China – US Trade War: Is India involved in an unhealthy threesome?

Today, we have a guest writer at this blog! His research concentrates on investment law, arbitration law and trade matters. On request, the author’s identity is kept anonymous. Hope you enjoy this blog’s first guest post!

Trade War Series: Part 1

The world’s most entertaining President, Donald Trump, started yet another international controversy by initiating a Trade War. Most would think, wait a minute, what’s the big deal? All he has done is impose some tariffs on Steel and Aluminum, that too only a minimal amount of 10% and 25%. How can that really make such a big difference? Another question being raised is that if these tariffs are on every country, how is China the one targeted?

The answer lies in the backdrop to this Trade War. The issue began with China imposing restrictions on US companies setting up manufacturing units in China unless they transferred their technology as well (termed as Market Access restrictions). US companies, eyeing the cheap labour that China provided, shifted most of their manufacturing plants almost en masse to China as they saw very little harm in handing over technology and thought that the benefits of driving down their production costs far outweighed any possible repercussions.

Boy were they wrong! China soon reverse engineered most of the technology and began producing all the products at significantly cheaper prices leading to several Chinese companies becoming global players. The best example of this would be the smart phones market where companies like Xiaomi and Huawei which were unheard of a few years back, now have inventory problems as their production struggles to keep up with their sales on Amazon. It took me two weeks to buy my own Mi Note 4 as it was available only once a week on Amazon India and it used to be out of stock within 10 minutes of the product being available.

Trade thingamajig

Trump now feels like US got a rough deal and is using all his resources to try and remedy the situation. His main complaint against China has been that they have stolen Intellectual Property of US companies and must somehow make amends for it. This gave rise to the tariffs in Steel and Aluminum, which were admittedly applied against everyone, with the EU Commission President Jean Claude Juncker commenting that “This is basically a stupid process, the fact that we have to do this. But we have to do it. We can also do stupid.” (Wish I was paraphrasing, but this is honestly how Trump makes people feel).

However, subsequently US negotiated with major partners like Canada, Mexico, EU, and Australia and exempted all of them from these tariffs once the complaints started flowing in. They have only left India, Japan and China off this exemption list, which makes it clear who they were targeting. (On an unrelated note, is it just me or is this some Asian bias? Wouldn’t put it past Trump, given his track record).

China retaliated by imposing tariffs worth USD 3 billion to which Trump responded characteristically by immediately stating that the US is going to impose USD 60 billion worth of tariffs on Chinese exports across various products. At this point the US and China have finally reached the negotiating table and will hopefully reach a consensus, as with Trump’s stubbornness and the Chinese determination and economic power this is one showdown which will not end well for either party.

 India: An idle bystander or collateral damage

In India’s case, the US has shown clear signs of animosity. While Trump keeps saying India and Modi are “great friends”, one can’t help but notice the mockery and sarcasm (I know you think he isn’t capable of sarcasm, but it does seem that way) with which he uses both these names. His words and actions are however poles apart, because how many “great friends” do you initiate proceedings against at the WTO?

The main concern of the US against India is that our subsidies program, so critical to make our exports viable and to help millions in India maintain their living, is contrary to the Subsidies and Countervailing Measures Agreement (SCM Agreement) in Annex 1A of the Marrakesh Agreement. As a rule, subsidies are prohibited (Paragraph 1 (a) of Article 3), but this Agreement basically provides India the right to continue its subsidies program as long as it is an Annex VII (b) country (i.e a developing country on the brink of graduation to the next level). The US is contesting whether India can still claim this protection, as according to them we have graduated already and are no longer allowed to provide subsidies. (Just an FYI, graduation means moving out of this special Annex VII (b) status to that of “other developing countries”, who cannot avail exemption from challenges at the WTO for providing subsidies).

This issue has two dimensions essentially.

  1. Has India graduated from Annex VII(b)? : This issue revolves around the method of calculation of GNP (Gross National Product). I don’t want to bore you with the math, so long story short, there are two methods and there is a debate which should be used as they both give widely different results. Using these calculation methods (once it is decided which), if India’s GNP crosses 1000 USD per person, then India is deemed to have graduated.
  2. How long before subsidies need to be phased out?: This again is a debatable issue as there are two interpretations possible. One being that India must remove all subsidies immediately on graduation (which may have very harmful economic impacts and be hard to do as it would need rolling back of years of subsidies in one strike, something that could impact Indian economy as badly as GST and demonetization). The second interpretation, in arguendo, as lawyers would say, is that there is an 8 year period for phasing out these subsidies, which would give India some much needed time.

These arguments are just a possible stance that could be taken at the WTO Dispute Settlement Body, if consultations between parties fail (where both US and India will try to amicably settle the dispute, before approaching the WTO Panel of Arbitrators). More worrisome is the stance Trump may take on H1-B Visas, which could leave thousands of Indians stranded in the US and his obsession with Harley Davidson for which he keeps asking reduced tariffs. The largest problem is that Trump is completely unpredictable and could do the most damaging things to his own economy just to win a negotiation. His strategy is hopefully better for the US than for his Trump Empire (filed for 4 or 6 bankruptcies for his various companies, reports differ), because the modern economy is very much linked and trashing even one major player like the US will have repercussions worldwide.

5 thoughts on “China – US Trade War: Is India involved in an unhealthy threesome?”

  1. Hi author!
    Isn’t us imposing tariffs on China, Japan and India a violation of most favoured nation clause? I have no idea about trade law so could you give an idea of the arguments in favour of US in this regard?

  2. Dear Apoorv,

    It is indeed true that it could violate MFN Clause under GATT 1994, however, the primary defense that the US will avail to justify these tariffs is Article XXI of the GATT 1994, which states that a country may undertake any measure to protect “essential security interests” of the country. The issue with this provision is whether Article XXI constitutes a “self judging clause” (i.e does the US have the right to decide whether a measure is pursuant to an ‘essential security interest’ without WTO review). This question has not yet been resolved by the WTO and the matter is pending before a WTO Panel in Russia: Measures containing Traffic in Transit. (Crimea Tariffs case).

    So this being the case, the US is well within its rights as per the present GATT, 1994 to undertake a measure imposing tariff to protect domestic industries, and itself judge whether its within the ambit of “essential security interest”, without being subject to review by the WTO, given the current understanding of the provision.

    If you would like to understand this better and have a more detailed answer, you could check out discussions on the same in economic law and policy blog, where several renowned trade law scholars like Simon Lester and Steve Charnowitz have discussed this issue at length in a recent comment thread.

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