump had singled out India, accusing it of charging 100% tariff on some US goods. “We’re like the piggy bank that everybody is robbing,” Trump had said.

Meanwhile, US-China tit-for-tat tariff hikes threaten to escalate into a full-blown trade war, with Beijing saying it would place its own additional tariffs on 659 US imports worth $50 billion after Washington slapped punitive tariffs on Chinese goods.

Tough Times Ahead for Indian Businesses if Trump Imposes Retaliatory Tariffs

Tariff concessions are crucial for Indian SMEs exporting their products to the US market.

New Delhi: India’s exports to the US, especially those from sectors like textiles, gems and jewellery, automotive, organic chemicals and pharmaceuticals, could be hurt badly if US President Donald Trump carries out his threat of imposing retaliatory import duties on Indian products. This possibility looks real, given the way Trump has publicly shamed traditional US allies like Japan, Germany and Canada, and levied punitive duties on their steel and aluminium exports.

Any US move to levy retaliatory tariffs will largely hit India’s small and medium enterprises. That could complicate the Narendra Modi government’s political challenges, with general elections just around the corner.

The US accounts for nearly 16% of India’s total exports. In 2017-18, India had a trade surplus of $21 billion with the US.

The US’s industrial tariffs have fallen to close to zero after several rounds of trade liberalisation. But on the other hand, India still continues to impose high import duty, which riles Trump.

For example, India has kept high tariffs on automobiles and motorcycles (60-75%), alcoholic beverages (150%) and textiles (some ad valorem equivalent rates exceed 300%).

What is even more worrying for the US is that as much as 25% of India’s industrial tariffs remain unbound at the WTO.

According to latest WTO data, in 2015 India’s average bound tariff rate was 48.5%, while its simple ‘most favoured nation’ average applied tariff was 13.4%. The US has expressed concern over this, saying its exporters face tremendous uncertainty as India has considerable flexibility to change tariff rates at any time.

Meanwhile, US exporters of stents and knee implants are seething with anger over price caps placed by India on these medical devices.

Value of key Indian exports to the US in 2017-18

Product category	Exports ($bn)
Gems and jewellery	10
Pharmaceuticals	4.66
Apparel	3.85
Made-ups	2.39
Road transport vehicles	2.12
Organic chemicals	1.58

Source: Commerce Ministry

The US trade deficit with India has become a sore point for the Trump administration, which wants full reciprocity in trade relations with all countries.

That Trump has publicly flagged that India imposes prohibitive duties of 100% on some products has left little doubt about US intention. Indian trade diplomats’ hope of being exempted from prohibitive US steel and aluminium tariffs has already proved false. They cannot afford to stay complacent about the threat of US slapping punitive tariffs on Indian exports, said trade experts.

“We’re like the piggybank that everybody is robbing,” Trump said while addressing a press conference in Canada’s Quebec City at the conclusion of the G7 summit.

Trump has made it clear that his tariff grievances went beyond developed economies. He especially mentioned India, which he said imposed prohibitively high tariffs on US products like Harley Davidson motorcycles.

As much as 30% of India’s garment exports go to the US. Credit: Reuters/Danish Siddiqui

Indian exporters worried

Meanwhile, garment exporters are worried at the prospect of the US levying equivalent import tariffs. Currently, US import duty on garment import varies from 8% to 28%. In comparison, India imposes customs duty on garment imports at the flat rate of 32%.

India’s garment exports in 2017-18 were 11% lower than the preceding year. This declining trend continues in the current fiscal year too.

As much as 30% of India’s garment exports go to the US.

One Gurgaon-based garment exporter, who did not want to be identified, told The Wire that the sector could face troubles if the US imposes an equivalent duty on garment imports.

Indian exports of gems and jewellery to the US, estimated at $10 billion in 2017-18, too could face serious hurdles if the latter levies retaliatory tariffs. Export of road transport vehicles and organic chemicals are also at the risk of being hit with high tariffs.

Task cut out for Indian trade diplomats

The Trump administration has ordered a review of India’s compliance with 15 conditions outlined by the Congress for availing concession tariffs in the US market under Generalised System of Preferences (GPS).

Tariff concessions are crucial for Indian SMEs exporting their products to the US market. The Indian government has pleaded its case before the GSP subcommittee, which is conducting a review of India’s eligibility and will decide if the country is providing “equitable and reasonable” market access as a quid pro for GSP benefits.

