Outlawing India’s tech tariffs

Even if the EU does not impose trade sanctions on India, it might use the WTO ruling as a bargaining chip in the free trade agreement negotiations with India

May 03, 2023 02:05 am | Updated 02:05 am IST

A logo is seen at the World Trade Organization headquarters in Geneva on October 5, 2022.

A logo is seen at the World Trade Organization headquarters in Geneva on October 5, 2022. | Photo Credit: Reuters

On the complaints brought by the European Union (EU), Japan, and Taiwan, three World Trade Organization (WTO) dispute settlement panels have found India’s tariffs on certain information and communication technology (ICT) products such as mobile phones inconsistent with India’s WTO obligations. Specifically, the panels concluded that India has violated Article II of the General Agreement on Tariffs and Trade (GATT) because India’s tariffs breach its Goods Schedule. Since one of the central objectives of the WTO is to boost transparency and predictability in the multilateral trading order, WTO member countries are under a legal obligation not to impose tariff rates in excess of their ‘bound’ or maximum tariff rates committed in their Goods Schedule. The Goods Schedules are based on the World Customs Organization’s classification system, which catalogues traded products with specific names and numbers. This is also known as the Harmonized System of Nomenclature (HSN). Due to the continuous emergence of new products owing to technological innovations, the HSN system is regularly updated to reflect new products, also known as ‘transposition’.

Reasoning of panels

To justify higher tariff rates, India argued that its binding tariff commitments on ICT products are contained in the WTO Ministerial Declaration on Trade in Information Technology Products (ITA Agreement), which India joined in 1997. The ITA Agreement, adopted in 1996, is an arrangement through which select WTO member countries agree to eliminate duties on IT products. However, the commitments under the ITA become binding on a country under Articles II.1(a) and (b) of GATT only if they are incorporated in the Goods Schedule. Accordingly, the panels held that India’s Goods Schedule, not the ITA, is the source of India’s legal obligations on tariffs, including on products covered by the ITA.

The panels also rejected India’s contention that its commitments under the ITA are ‘static’. India argued that its commitments under the Goods Schedule do not include products that emerged due to technological innovations after the conclusion of the ITA. But the panels held that the ITA cannot override the tariff commitments given in India’s Goods Schedule.

Finally, the panels also denied India’s argument based on Article 48 of the Vienna Convention on Law of Treaties, which, inter alia, declares that an error in a treaty would invalidate a state’s consent. India argued that an error was committed during the transposition of its Goods Schedule from the HSN 2002 edition to the HSN 2007 edition. The panels accepted India’s argument that at the time of the transposition, India had assumed that its ITA undertakings restricted the scope of its Goods Schedule — that is, the transposition process into the HSN 2007 edition did not expand the scope of India’s tariff commitments. Nevertheless, the panels held that India failed to show that this assumption formed a necessary basis for India’s consent for the Goods Schedule. In any case, the panels said India was put on notice that its commitments under the Goods Schedule may have expanded during the transposition process.

Appealing ‘into the void’

Accordingly, the panels have recommended that India reduce its tariff rates and make them compatible with its Goods Schedule, but it is unlikely that India will comply. Compliance would mean dismantling the high protective tariff wall that India has erected hoping it will boost domestic manufacturing of ICT products. In fact, India, relying on Article 17 of the WTO’s Dispute Settlement Understanding (DSU), is likely to appeal against the panel ruling. However, the Appellate Body that hears appeals has ceased to exist since 2019 because the United States has been blocking the appointment of the body’s members. Thus, India’s appeal will go into the void. Legally, India will not be required to comply with the panel rulings till the time its appeal is heard.

Relying on Article 25 of the DSU, the EU and a few other WTO member countries have created an alternative appellate mechanism — the Multi-Party Interim Appeal Arbitration Arrangement (MPIA). However, India is not a party to this and will not use it to resolve this dispute.

EU retaliation

Can the EU impose trade sanctions on India in case India does not comply with the rulings, and appeals into the void? Under the WTO law, the EU cannot do so. The WTO law does not allow countries to impose trade sanctions when an appeal is pending. Retaliatory action in the form of trade sanctions can be imposed only after the authorisation of the Dispute Settlement Body, which comprises all WTO members.

Notwithstanding the above, the EU has developed a legal mechanism according to which if a country files an appeal against a panel under Article 17 of the DSU into the void, and refuses to use the MPIA to resolve the dispute, the EU can unilaterally impose trade sanctions against the losing country. The EU’s objective is to use the stick of trade sanctions to push countries like India to join the MPIA. However, such countermeasures will be inconsistent with the WTO law. Individual countries like India can’t be held responsible for a missing Appellate Body. Even if the EU does not impose trade sanctions, it might use this ruling as a bargaining chip in the ongoing free trade agreement negotiations with India. Thus, India needs to tread cautiously.

Prabhash Ranjan is Professor and Vice Dean, Jindal Global Law School. Views are personal

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