Explained: Why India is indeed a ‘tariff king’

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July 26, 2019 12:39 AM

There is very little by way of analytical comparison of tariff structures that would negate the impression of India being a high-tariff economy, at least among the emerging market developing countries

World Trade Organisation, US india trade, Donald Trump, WTO members, US products, high tariff economy, MFN status, india tariff, Relative market accessA particular feature of India’s import tariffs is the high ‘bound’ rates.

The flow of bad blood between India and the United States (US) on trade doesn’t look like ebbing. The latest in the saga is the challenge mounted by the US at the World Trade Organisation (WTO) on India’s hike in customs duties on as many as 28 US products, imposed on June 15, 2019. The US contends that by acting the way India has, it has accorded less favourable treatment to products imported from the US, as opposed to those from other WTO members. This move came on the back of the US President Donald Trump again describing India’s tariffs as “not acceptable.”

The description of India as a high-tariff economy is familiar and commonplace. However, is it correct? Whether India is a high-tariff economy or not should be judged vis-à-vis the tariffs charged by other large major emerging market developing countries, which are structurally comparable to India. Indonesia and Brazil might be the relevant examples.

According to the WTO, India’s simple average MFN (most favoured nation) applied tariff rate was 17.1% in 2018, with an average agricultural tariff of 38.8% and non-agricultural tariff of 13.6%. The comparable tariffs for Indonesia were 8.1%, 8.6% (agriculture) and 8% (non-agriculture); and for Brazil these were 13.4%, 10.1% (agriculture) and 13.9% (non-agricultural), respectively. Going by simple averages, Indian tariffs faced by other WTO members are higher than those they face in Indonesia and Brazil. The higher overall Indian tariffs are primarily a result of the high agricultural tariffs. Both Indonesia and Brazil have much lower applied agricultural tariffs than India. On the other hand, India’s average applied non-agricultural tariffs are slightly lower than Brazil’s, while being higher than Indonesia’s.

A particular feature of India’s import tariffs is the high ‘bound’ rates. Bound rates—these are the maximum rates up to which WTO members can push up tariffs—are noticeably high for several categories for India. For fruits and vegetables, for example, India’s tariffs are bound at an average of 101.1% with a maximum of 150%. Such rates for Indonesia and Brazil are 45.6% and 60%, and 34.1% and 37.1%, respectively. India’s average applied tariffs for fruits and vegetables are 32.4% with a maximum applied rate of 105%. The similar rates for Indonesia and Brazil are 5.7% and 20%, and 9.7% and 35%, respectively. Therefore, India’s much higher bound rates, as well as the high maximum applied rates, leave little scope other than concluding India to be a much higher tariff economy than Indonesia and Brazil in fruits and vegetables.

The other feature reinforcing impressions of India being a high-tariff economy is the ‘binding overhang’, i.e. the difference between the bound and applied rates. Large differences tend to create uncertainties about an economy among its partners with respect to its trade policy actions. Such uncertainties lead to strong demand for deep tariff cuts in bilateral and regional negotiations. In hypothetical India-Indonesia tariff talks, for example, India’s binding overhang of 68.7% in fruits and vegetables, as opposed to 39.9% for Indonesia, would encourage the latter to demand deeper cuts. Agreeing on an equivalent slice of tariff cuts, say 20% on the bound and applied tariffs, would mean India cutting the average bound and applied tariffs on fruits and vegetables to 79% and 25%, from 101.1% and 32.4%. For Indonesia, similar cuts would mean the average bound rates dropping to 36% from 45.6% and the applied rate to 4.5% from 5.7%. Relative market access to be given up to India would be much more. Furthermore, the binding overhang would still remain much high for India, leaving the room for demand for further cuts in the future. India, though, might not be able to demand the same.

Like most other countries, the American perceptions on Indian tariffs are guided significantly by the high bound rates and the binding overhang, particularly in agricultural products, contributing to the ‘tariff king’ perceptions. The other factor contributing to such perceptions is to leave products outside the ‘binding’ coverage of the WTO. These are the products where countries wish to have the flexibility of applying tariffs higher than the bound rates they commit to at the WTO for the sector. For India, this is mostly noticeable in the manufacturing sector. In transport equipment, for example, while the WTO bound tariff rate is 40%, almost 30% of the disaggregated tariff lines for transport equipment products are outside the binding coverage. Tariffs for this excluded segment can be conspicuously high. Indeed, in India’s case, the applied maximum tariff of 125% is well above the bound rate of 40% for transport equipment. The ‘unbound’ tariff lines are far less for Indonesia, while Brazil has bound all its imports to the rates committed to the WTO.

There is, unfortunately, little room to dispute that India is a far higher ‘tariffed’ economy than its counterparts such as Indonesia and Brazil. Other comparisons might lead to somewhat different conclusions, but only in magnitude. There is very little by way of analytical comparison of tariff structures that would negate the impression of India being a high-tariff economy, at least among the emerging market developing countries. The ‘tariff king’ label is there to stick.

The author is Research lead (Trade & Economic Policy) , Institute of South Asian Studies, NUS

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