Tariff rate quotas can be a boon for trade deals

They protect domestic producers from competition from large imports. They also allow consumers and producers in the importing country to enjoy benefits of lower priced products

trade, economy, import, exports
Illustration: Rohnit Phore
trade, economy, import, exports
Illustration: Rohnit Phore

By Sanjay Chadha

India has a whopping $104 billion trade deficit with the 16-member Regional Comprehensive Economic Partnership (RCEP) grouping, which was 64% of India’s total trade deficit of 2017-18. No wonder, there is a raging debate on opening up a very significant portion of the market, given the sensitivities around agriculture- and labour-intensive domestic industries. Several other trade agreements are also in various stages of negotiations.

Long-term back-ending of tariffs or spreading tariff eliminations over a longer period of time have been our palladium of trade negotiations in the past. However, it need not continue to be so for all lines in which concessions are eliminated. The introduction of tariff-rate quotas (TRQs) can be a more germane transitional tool, providing a degree of safeguard to the future demand growth in a rapidly expanding market. This is especially true when negotiating with countries which have saturated markets and do not reciprocate such a potential for growth in their markets.

A TRQ allows a set quantity of specific products to be imported at a low or zero rate of duty. TRQs are established under trade agreements between countries.

TRQs do not function as an absolute limit on the quantity of product that may be imported. The “TRQ commitment”, therefore, does not apply any limits on the quantity per se of import of a product, but applies a higher rate of duty for that specific product once imports up to the “TRQ commitment” have been reached.

For example, the US cotton tariff quota protects US cotton growers while allowing textiles manufactures to import some cheaper cotton also.

Another aspect of TRQ is that the quota component works together with a specified tariff level to provide the desired degree of import protection. Essentially, a TRQ is a two-tiered tariff instrument. Imports entering within the quota portion of a TRQ are subject to a lower tariff rate called the tariff quota rate or TRQ rate. The later Imports that are unable to make it to quota’s quantitative threshold face a much higher tariff rate, which is normally the MFN tariff (MFN tariffs are what countries promise to impose uniformly on imports from other members of the WTO). In other words, Tariff Rate Quota is a limit on the quantity eligible for lower or zero duty.

The use of this instrument is globally quite prevalent. It is estimated that as many as 1,200 TRQs are operated each year by WTO members, including the EU, Japan, Canada and the US. This ensures that limited volumes of these sensitive products can enter their market at a low tariff, whereas the tariff outside the TRQ quantity is kept high to offer a degree of protection to the domestic producers.

Essentially TRQs are a compromise. On one side, they protect domestic producers from having to face competition from large quantities of imports. While on the other, they allow consumers and producers in the importing country to enjoy benefits, albeit a limited one, of lower priced products.

Tariff quotas are used on a wide range of products. Most are in the agriculture sector: cereals, meat, fruit and vegetables, and dairy products. Sugar is not far behind. Sugar is protected in most producing countries with tariff quotas. However, not all TRQs are food: And not all are agricultural.

In fact, most of the current WTO TRQs are in the agricultural sector. The idea behind this arrangement was that even if members were sensitive to lowering tariffs in agriculture, they would be obliged to open up a modicum of access to some of their domestic market demand.

In the larger perspective, the compromise in international trade negotiations, comes from the need to strike a balance between the interests of the consumers and downstream producers and the competing domestic producers of each country. How that balance is struck depends on the country’s lobbying forces of the various interest groups.
The TRQ have found a sweet spot in the evolving global trade arrangements. While they were born of a need to ensure that existing market access was maintained, in recent times, they have played vital roles in consuming trade arrangements.

TRQs have now become a way of reaching a consensus with trading partners to sign up trade deals. The EU-Japan bilateral deal was finally unblocked with a TRQ for cheeses including mozzarella, Brie, Camembert and feta. As for the proposed EU-Mercosur deal, EU TRQs for beef and ethanol are the main event as far as Brazil and Argentina are concerned, though they represent a fraction—only 1% for beef—of total EU consumption.

The success notwithstanding, TRQ have their share of criticism.

Trade liberalisation proponents argue that TRQs are a complex, inefficient and perhaps even counter-productive way to conduct trade liberalisation. They go as far as to say that this will do well to feature is the trade policy of the 19th century, but certainly not the 21st.

They certainly do well to argue that while TRQs allow imports, they do so in an inefficient manner. For, they create new distortions and impediments to further liberalisation. They argue that TRQs have as much to do with managing trade as freeing it. Yet, TRQs now appear to be a permanent fixture of global trade.

The reason is not far to see. On the one hand, TRQs are used as sweeteners to help reach a consensus in trade negotiations, on the other, TRQs help overcome traditional domestic opposition to trade deals—they are a trade-off between the broader interests of consumers and the degree of protection afforded to the competing domestic producers. As a result, it also puts pressure on them to improve their efficiency, while abating the higher production costs on account of market imperfections.

But more importantly, one can ratiocinate its utility as an instrument for stimulating growth in domestic production and investment in manufacturing that is driven by domestic demand.
The challenge, in this context, lies in addressing the concerns of domestic Industry? Their argument cannot be ignored: If duties are zero, who will make in India? Does a reasonable duty wall bring in investments? For example, global car majors invested in India on account of an import duty wall.

A possible clue in addressing this concern lies in surveying the happenings in global trade, especially in regard to China. China has built its global leadership in trade on the strength of its investments. As per the recent Nomura report on Sino-US trade war, 43 per cent of China’s exports are by Foreign owned companies, bringing up the pertinacious need for inducing investments in manufacturing—more so today than ever before, as industries in China are relocating or diversifying their production base.

While it can indisputably be argued that the TRQ administration system should be as conducive to trade as possible and must not ‘impair or nullify the market access commitments negotiated’, it is also argued that a system of TRQ administration which is ‘transparent, predictable and minimises transactional costs for traders, is not a unicorn, and it need not be seen as an insurmountable task.

Historically, the quotas are allocated through a slew of processes. These are: Auction, where importers bid for shares or licences; First-come, first-serve, where physical imports charged in-quota tariffs until the quota is filled; Licence on demand, where allocation is made in relation to quantities demanded, often before the period specified for the quota—first-come, first-served or allocations trimmed proportionately; and finally, import by state trading entities.

While the idealist can propound many arguments on the undesirability of TRQs, the realist must take into account the imperfections in the global trade and the salvific effect of TRQs on fast growing markets where domestic manufacture fills in a sizeable portion of the domestic demand.

One cannot dispute the fact that a tariff arbitrage is an effective tool for inducing local manufacture or at least domestic value addition in the country. It has been a basic tool in the country’s Phased Manufacturing Program policy. If we are to induce investments in manufacturing, then the future growth in domestic market, perhaps, need not be committed entirely to a zero tariff regime, however back ended. A quantity linked tariff elimination could also be considered in the long run, keeping aside our future demand growth as an inducement for investments and expansion of domestic manufacturing.

Author is Additional Secretary, Department of Commerce. Views are personal

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.