While Prime Minister Narendra Modi wants to make President Donald Trump’s forthcoming visit to India a memorable one, the United States (US) has signalled its desire to drive a hard bargain on trade, making a deal unlikely during the visit. The signal for this came when, just days before the visit, the US stripped India of its status as a “developing” country in the World Trade Organization (WTO). According to the United States Trade Representative (USTR), countries such as India shall not be considered “developing” as regards the imposition of countervailing duties (CVD) is concerned.
Under WTO law, countries are allowed to impose CVD on subsidised imports, hurting importing country’s domestic producers. The imposition of CVD is regulated by the Subsidies and Countervailing Measures (SCM) agreement in the WTO. Under Article 11.9 of the SCM agreement, a CVD investigation against a WTO member country must be terminated if the amount of subsidy is de minimis (too trivial to merit consideration). The de minimis margin is defined as less than 1% ad valorem. However, as per the SCM agreement, the de minimis standard for developing countries is 2% or less. The higher de minimis standard for developing countries is an example of special and differential treatment (S&DT). The US decision to not consider India as a “developing” country means that India would not benefit anymore from the 2% de minimis standard, thus increasing the vulnerability of Indian exports to the US for CVD action.
In order to decide whether a country is “developing” or not, the USTR has come up with the following criteria. First, the per capita Gross National Income (GNI) of a country should be less than $12,375. Second, the country’s share in the world trade should be less than 0.5%. Third, the country should not be a member of the Organization for Economic Cooperation (OECD), or seeking accession to OECD, or of the European Union or Group of Twenty (G20).
Being a low-middle income country, India’s per capita GNI is much lower than $12,375. Nonetheless, India is off the US’s list of “developing” countries because India’s share of world trade is more than 0.5% and India is a member of the G20.
What is interesting to note is that the USTR criteria to designate countries as “developing” has no basis in WTO law. Under the WTO system, countries are generally divided into three categories: Developed, developing and least developed countries (LDCs). While Article XI.2 of the WTO agreement provides that the LDC status of a country in the WTO is based on such status being recognised by the United Nations, the agreement does not mention any criterion to determine “developing” country status. Accordingly, as per accepted wisdom, countries self-designate themselves as “developing” so as to take advantage of the S&DT provisions. These S&DT provisions give developing countries the much needed policy space to prepare themselves to compete with developed countries in global trade.
The unilateral revocation of “developing” country status of WTO member countries by the US, based on its own subjective criteria, is a clear violation of international law and yet another onslaught on the rule-based global trading order. Moreover, economically, it is bizarre to suggest that a country is not “developing” by just focussing on two factors, namely share in global trade and membership of the G20, ignoring all other facts. India, along with China, South Africa and other countries countered the US assertion in the WTO last year by submitting a detailed paper. In its paper, India gave hard data to show that it is still a poor country, and thus, it requires the S&DT provisions. For example, the paper documents that India’s GDP per capita is very low; India has 364 million people living in multidimensional poverty — the highest in the world; the domestic subsidies provided to per farmer in India is a meagre $227, which is 267 times less than that provided in the US; India has a very low research and development (R&D) capacity with only 216 researchers in R&D per million people.
Since the US does not consider India a “developing” country for the purpose of CVD action, it also means there is no possibility of the US restoring the Generalised System of Preferences (GSP) — a US trade preferential programme that provides favoured market access to poorer countries. The US had terminated India’s status as a GSP beneficiary country last year.
All these factors will throw a spanner in the works of a trade deal between the two countries, irrespective of when negotiations pick up again. India should not enter into a trade deal with the US just for political optics — till the US agrees to play the game by the rules.
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