But there is not much hope of India getting a clean chit in the GSP review in which powerful US trade associations are petitioners. While the National Milk Producers’ Federation and the US Dairy Export Council have complained about restricted market access for farm products, the Advanced Medical Technology Association has brought up price caps on coronary stents and knee implants.

Given all of this, it would not be surprising if the US president goes ahead with his threat of increasing tariffs on exports from India in the event talks do not yield results.

Starting from June 10, India’s commerce minister Suresh Prabhu was on a two-day visit to the US, where he held talks with US secretary of commerce Wilbur Ross and US Trade Representative Robert E. Lighthizer to cool the rising trade tensions between the two countries. However, chances that Prabhu persuaded the US administration to drop its demand of full reciprocity in bilateral trade relations look dim.

India’s exports to the US grew by 13.42% during the year, much faster than the 9.98% growth rate of its overall merchandise exports, underlining the significance of the American market for Indian industry.

However, the easy access that Indian exports have traditionally enjoyed in the US market could be a thing of the past soon, if the Modi government does not properly handle Trump’s demand on reciprocity in bilateral trade relations.

Why Has the US Launched an Offensive Against WTO’s Dispute Settlement System?

The US has been blocking the appointment of ‘judges’ to WTO’s Appellate Body because of disagreements with both the procedure followed and some of the body’s rulings.

File photo of the World Trade Organization logo seen at the entrance of the headquarters in Geneva April 9, 2013. Credit: Reuters/Ruben Sprich

Geneva: “It is called Buyers’ Remorse – ‘We made the rules, we know what they mean and they should not apply to us’ – this is effectively the position of the US,” a seasoned trade official in Geneva says on the deepening crisis at one of the most important institutions for international trade governance – the Appellate Body (AB) at the World Trade Organization (WTO).

The ‘crisis’, put simply, is this: the US is unhappy about certain procedural issues and how some trade disputes have been resolved at the WTO. This has resulted in an impasse with potentially serious consequences for the rules-based regime of international trade.

Resolving trade disputes has been one of the core functions of the WTO. When countries cannot resolve matters with their trading partners, they show up at the door of the WTO. The AB, one of the highest adjudicating bodies of the international trade world, hears disputes brought by WTO members. After more than two decades, this mechanism is now under duress.

More than 500 disputes have been filed at the WTO by countries since 1995. The AB has adjudicated on complex and diverse issues including on environmental protection, renewable energy subsidies, tax evasion, money laundering, patent protection, animal welfare and food safety, among many others. The WTO has 164 countries as members.

This trust in the independence and autonomy of the AB has been under pressure from the US – a country that has brought more than 100 disputes to the WTO and has been a respondent in many more. By putting a spoke in the wheel of this well-functioning system, matters have now come to a tipping point where the US risks severely undermining the legitimacy of the international dispute settlement system. The AB is essentially an international trade tribunal.

The dispute settlement system has been called the crown jewel of the institution, the only ‘real’ functioning system in multilateral trade, given that the WTO has long been paralysed by members unable to make progress on key areas of negotiations including on the lack of consensus on the trading rules for the developing world. The dispute settlement system has increasingly become the raison d’être of the WTO itself, experts say.

How has the US managed to bring this system to a near brink and, some have even said, posed “an existential threat” to the WTO itself? By systematically blocking the filling of vacancies for ‘judges’ to the seven-member AB, it has acutely affected the functioning of the body, even as disputes continue to pile up.

The US has made clear that it has been unhappy with some of the rulings of the AB and is holding up the selection process to appoint new members. This is being seen as a pretext for a more concerted attack against the multilateral system of international trade. By doing so, the US “strikes at the heart of WTO”, trade officials believe.

Why is dispute settlement so important and what will this impasse around appointments mean going forward? The Wire spoke to a number of trade officials, lawyers, experts, former WTO staffers and delegates from permanent missions in Geneva who spoke on the condition of strict anonymity.

Why the dispute settlement system is important

The dispute settlement process at the WTO is administered by the Dispute Settlement Body (DSB). The DSB comprises all members of the WTO and is a political body bound by the Dispute Settlement Understanding – a set of rules that govern this process.

Pre WTO, many disputes were agriculture related and typically between US and what was then referred as the European Communities. Such disputes became numerous enough to negotiate comprehensive rules for the resolution of disputes. Individual parties to a dispute, typically the one whose measure was being challenged, could walk away or negotiate without accepting the results of the resolution. This right of the losing party was eliminated during the Uruguay round of negotiations.

