Safeguarding Free Trade and the Domestic Industry: Bilateral Safeguard Mechanism

Going forward, Indian authorities must be cautious in implementing the FTAs as a whole- not just liberalizing tariffs and extending concessions to FTA partners but also ensuring implementation of safety mechanisms enshrined therein...

Article I of the General Agreement on Tariffs and Trade ("GATT") provides for the principle of the Most Favored Nation ("MFN"). Under the principle of MFN, Member Countries of the World Trade Organization ("WTO") must accord uniform and similar treatment to all other Member Countries. An exception to this principle is found in Article XXIV of the GATT, which allows two or more Member Countries to extend tariff concessions to one another which they do not extend to other members, by entering into Free Trade Agreements ("FTA")/ Regional Trade Agreements ("RTA"). RTAs have risen in number over the years- as of 1st September 2019, 302 RTAs between Member Countries are in force.

India has notified 15 RTAs as of date, while several negotiations are in the pipeline. The following Indian RTAs are in force:

India is currently negotiating FTAs with European Free Trade Agreement ("EFTA"), EU, Australia, and New Zealand, among others. India was also a negotiating partner in the mega regional agreement (yet to be concluded)- the Regional Comprehensive Economic Partnership ("RCEP"). However, it seems India has taken a step back in the negotiations, due to a failure of the final texts to tackle its trade concerns. With the changing global landscape, India has been moving towards a more protectionist form of trade governance. As per WTO data, the average applied MFN tariff rate for India is 17.1%, and trade weighted average rate is 11.7%¹, which is much higher than its counter-parts. Further, only 9.8% of the imports are MFN duty-free.² On the other hand, the duty-free imports under the various FTAs signed by India constitute a substantial part of the total imports into India, which has been widely contended a serious set-back for the domestic industry in India.

Source: Annual Report 2018-19, Ministry of Commerce and Industry

Imports under the major FTAs of India constitute 17.1% of the total imports to India, a significant portion of which is duty free imports. At the same time, India's exports to FTA countries have not experienced a similar exponential growth, and the utilization of the benefits of the RTAs by exporters from India is only 5-25%, which is extremely low.³

It has long been claimed that the root of all domestic industry woes was the signing of multiple FTAs with very short transition periods and quick liberalization of tariffs to zero duty. For example, under the ASEAN, there was rapid tariff liberalization and elimination to zero-duty levels within the first 4 years for a majority of the tariff lines. Accordingly, the trade deficit with ASEAN has widened post the signing of the FTA. Similar experiences are notable in other leading FTAs with Korea RP and Japan.

However, here it becomes pertinent to note that most FTAs signed by India have the negotiator-foresight of incorporating a safety mechanism for the ill-effects that a FTA may have on the domestic industry. FTAs with Malaysia, Korea RP, Japan, Singapore and ASEAN all contain provisions pertaining to 'Bilateral Safeguards'. In the event of a surge in imports due to the tariff liberalization / elimination and market access benefits provided by the FTA, this provision allows India (or the trading partner) to:

"(a) suspend the further reduction of any tariff rate under this Agreement for the good; or

(b) increase the tariff rate on the good concerned to a level not to exceed the lesser of:

i. the applied MFN tariff rate on the good in effect at the time the action is taken; or

ii. the applied MFN tariff rate on the good in effect on the day immediately preceding the date of entry into force of this Agreement."

For imposition of bilateral safeguards, the imports from the partner country should be in such quantities that they 'substantially cause or threaten to cause serious injury to the domestic industry'.

However, India is a dualist state, and an international agreement does not become applicable in its domestic territory without being notified as municipal law by the act of Parliament. Therefore, provisions of the FTA need to be incorporated in the municipal law of India to be enforced.

Since the bilateral safeguard provisions of FTAs had no place in India's domestic law, the Indian industry could not avail the safety mechanisms built into the FTA. Fairly recently, India has notified Safeguard Rules under major FTAs to extend the protection provided by them:

These rules echo the wordings of the applicable FTAs and are built into the existing safeguard mechanism in India. The introduction of these rules was a wave of relief for the domestic industry. In 2019, three bilateral safeguard investigations have been initiated by the Directorate General of Trade Remedies ("DGTR/Authority"), pursuant to the applications filed by the respective domestic producers:

In the Bilateral Safeguard Investigation concerning imports of "Refined Bleached Deodorised Palmolein and Refined Bleached Deodorised Palm Oil" into India from Malaysia, preliminary findings have also been published vide notification dated 26th August 2019, only 12 days after the date of initiation. Acknowledging the critical circumstances in the case, which have affected the overall performance of the Indian industry and have caused serious injury to the domestic producers, the Authority has recommended an increase in rate of customs duty on imports of subject goods originating from Malaysia by 5% for a period of 180 days. The Ministry of Finance increased the rate of customs duty by 5 per cent for 180, acting on the recommendation of the DGTR. The short timelines of these investigations and speedy actions taken by the Indian authorities will certainly prove to be extremely effective in safeguarding the interests of the domestic industry.

The Bilateral Safeguard Mechanism negotiated into the FTAs entered by India appears to be an effective mechanism to counter the trade surge arising out of the undertakings in such FTAs. In spite of such a safety mechanism available under the FTA, the belated incorporation of the same into Indian domestic law left the Indian industries without remedy for a long time and has led to the widening trade deficit with our FTA partners. Ultimately, contrary to the popular opinion that it is India's FTAs which have caused the current situation of trade imbalance, timely incorporation of the negotiated safety mechanisms such as the bilateral safeguard measure into domestic law could have gone a long way in addressing these concerns.

Going forward, Indian authorities must be cautious in implementing the FTAs as a whole- not just liberalizing tariffs and extending concessions to FTA partners but also ensuring implementation of safety mechanisms enshrined therein.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.