With prices staying low for long, media are rife with reports and discussions by the ‘saviours’ of rubber who demand immediate remedial action against unbridled natural rubber imports into India little knowing that, under the prevailing WTO-mandated trade policy regime, individual member-countries lack flexibility to ban the import or put quantitative restrictions
Falling prices of natural rubber (NR) and suggestions for addressing the farmers’ woes have been dominating discussions among rubber fraternity the world over for more than two years. Around 84% of India’s total output of NR comes from the State of Kerala. This 100% literate State is known for the public’s obsessive dependence on the media for grabbing the most updated information. Both the print and visual media in the State are flooded with daily reports and columns pointing out measures for addressing the crisis in the rubber farming sector.
Ironically, almost all the remedial measures which have come up during the past two years, (and extensively reported through the media or deliberated by various forums), are built up on the wrong premise that India still remains a closed economy and the sub-sectors of the economy remain insulated from the rest of the world. The reported remedial policy measures largely reveal lack of awareness of the proponents about the economic reforms initiated in India in 1991, the paradigm shift in the country’s policy orientation following the signing of GATT 1994 and the subsequent mandatory removal of quantitative restrictions (QR) on imports and exports.
This article attempts to take a survey across the various remedial measures which have been repeatedly suggested through the media for addressing the prevailing low rubber prices. It also examines the merit of the suggested measures in the context of the prevailing economic policy environment mandated by GATT 1994.
Commitments under GATT 1994
India is a founder member of the WTO established in January 1995 and signatory to the GATT 1994 and its associate agreements. GATT 1994 aims at ensuring that markets remain open and this access is not disrupted by sudden and arbitrary impositions of import restrictions. With this objective, the whole framework of GATT 1994 is laid up on three basic principles which are: i) Market Access, ii) Most Favoured Nations Treatment and iii) National Treatment Rule. Among the three, the principle of market access is important in the context of the remedial measures repeatedly suggested for the country’s NR sector.
The market access principle requires all WTO member-countries to keep domestic protection measures at low and provide it only in the form of the Customs tariff. The use of quantitative restrictions (QR) on imports is prohibited except under very special situations which are specified under Article XII, XX and XXI of GATT 1994. Member-countries should reduce the Customs tariffs and remove all other forms of barriers to trade. The reduced Customs tariffs are bound against further increase by getting the bound rates listed in each country’s National Schedule. The National Schedule forms an integral part of GATT 1994, and individual member-countries are not permitted to change the bound rates listed in it. The bound rate committed under India’s National Schedule for NR traded in the forms of RSS (Ribbed Smoked Sheets), Block Rubber and other dry forms is 25%. This means that 25% is the maximum Customs tariff which India can levy on these forms of NR. However, this is not applicable to import of NR in the form of latex because the Government had left NR latex without fixing a bound rate. Therefore, India enjoys the flexibility in keeping the Customs tariff for NR latex at any level.
Being a signatory to GATT 1994 and its associate agreements, it has become mandatory for the Government of India to phase out all QRs on imports and reduce the Customs tariffs in a phased manner. Therefore, it has become obligatory for the country to frame its EXIM policies and domestic support measures in compliance with the basic principles of GATT 1994. Accordingly, the Government had to remove all QRs for NR’s imports effective April 1, 2001. From that date onwards, NR can be imported into the country in any quantity, without licence by paying the Customs tariff at the prevailing rate. Moreover, the levy of the Customs tariff should be subject to the bound rate committed through the National Schedule.
Given this background, the following sub-sections examine the merit of the various remedial measures which have been suggested for addressing the current phase of low NR prices.
Ban on import
GATT 1994 does not allow any member-country to ban or quantitatively restrict imports, even for a temporary period, except under very special situations which are specified under Article XII (Against severe Balance of Payment crisis) and Article XX and Article XXI (To protect human, animal and plant life, and on national security grounds). Surge in imports, piling-up of stock or fall in prices do not provide justification for a member- country to reinstate QR.
Imports of NR into India remained quantitatively restricted right from 1947 onwards until March 2001 as explained in the Table.
From the Table, it is evident that the Government enjoyed flexibility until March 2001 for restricting the quantity of imports or even totally banning them. The Government lost this flexibility from April 2001 onwards. Therefore, the suggestions for banning the import or putting quantitative restrictions are illogical in the prevailing WTO-mandated trade policy regime in which individual member-countries lack flexibility in doing so.
However, the Government may discontinue or restrict the Advance License scheme for duty-free imports of NR against export
of manufactured rubber products. This, being an incentive, provided by the Government for promoting export of value-added products, does not come under the ambit of GATT 1994.
