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US Challenge to Indian Export Subsidies Raises Price and Policy Questions

The U.S. challenge to India’s “export subsidy programs” that run afoul of World Trade Organization rules could result in increased prices or reforms in the Indian economy. And also seems to present a policy dichotomy from the Trump administration.

Last week, the U.S. requested dispute settlement consultations with India at the WTO over the programs. The U.S. Trade Representative’s Office said “export subsidies provide an unfair competitive advantage to recipients and WTO rules expressly prohibit them.”

According to USTR, there is a limited exception for government subsidies for specified developing countries until they reach a defined economic benchmark, but India surpassed the benchmark in 2015. While India’s exemption has expired, it has not withdrawn its export subsidies.

“When countries sign onto the WTO, that comes with clear commitments and they need to follow the rules. There are specific things about export subsidies that they are not allowed to do,” Stephen Lamar, executive vice president of the American Apparel & Footwear Association, explained.

Last year, India cut its duty drawback rates, apparently in a move to come into closer compliance with global trade rules and reform its tax structure, though it was much to the chagrin of exporters that had relied on the funding to keep prices at bay and maintain competitiveness with Asian manufacturing neighbors.

A drawback is the refund of certain duties, internal revenue taxes and certain fees collected upon the importation of goods when goods are then used for export. When the duty drawback move was announced, Indian manufacturers were in somewhat of a panic, claiming the cut would lead exporters to raise prices to balance the loss of revenue from the refund.

Lamar said if the U.S. is successful it could result in the cost of goods going up.

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When India cut the drawback duties in November, Deepika Rana, president of strategic initiatives at Li & Fung with responsibility for the Indian Subcontinent, said exporters saw the drawback as a rebate and figured their costing with that in mind, which, she said, is “probably not the most effective thing to do.”

At the time, Rana noted there was a gap between the rescinded drawback and the rollback of a goods and services tax of about 5 percent, which could lead to a comparable increase in FOB prices.

Reacting to the latest move, Lamar said, “It may be that those subsidies are offsetting some inefficiencies in the Indian economy.” If the U.S, is successful in having these subsidies declared illegal, India might be forced to reform certain aspects of its economy to make these subsidies unnecessary. “In other words, the reasons they had these subsidies could be that the environment in which they were operating in was excessively expensive,” he said.

For Lamar and the AAFA, what’s important to note is that the Trump administration was taking another country to the WTO.

“There’s been a lot of language that the Trump administration might be having difficulties with the World Trade Organization and this is evidence that they see a role for the WTO,” Lamar said. “Second, we’re pleased to see the administration look at the WTO as the binding arbiter of trade obligations because we don’t want the U.S. to take actions that are outside the WTO, either.”

That the USTR action comes at the same time the Trump administration is ready or threatening to impose tariffs on foreign imports of certain products presents a dichotomy, he noted.

“If the tariffs you’re imposing are consistent with trade obligations and they are consistent in challenging export subsidies, then they would jive, but if the actions you are taking are not consistent with trade obligations, then either the rationale you’re using to impose them or the levels that you impose them at are not consistent,” he said. “The problem a lot of people have with the tariffs is that they fall out of the WTO framework.”

The programs in dispute in the India WTO case are the Merchandise Exports from India Scheme and Export Oriented Units Scheme, as well as sector-specific programs, including Electronics Hardware Technology Parks Scheme, Special Economic Zones, Export Promotion Capital Goods Scheme and a duty-free imports for exporters program.

USTR said through these programs, India provides exemptions from certain duties, taxes and fees; reduces import duty liability, and benefits numerous Indian exporters, including producers of textiles and apparel, steel products, pharmaceuticals, chemicals and information technology. According to Indian government documents, thousands of Indian companies are receiving benefits totaling over $7 billion annually from these programs, USTR said.

“In fact, India has increased the size and scope of these programs,” USTR Robert Lighthizer said. “For example, India introduced the Merchandise Exports from India Scheme in 2015, which has rapidly expanded to include more than 8,000 eligible products, nearly double the number of products covered at its inception.”

USTR said exports from Special Economic Zones (SEZs) increased over 6,000 percent from 2000 to 2017, and in 2016, exports from SEZs accounted for more than $82 billion in exports, or 30 percent of India’s export volume.

India textile and apparel imports to the U.S. increased 11.4% in January to 455 million square meter equivalents (SME). The value of imports from India increased 2.69% to $649.76 million, taking it to a 6.96% U.S. market share in the sector.

For all of 2017, India’s imports to the U.S. rose 7 percent to 5.15 billion SME on top of a 5.7% hike in 2016. The value of India’s imports increased 1.2% to $3.68 billion in 2017.

In January, the U.S. Commerce Department issued affirmative final determinations in the countervailing duty investigations of fine denier polyester staple fiber from India and China, finding that exporters from those countries received unfair subsidies of 41.73% to 47.55% and 9.5% to 25.28%, respectively.

The India investigation included Bombay Dyeing & Mfg. Co. and Reliance Industries Ltd. In 2016, imports of fine denier polyester staple fiber from India was valued at an estimated $14.8 million.

Consultations are the first step in the WTO dispute settlement process. If the U.S. and India are not able to reach a mutually agreed upon solution through consultations, the U.S. can request the establishment of a WTO dispute settlement panel to review the matter.