One of the most important outcomes of the negotiations of the Uruguay round was strengthening of the dispute settlement system. Since then, during the key stages of the dispute settlement process, the DSB can establish panels, adopt reports of a panel and adopt reports of the AB – unless there is a consensus against it.

This innovation in decision-making – the negative or reverse consensus – meant that all members must object if the adoption of a report needs to be blocked. “One sole Member can always prevent this reverse consensus, i.e. it can avoid the blocking of the decision (being taken). To do so that Member merely needs to insist on the decision to be approved,” the WTO explains. (It is understood that the US had then pushed for this rule and now finds it problematic.)

The AB, established in 1995, is a standing body of seven persons functioning out of the WTO in Geneva. It hears appeals from reports issued by ‘panels’ in disputes brought by WTO members. It can uphold, modify or reverse the legal findings and conclusions of a panel. Once adopted by the DSB, the reports of the AB must be accepted by the parties to the dispute.

Each appeal before the AB is heard by three of its members. The members of the AB have renewable four-year terms, which are staggered to ensure that not all members begin and complete their terms at the same time.

American objections to the dispute settlement process

The US wishes to reform the dispute settlement process to address its concerns from transparency to staffing issues. In addition, the US believes that some of the rulings of the AB were not decided fairly.

What has been difficult according to other countries at the WTO is that the US is linking the broader reform of the dispute settlement process with the filling of vacancies for the members to the AB. This impacts the dispute settlement mechanism as a whole.

Procedural matters

Of the seven members the AB must have, it now has only five – Shree Baboo Chekitan Servansing, Hong Zhao, Peter Van den Bossche, Ujal Singh Bhatia (chairman), Thomas R. Graham. (The chairman, appointed for a one-year term, is responsible for the overall direction of the AB.) One member’s term came to an end in June, another will finish in December 2017. One member left to work as a trade minister in the Korean government. By September next year, another member’s term will conclude.

In order to ensure continuity, the AB members work on appeals they have begun working on till the process is complete, even if their term is over. The US has strong reservations about this. Ricardo Ramírez-Hernández, whose term concluded in June this year, continues to work on ongoing appeals proceedings in which he is involved.

If the US continues to block appointments of new members, the AB might be reduced to three members in one year’s time. (Each appeal before the AB is heard by three of its members.) Other countries want to launch a single selection process to fill all vacancies at the same time.

Letting members of the AB continue to work on appeals even though their terms have expired has been one of the key issues for the US. “The US believes that there needs to be a legal basis to show that a person who has ceased to be a member of the AB should continue serving on an appeal,” according to a statement of the US at a recent meeting of the DSB in September in Geneva. This was shared by the office of the United States Trade Representative (USTR) in response to queries sent by The Wire.

Thus as long as one member of the AB continued to serve despite the expiration of his or her term, the US is unwilling to consider the selection process for the other vacancies. Only the DSB has the authority to decide whether that member should continue, the US has maintained.

Even with a seven-member team, the increased number and the complexity of appeals that the AB has had to consider means that members consider multiple appeals at once. (The Appellate Body Secretariat comprises fewer than a dozen lawyers and some support staff.)

Therefore, by blocking the process to appoint new members to the AB, the US has put additional pressure to a system already burdened with disputes. (A rise in protectionism has also led to an increase in disputes.)

Delays in resolving disputes can clog the system. Rules say that the AB should rule upon an appeal within 60 days, extendable to a maximum of 90 days. Fewer members at the AB mean that these deadlines are severely impacted. More importantly, increased time to resolve disputes affect countries and businesses for a longer period.

“To the extent that delays in dispute resolution involve delays in the assertion of the rule of law, they provide an incentive to those who benefit from those delays,” chairman of the AB Bhatia said in a speech earlier in the year, talking about some of the challenges faced by the institution. “Delays compel WTO members to look for other solutions, potentially elsewhere. And in this, it is the weaker countries that stand to lose the most,” he added. Eventually countries could stop bringing their disputes to the WTO as a result of delays.

The rulings of a dispute are not only binding on the parties involved but also provide guidance to other WTO members. Countries attach significance to the reasoning provided in previous reports. This helps in avoiding future disputes, Bhatia had said in his speech.

Disagreements with AB rulings

The judges in the AB are selected to work on any appeal by a process that ensures “randomness, unpredictability and opportunity” so that all the seven members serve, regardless of their national origin, the WTO explains. To ensure consistency and coherence in decision-making, members exchange views with the rest of the AB before finalising reports. Therefore, the entire team of the AB comes together and seeks to provide balance to the rulings in terms of geography, legal traditions and expertise.

