By Prerna Prabhakar and Hemant Mallya
India’s plan to increase merchandise exports to $1 trillion by 2030 has to tackle several new ‘green’ international regulations. Among them are the European Union’s Carbon Border Adjustment Mechanism (CBAM) that entered into force in October and the US Inflation Reduction Act that incentivises green energy production projects, but with the caveat that there has to be a certain degree of local content required in the manufacturing process. These are just some of the hurdles that India’s export journey is going to see, especially as it plans to compete with other Asian giants.
Recent analysis by the Council on Energy, Environment and Water (CEEW) shows that the EU’s carbon tax and other laws could impact about $37 billion in Indian exports, accounting for 43% of India’s total exports to the EU in 2022. Also known as non-tariff measures, these European and American regulations are sustainability-driven policy measures being fast implemented by most developed countries. They go beyond ordinary customs tariffs and can have an economic effect on trade, and include measures such as labelling, standards on technical specifications, and quality requirements.
For instance, when it comes to the Carbon Border Adjustment Mechanism (CBAM), although the immediate impact will be subdued, in the long run, a large portion of India’s exports could get impacted as carbon intensity norms for exports to the EU market become more stringent, and the scope of CBAM expands from commodities to manufactured goods. Other such regulations that have been proposed to the European Commission and can be notified to the World Trade Organization (WTO) at some stage are likely to target sectors such as textiles, chemicals, consumer electronics, construction materials, and packaging materials. Many of these regulations cater to the goals set as part of the European Green Deal and lay down complex rules targeting the life cycle of production. For instance, the EU Strategy for Sustainable and Circular Textiles aims to ensure that textile products sold in the EU market are recyclable, and to a great extent made of recycled fibres, free of hazardous substances. These regulations carry a risk of becoming non-tariff measures in themselves, hampering Indian exports. Such measures have challenged Indian exporters in the past. Chemical exports from India were met with stringent regulations in the form of Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), implemented by the EU in 2007. It led to approximately 40% of chemical exporters withdrawing from the market.
While India has taken significant steps to address the challenge imposed by non-tariff measures, it still needs to develop a structured approach to deal with these measures to ensure that its exports are not impacted.
One approach can be to use the international policy route to discuss and negotiate these issues at multilateral or bilateral levels. For instance, India can incorporate provisions in bilateral Free Trade Agreements for mutual recognition of compliance assessment activities in the respective countries. The recently signed Comprehensive Economic Partnership Agreement between India and the United Arab Emirates sets an example in this regard. It entails a commitment to fast-tracking product registrations for exporting Indian pharmaceutical products to the UAE that have received similar approvals from regulatory authorities in Australia, the EU, Japan, the UK, or the US.
Another important international strategy is utilising the WTO framework to raise specific concerns concerning non-tariff notifications by other WTO member countries. Specific trade concerns are an effective way for WTO members to share their concerns, develop an understanding of the regulations, and exchange details relating to the compliance mechanism. In some cases, like the EU’s REACH regulation, trade concerns from their trade partners led them to provide technical assistance and advice to facilitate compliance with the regulation.
Finally, at the national level, we must prepare our industries for such international regulations. The foremost step here is to prepare the industry to comply with the strict regulations by providing them with relevant information about these. This calls for developing a common knowledge-sharing platform where firms can be registered and the information can be tracked. While the Indian government holds regular meetings with the industry about new non-tariff measures, a comprehensive approach with mechanisms to support affected exporters in dealing with these should be adopted for better outcomes. This may also require specialised working groups with representation from relevant stakeholders. At the same time, India needs to ramp up its regulatory mechanism to introduce its own standards and non-tariff measures and use these to ensure the quality of its manufactured items. Standard-setting agencies in India should also ensure that the standards and conformity assessment procedures align with global standards and procedures.
The world is increasingly looking at sustainability both in policies and the marketplace. Non-tariff measures are likely to cover a wider range of export items and will be key in determining the global competitiveness of exports. The Indian industry should prepare itself in time to be a frontrunner in this race.
Writers are respectively, program associate and fellow, CEEW Views are personal