Upward revision of Customs tariff
GATT 1994 requires that all WTO member-countries should keep the applied rates of basic Customs tariffs within the bound rates they have listed in their respective National Schedules. The bound rate, which India has committed for NR traded in the forms of RSS (HS code 400121), Block Rubber (HS code 400122) and other dry forms (HS 400129), is 25%. Against this, the applied rate of the Customs duty, effective April 30, 2015, is “25% or Rs.30 per kilo gram whichever is lower.” The prevailing applied rate for dry forms of NR is the maximum level to which India is permitted to raise the Customs tariff. India lacks any further option to raise the Customs tariff for dry forms of NR. The only option which is available now is to remove the cap of Rs.30 per kilogram on the Customs tariff. But, at the current level of prices in the international market, the removal of the cap does not provide any added protection.
Levy of Anti-dumping Duty
There is a general notion that any abnormal increase in the imports of a product could be treated as dumping. For instance, a total quantity of 442,130 tonnes of NR was imported into India during 2014-15 as against the average annual import of only 61,500 tonnes during the period from 2001-02 to 2008-09. Obviously, the import surged by more than seven-fold. This abnormal surge in the imports is often quoted as justification for levying anti-dumping duty on NR imported into the country. But, under the Agreement on Anti-dumping Practices of GATT 1994, it is laid down that a surge in imports per se cannot be considered as dumping. A product is considered dumped into a country only if either of the following two unfair trade practices is proven:
i) The product is exported from the source country at a price lower than the price normally charged in the source country.
ii) The product is exported from the source country at a price below its cost of production.
Even if there is surge in imports, it cannot be considered as dumping unless either of the two is established. For instance, suppose there is surge in Indonesia’s exports of ‘SIR 20’ grade of Block Rubber into India and it causes material injury to the Indian NR production sector. This can be considered as dumping only if it is proven that i) Indonesia exported SIR 20 at a price below its cost of production or ii) Indonesia exported SIR 20 at a price below the corresponding market price in Indonesia. As far as either of these two conditions is established, there is no unfair trade practice involved and hence dumping cannot be charged or anti-dumping action cannot be initiated.
Safeguard action
The levy of anti-dumping duty discussed in the previous sub-section is a punitive action against an unfair trade practice. But, safeguard action is a provision given under the Agreement on Safeguard Duty of GATT 1994 for providing protection to the domestic sector even if no unfair trade practice is involved. But, this is applied under specified situations subject to well-stated conditions. There have been media columns pointing out that India could initiate safeguard action against imports of NR into the country. Unfortunately, they missed proper
understanding of the various clauses and conditions laid down under the Agreement on Safeguard Duty. Safeguard action is recommended under the following special situations:
i. There is no issue of unfair trade practices involved. Import surged although the trade is undertaken through fair practices only.
ii. The domestic sector is not prepared to face the surge in imports. The domestic sector needs time for preparing itself for facing the increased competition.
For instance, suppose India considers initiating safeguard action on SIR-20 imported from Indonesia. As far as the imports take place through fair practices, it is not possible to initiate punitive measures against Indonesia. Suppose India feels that the domestic NR production sector would be able to attain competitiveness if it is provided time to prepare itself for the same. This means, the domestic NR production sector would be able to reduce the cost of production so that it would be possible to offer domestically produced NR at prices lower than the prices offered by exporters in Indonesia.
Moreover, it has to be proved that the domestic NR production sector is seriously damaged and the surge in imports from Indonesia is the cause for the same. Under such a situation it is possible to initiate safeguard action against import of SIR-20 from Indonesia for a specific period. This is only the conceptual part of the safeguard action and most of the proponents of this measure have never gone beyond the conceptual part.
Safeguard action can be in the form of an increase in the Customs tariff or imposition of QR for a specific period for importing SIR 20 from Indonesia. But, the most important point is that safeguard action is not a punitive measure against an unfair trade practice. But, it is a measure against fair trade. Due to the same reason, safeguard action could be initiated only with the consent of the exporting country concerned. For initiating safeguard action against Indonesia, India has to get the consent of the former. Indonesia is not expected to agree to a proposal having potential adverse damage to its own trade interest.
Moreover, Indonesia’s smallholder-dominated NR production sector is export-oriented and therefore the Indonesian Government is unlikely to agree to an action affecting the interest of the country’s smallholders. In order to get Indonesia’s consent, the country proposing to initiate safeguard action (India) has to offer highly attractive compensation to Indonesia. The compensation could be in the form of tariff concession on other products of export interest to Indonesia. For instance, Indonesia may ask for a lower Customs tariff for importing palm oil into India. But, this will cause damage to India’s domestic edible oil sector.
Suppose that all the above complications are somehow managed and safeguard action is taken on SIR 20 imported from Indonesia. The domestic NR production sector still has to suffer from the import of SMR 20 from Malaysia, STR 20 from Thailand and SVR 10 from Vietnam. That means, India may have to replicate the same exercise with these countries as well by offering them highly attractive compensations. While Malaysia may ask for concessional tariff for importing palm oil or timber products into India, Vietnam may demand a lower tariff for importing coffee into India and Thailand may ask for a special tariff for rice. In short, India may have to sacrifice the interests in several domestic production sectors before considering safeguard action against import of NR. Even if India is willing for such a sacrifice, major NR exporting countries are unlikely to consent for a measure having potential damage to their NR trade sector. For the major NR exporting countries, India is a bright spot in view of the country’s increasing dependence on imports. Therefore, safeguard action is not a feasible proposition in addressing the current phase of low NR prices.