“By blocking appointments, the US is effectively throttling debate. There is a robust debate amongst all members. The members who have worked on an appeal come with tentative ideas and conclusions, but all seven members discuss till every vestige of reasoning is attacked. In this process specific angularities are taken care of,” a trade official in Geneva explained during an interview with The Wire.

In the light of this tradition, when the US singled out criticism of one member of the AB by referring to rulings in certain appeals, and opposed his reappointment in 2016, this was taken seriously. It was “decidedly unfair”, one trade official told The Wire. This prompted former AB members in 2016 to send a letter noting the threat to politicise the WTO dispute settlement system.

Reappointments of member to the AB are decided by consensus and only opposed under extreme circumstances. Members such as Korea were of the view that such an opposition by the US was “an attempt to use reappointment as a tool to rein in Appellate Body Members for decisions they make on the bench”.

This was not the first time that the US expressed displeasure with the dispute settlement system at the WTO. In the past too, the US blocked the reappointment of some members, including a US national, whose rulings were perceived as not being attentive enough to American interests, observers have pointed out.

The US has indicated that the AB was responsible for judicial activism, meaning that the tribunal had indulged in rule-making beyond what the members negotiated and signed up for at the WTO. In 2016, the US said the AB should not “use an appeal as an occasion to write a treatise on a WTO agreement”.

However, experts say trade law has broadly been functioning under whatever was negotiated in the Uruguay round and there has not been enough rule-making in the last two decades – a sort of a soft paralysis.

The headquarters of the World Trade Organization (WTO) are pictured in Geneva, Switzerland, April 12, 2017. Credit: Reuters/Denis Balibouse/File Photo

Robert E. Lighthizer, the USTR under the Donald Trump administration, said last month, “…The dispute-settlement process over the years has really diminished what we bargained for or imposed obligations that we do not believe we agreed to…”.

Specifically, the US alleged that rulings arising from a bunch of disputes are flawed, typically involving trade remedies such as the imposition of countervailing duties including United States — Countervailing Duty Measures on Certain Products from China (DS437) , United States — Countervailing and Anti-dumping Measures on Certain Products from China (DS449) and Argentina — Measures Relating to Trade in Goods and Services (DS453 – US as third party)

“The US is of the view that the AB says more than it has to. The US feels that the AB needs to be more conservative in its interpretation,” a trade lawyer told The Wire in a phone interview.

In his speech in June, talking about the evolution of the tribunal, Bhatia had said, “Its 146 adopted reports, along with more than 300 panel reports, constitute tens of thousands of pages of jurisprudence which is as wide in its reach as it is deep in its probing of the meaning of the covered agreements.”

A lawyer in Geneva who works on WTO disputes said, “Parties in dispute come to court because an agreement may not be clear. It is for the judges to have their own reading and rule accordingly after consideration of the evidence. It is an interpretation of law”. The WTO agreements are a map, they do not have everything, and it is the task of the AB to read the map, he added.

Not unlike a few members, the EU has also made its displeasure known at losing disputes, but it has not kicked up a fuss and or tried to take the system hostage, one trade official noted.

This was echoed by a developing country trade official in Geneva, “We are not happy with some of the rulings of the Appellate Body, but that does not mean we will call for an abolition of the court.”

There seems to be some disconnect on how the US now sees the WTO. “… Americans look at the WTO or any of these trade agreements and we say, OK, this is a contract and these are my rights. Others – Europeans, but others also – tend to think they’re sort of evolving kinds of governance. And there’s a very different idea between these two things,” Lighthizer said at an event last month.

What the US really wants

Countries want the US to come clear about its concerns and proposals for addressing the crisis. There are no concrete indications on how the US wants to reform the processes at the AB, WTO members believe.

The US position seems purposefully vague, observers say. “They do not want to show their cards, but want everyone else to reveal their positions,” one trade official said.

The protectionist lobby under the Trump administration has been active. The trade team of the Trump administration is currently staffed by those who have had interests in sunset sectors such as steel including, notably, billionaire investor Wilbur L. Ross, secretary of commerce.

Lighthizer’s previous stint in the US administration, his time as deputy USTR, saw frequent use of the American domestic statute called Section 301 of the US Trade Act of 1974. The statute empowers the USTR to investigate and launch unilateral retaliatory action against trade practices.

