India as Scapegoat: U.S. Action under Super-301

Arvind Panagariya

The stated objective of the recent upper-301 actions against India, Brazil and Japan by the U.S. is to open markets and expand international trade.  Unfortunately, the result may turn out to be quite the opposite.  The actions may unleash the worst global war since 1930.

            The U.S. Trade Act of 1974, which authorized the president to negotiate tariff reductions under the Tokyo Round of the General Agreement on Tariffs and Trade (GATT) also introduced Section 301, a provision for retaliation against foreign practices that “unreasonably” restrict U.S. exports.  Between 1974 and 1988, approximately 70 cases arose under Section 301.  Some of these cases were initiated by the U.S. administration, while other resulted from private petitions.

            During the 1970s and 1980s, protectionist sentiment was on the rise in the U.S. Congress.  In spite of a president who was committed to free trade policies—or perhaps because of it—the Congress passed the Omnibus Trade Practices and Competitiveness Act in 1988.  The new trade law considerably strengthened Section 301 of the 1974 Act.  Accordingly, the United States Trade Representative (USTR) is required to identify priority foreign practices, which if eliminated will have the greatest benefit for U.S. commerce.

            Investigation of policies of a country, which restricts U.S. exports is done under Super-301 provisions of the 1988 Act.  Action against policies that deny American residents the protection of intellectual property rights (e.g., patents, trademarks, and copyrights), is taken under the Special-301.

Unfair Traders

            Ms. Carla Hills, the current USTR, decided to use the power given to her office by the new Act.  On May 25, she declared India, Brazil and Japan to be “unfair traders” under Super-301.  Specific charges were brought against each country.  Brazil was cited for maintaining a variety of non-tariff barriers including prohibition on the import of 1,000 items.   Japan was charged, inter alia, with forbidding American manufacturers of satellites and supercomputers for government contracts.

            Interestingly, charges against India did not concern restrictive policies with respect to merchandise trade.  Instead, we were cited for our restrictive policies in respect of foreign investment and an invisible, namely, insurance.  The USTR would like India to revise its policy of requiring government approval of foreign investment and to open its insurance market to foreign companies.

            The USTR has also placed several nations on a “priority watch list” for possible violations of intellectual property rights under Special-301.  These nations are India, Brazil, Mexico China, South Korea, Taiwan, Saudi Arabia and Thailand.  The USTR will reassess the situation on November 1, 1989 and may decide to cite some or all of these countries for violations.

            Under the U.S. law, the USTR must negotiate a separate agreement with each country cited within 18 months of the announcement.  The agreement mus tprovide for the elimination of, or compensation for, the offending practice within three years.  If an agreement is not reached or if the agreement is violated, tariffs up to 100 percent must be imposed on imports of selected items from the country concerned.

            Even if India meets all U.S. demands, economic gains to the U.S. will be negligible.  India’s GDP is less than 2 percent of the GDP of the industrial market economies.  The bilateral U.S. trade deficit with India is less than 0.4 percent of the total U.S. trade dficit.  Inclusion of India in the hit-list is, therefore, almost contrary to the spirit of the 1988 Act which seeks to identify priority countries where corrective action will confer the “greatest” benefits on the U.S.

Additional Culprits

            By all accounts, the principal target of the action was Japan.  But, moving against Japan alone would have looked vindictive.  Additional “culprits” had to be found.  The reason why India became one of the culprits was perhaps that it is the best publicized case of a highly protective trade and investment regime.  At the same time, India’s significance for the U.S. as a trading partner is minimal.  So the potential loss to the U.S. in the event a trade war with India is practically nil.

            Two additional factors worked against India.  First, the U.S. has been pushing hard for liberalizing trade in those services  which it produces cheaply, like banking and insurance, while India has opposed this vehemently.  It is demanding that if less-developed countries are to comply, the U.S. and other developed countries must open their markets for labor-intensive services such as construction.  Second, the long-run political relationship between India and the U.S. has been less than warm.  Moreover, there is no effective lobby in Washington to guard the Indian interests.

            Not surprisingly, India has refused to negotiate with the USTR.  Japan has done the same.  If the two countries do not alter their position in the next 18 months, as is likely, the U.S. may impose 100 percent tariffs on imports of selected items.  USTR has cited India for restrictive trade practices in precisely those areas where it is least capable of responding favorably.  Liberalisation of foreign investment is an extremely sensitive issue.  Without a substantial change in the climate, any government will be taking a major political risk by substantially relaxing the current regulations.  As regards insurance, this sector is nationalized in India.  Opening the market to foreign companies will amount to denationalization of the industry which raises rather complex economic and political issues.

EEC Policies

The U.S. has lost the moral ground due to the fact that it has chosen to put less-developed and debt-burdened countries such as India and Brazil on the hit-list but ignored the highly restrictive policies of the European Economic Community (EEC).  It is reported that the EEC had threatened to retaliate if it was cited for Super-301.  The inevitable inference is that the countries, which have the power to retaliate effectively, will be spared the wrath of Super 301.

Even while rejecting U.S. demands, India should take this opportunity to rethink foreign trade and investment policies.  We must not lose sight of the fact that for some years now, the U.S. has been the largest single importer of our goods.  In 1987-88, 18.3 percent of our exports went to that country.

We should seize the intiative and make policy changes that are in our national interest.  My view concerning our trade policies is that we have maintained very high tariffs for very long.  Admittedly, tariffs are a major source of revenue for us.  But lowering tariff rates which average 130 percent will raise, not lower, revenue.   At present, there is a substantial evasion of tariffs via smuggling and fake invoicing.  Lowering tariffs will undoubtedly reduce incentive for evasion.  High tariffs and other import restrictions have also encouraged inefficiency.  For example, it was not until we allowed Suzuki to collaborate with Maruti to produce the state-of-the-art automobile that we discovered the ills of Fiat and Ambassador cars.

It is, of course, not wise for us to deregulate foreign investment at this stage.  But the time is ripe for lowering restrictions on trade at least to the point that they do not reduce revenues.  There is also a desperate need to accelerate the simplification of procedures.  Significant amount of resources and energy wasted in figuring complex procedures and evading regulations have become major drain on the Indian economy.

Times of India, June 23 1989.