Inclusion of NR under Agreement on Agriculture
NR is not included in Annexe 1 of the Agreements on Agriculture (AoA) of GATT 1994 and, therefore, it is treated as “other products” which are often referred to as industrial products. There is a misconception that the bound rate of Customs tariff for NR could be raised if it is brought under Annexe 1 of the AoA. First of all, re-classification of Annexe 1 is practically impossible as it requires consent from all member-countries of WTO. Secondly, NR’s inclusion in Annexe 1 of the AoA and upward revision of an already committed bound rate are two different matters. Upward revision of an already committed bound rate is practically impossible because it requires consent from all the member-countries whose trade interest could be affected due to the revision. India has already emerged as a major destination of NR exports from Thailand, Indonesia, Vietnam and Malaysia. Therefore, it is practically impossible to get the consent of these countries for the upward revision of India’s already committed bound rate.
Another misconception is that planting subsidies and other forms of incentives to the domestic NR production sector could be enhanced if NR is brought under the AoA. NR being classified under “other products”, rules on subsidies are governed by the Agreement on Subsidies and Countervailing Measures of GATT 1994. The Agreement on Subsidies and Countervailing Measures permits subsidization to the extent of 5 per cent of the value of output. Based on the production and average price of NR during 2014-15, 5 per cent of the value of output comes to Rs. 4,300 million. That means, Agreement on Subsidies and Countervailing Measures already allows India to raise the annual amount of subsidization to the extent of Rs. 4,300 million which is more than four times the amount being currently provided. Evidently, GATT 1994 is not a constraint for India to bring more than four-fold increase in the amount of subsidization provided to NR. Inclusion of NR in Annexe 1 of AoA is not needed for the same.
Notification of Statutory Minimum Support Price
During the protectionist period, the Government of India used to administer NR prices by notifying statutory fixed prices, minimum prices, maximum prices or both the maximum and minimum prices. This had been in practice in various forms right from 1942 onwards as part of the domestic support measures provided by the Government during the pre-reforms period. As imports and exports of NR were quantitatively restricted during the period up to March 2001, it was possible to effectively enforce the prices notified during the period.
A few media reports have recently suggested statutory notification of minimum price as a solution to relieve the farmers from the prevailing low prices. The reports have quoted the successful enforcement of the same during the past. But, the proponents of the administered price ignore the basic fact that Indian economy is no longer an insulated island. The support measures and strategies that prevailed during the protectionist period of the past, and were effective in supporting the domestic sector, are no longer feasible in the changed economic scenario. Effective April 2001, there are no restrictions on imports and exports. Even if the Government notifies a statutory minimum price, it can be effectively enforced only if imports are quantitatively restricted and NR is procured by a designated agency at the notified minimum prices. As stated earlier, it is practically impossible to reinstate QR on imports and, therefore, administration of price by notifying a statutory minimum support price lacks logic in the changed economic scenario.
In order to make this point clear, suppose the Government notifies Rs.180 per kilogram as the statutory minimum price for NR in the country. Once this is notified, buying or selling NR at a price lower than Rs.180/kg is a punishable offence. But, imports are allowed free of restrictions and NR is available at the international market at Rs.110/kg. Naturally, the domestic manufacturing industry will source NR from the international market leaving no buyers for the domestic NR. Eventually, farmers in India will not able to sell the produce even if they are willing to offer at prices much lower than the notified minimum prices.
Domestic procurement
Domestic procurement of NR is a policy suggestion that has dominated among the various measures which have been pointed to support the domestic prices of NR. Those advocating this policy measure blindly presume that the domestic price can be brought upward by bringing down the supply and this can be achieved by procuring NR from the domestic market by a designated Government agency. They point out that procurement operations carried out by the Government in the past had been effective in addressing the low prices prevailed during those days.
It is true that the domestic procurement operations were effective in shoring up the low prices during the pre-reforms period when the domestic market enjoyed insulation from rest of the world. Until March 2001, imports were quantitatively restricted and, therefore, it was possible to regulate availability in the domestic market by procuring NR from the market. As mentioned earlier, policy measures which had been effective during the protectionist period cannot be expected to yield the same result in the changed scenario.
It is possible to bring down the water level in an unconnected pool by pumping out water from it. But, if the pool is connected to an ocean, it is hard to bring down the water level in the pond. The Indian NR market from April 2001 onwards is like a pond connected to ocean. The domestic market is integrated to the world market and, therefore, domestic procurement will be a futile exercise as far as imports are permitted free of quantitative restrictions.
Proper understanding of the changed economic scenario and WTO-mandated trade policies are essential in dealing with the prevailing crisis in the NR market and identifying the appropriate remedial actions. One should not enter a new battlefield with the weapons used in the past. Let us study the battlefield and rules of the game before choosing the weapons.
(The writer is Deputy Director, Rubber Board, India)
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