“There seems to be no long term vision at the USTR but one hopes that eventually the US will assess the benefits of the dispute settlement system at the WTO,” one observer said.

The ‘new economy’ companies in the US need WTO rules and may eventually prevail on the official trade establishment, a source said. After all, big American companies have a stake in the efforts to push for formal proposals on e-commerce rules at the WTO – currently very contentious amongst WTO members. (Many countries view potential multilateral rules on e-commerce as attempts to access markets through the backdoor.)

Way forward

Efforts are on to get the US to not restrict or stand in the way of the selection of the members to the AB. However, few people are optimistic that this crisis will resolve easily. Meeting after meeting, the impasse continues.

While any fundamental change in the mandate of the WTO is ruled out, there might be political accommodation at the margins, one trade official indicated. What this means is essentially dealing with US demands (when they come clear) as a part of a larger negotiations package. “The main deliverable will be unblocking of the appointments of the judges,” he added.

World Trade Organization (WTO) Director-General Roberto Azevedo attends a news conference on world trade figure for 2016 and forecast for 2017 in Geneva, Switzerland, April 12, 2017. Credit: Reuters/Denis Balibouse

While the AB reserves the right to intervene, the AB alone cannot resolve this. “The AB does not get into street-fights,” a source in Geneva familiar with the institution said.

Others agree the AB should be independent from the process of addressing and resolving the issue. “The AB should be independent and maintain the integrity of the system,” one trade expert said.

It seems that countries steadfastly support the AB and will do everything to protect the autonomy and the independence of the AB. But when and how members will come together to challenge the US remains to be seen. It is for the larger members to carry the cross, one developing country trade official said.

The EU has been found wanting in its role to diffuse the crisis, some believe. The US contributes to a little more than 11% of the WTO budget. Five members alone (Germany, UK, France, Spain and Italy) account for more than 20% of the budget. “The EU has been a paper tiger and has not pushed the US enough. Why has not the EU stepped up and banged its fist on the table?” asked one trade lawyer in town who has worked on several disputes. The EU has proposed that new members should be found by the end of November 2017.

Voting against the US?

In the event that members cannot convince the US to change its position, they can come together and vote to resolve the issue. But this is the last option, since the WTO has traditionally been a system that has been built on consensus.

“Pushing a vote under normal circumstances would be revolutionary enough. The WTO has always decided by consensus and has never voted on anything, including in the darkest hours of negotiations when there was only one member holding out,” a former WTO staffer said. Article IX of the WTO Agreement provides for decision-making by consensus. Voting becomes an option only if a decision cannot be arrived at by consensus.

It will be a watershed moment and a shift from the consensus-driven culture at the WTO. It is a nuclear option that member states would not want to use, one official familiar with the rules said. Besides, the rules that govern the appointment of members to the AB provide for consensus only, and never a vote, as per Article 2 (4) of the Dispute Settlement Understanding.

An alternate option to bypass the dispute settlement process is to adopt the arbitration facility at the WTO, which will not be the most efficient way to resolve disputes, experts say.

It is therefore for the WTO members to resolve this. It is not entirely clear to what extent the director-general of the WTO, Roberto Azevedo, will intervene to resolve the crisis, although he reportedly has had discussions with the USTR on the issue.

“The independence of the AB is crucial,” said one trade official. Once countries lose trust in the autonomy, they will cease to put their faith in a system that has been working impartially for them. This is larger than all of us, he said. For now, it seems the crisis has not resulted in a chilling effect.

Some officials The Wire spoke to were not very optimistic. “I don’t see this resolving easily or soon. The benefits of WTO rule-making have gone to the US, which has benefitted disproportionately. It is the US against the rest and the US is not going anywhere,” said an official from one of the permanent missions to the WTO in Geneva.

Given the pessimism around multilateralism in trade in general, on the back of an increase in plurilateral agreements, lack of cohesion around the Doha Development mandate and prickly issues of e-commerce to public stockholding of food – there is undeniable disenchantment with WTO processes. Delays in dispute settlement bring into question WTO’s rules-oriented system itself, experts caution.

One official associated with dispute settlement said, “This is very important and I am willing to step up all my efforts to protect this. Where else will countries go faced with a trade bully? Much is at stake”.

Priti Patnaik is a Geneva-based journalist and researcher. She has previously worked as a consultant in the UN system including at the WHO. She tweets at @pretpat and can be reached at patnaik.reporting@gmail.com.