A panel of the World Trade Organisation (WTO) found out that India’s tariff policy is inconsistent with global trading rules in a dispute with the European Union, Japan and Taiwan over import duties on a wide range of information and communications technology (ICT) products. This ruling can affect India adversely, as it could slow down the rate of Foreign Direct Investment (FDI) in India and can impact India’s domestic manufacturing goals. India is likely to appeal against this ruling of the WTO.
The WTO’s Dispute Settlement System is very efficient and is often called “jewel in the crown” of the WTO. Nevertheless, it is not functional at the moment due to the US’s opposition to judges’ appointments. Due to this move by the US, the working of the Dispute Resolution System has come to a grinding halt. Therefore, the chances of India succeeding are bound by the WTO’s inability to resolve the dispute as the appeal against the panel report might become void. In such challenging times, most likely, India will have to make amendments in its duty structure. If India makes changes in the duty structure, it will have to face severe impacts.
Resolving trade disputes that are widely influential, jurisprudentially challenging and potentially powerful, needs a central stage in the modern legal discourse. With this background, this article analyses the recent panel report of the WTO against India. Additionally, this blog analyses the potential impact of the ruling with respect to complexities and problems present in the present framework. With an analytical-oriented approach towards research, this article aims to bring the current framework into a broader legal and scholarly conversation on its importance to resolve such disputes and ultimately provides way forward.
Implications of the panel report in India
India is a signatory to the Information Technology Agreement (ITA). The signatories have to completely eliminate duties of ICT products. Hence, a number of other nation-states have criticised India for imposition of tariffs on ICT products as it was against the principles of ITA. India has denied the allegations stating that in 1997, when the ITA was signed, many devices were not there and hence, no case of violation of the ITA arises. However, this line of reasoning was rejected by the WTO.
This dispute dates back to 2019, when the European Union (EU) filed a case against introduction of import duties by India ranging between 7.5% and 20% for a wide range of ICT products. Later, Japan and Taiwan also filed similar complaints accusing that the import duties exceeded the maximum rate. In its response, the WTO has ruled that India should not impose any tariffs or apply a zero-duty rate on ICT products. However, India has imposed duties up to 20%. Furthermore, the WTO noted that “Respect for the rules-based trading system is vital for a good trade relationship.”
The current situation leaves India with two choices. Either make changes in duty structure or appeal against the decision in the WTO. If India chooses to change its duty structure, it may have severe impacts on domestic manufacturing initiatives. For instance, the Production Linked Incentive Scheme (PLI) for mobile phone manufacturing has benefitted from the current duty structure. The protection given to the local manufacturing will be removed if India reduces duty. Furthermore, the rate of Foreign Direct Investment (FDI) can also be affected as the foreign investors may refrain from investing in India. As noted by Tarun Pathak, research director at the market intelligence firm Counterpoint Research, “if the decision on the ruling affects the duty structure in India, it could impact the momentum of local value addition.”
Another alternative that India has decided in the present case is to appeal against the decision in the appellate court, however the appellate body of the WTO has not been functional for the last three years because the US has blocked the appointment of new Appellate Body members. The WTO Appellate Body lacks the requisite quorum and hence, it stands dysfunctional. Therefore, the WTO’s highly efficient dispute resolution system is under threat. WTO members have lost the right to appeal as the WTO appellate body is not functional. This impairment makes it difficult for India to move forward with appeal as except for buying some time, it will do no good to India.
Analysing the deadlock in the Appellate Body
The impact of impairment of the WTO Appellate Body is grim. This threatens the survival of the multilateral trading system. The resolution of trade disputes between the member states is one of the most important and core functions of the WTO. There are a number of rules that need to be complied with and a number of concessions that are negotiated between the member states. For their enforcement, a robust WTO Dispute Resolution is essential. Without an appellate body of the WTO to adjudicate upon the issues, the decision by the WTO will remain in limbo. Earlier, if a member state was not satisfied with the decision of the WTO, it could seek an appeal against the decision. However, in contemporary times, if the member states want to appeal against the decision, they are left with no choice.
In these challenging times, another solution is Multi-Party Interim Appeal arbitration arrangement (MPIA). MPIA was founded by 20 member states of the WTO in absence of a functional WTO Appellate Body for resolving disputes. Under Article 25 of the WTO Dispute Settlement Understanding, member states can approach through MPIA. However, MPIA only provides a temporary solution to the deadlock of WTO Appellate Body. However, with this alternative approach, a challenge arises that with no binding force, member states have no incentive to bind themselves to arbitration if an unfavourable outcome is expected. Therefore, this alternative method of dispute resolution can only succeed if the member states sign a Plurilateral WTO Arbitration Agreement, which binds the signatory states in a dispute.
Currently, India has not signed any MPIA and is also reluctant to do the same. Earlier, the European Union (EU) approached India to resolve the issue of the MPIA. However, India did not support MPIA because it is less efficient to resolve disputes. Currently, India enjoys a special and differential treatment by the WTO and if India chooses to bind itself by MPIA, it will lose the special and differential treatment status. Moreover, due to power imbalances in the functioning of MPIA, developing nations like India can suffer adversely.
Article 25 of the Dispute Settlement Understanding was formulated to provide an alternative to dispute resolution but MPIA is not the answer to the same. The MPIA was created with the very specific goal of allowing its members to continue properly appealing Panel Reports in cases involving each other for the duration of the crisis. It can only provide an interim solution. MPIA has its own limitations and it cannot serve as a permanent solution. If the member state is not willing to accept this alternative solution it cannot be forced against such a state. This right is not the same as to exercise a right to appeal under the Appellate Body of the WTO. In such cases, the parties that are willing to settle through arbitration also suffer, as the EU will suffer in the present case, because the resolution of the dispute will be in limbo.
Conclusion and way forward
These are turbulent times for India in terms of international trade cooperation. Ongoing structural impairment in WTO and economic development in India due to current duty structures have left India with difficult choices. Nevertheless, the current situation is pregnant with many possibilities. It is too early for India to reject the alternative of MPIA. Its assessment can be done through the legitimacy that it provides and after assessing the same, India can become a part of the MPIA. Moreover, to save domestic manufacturing, India can incentivize production by different schemes such as the PLI scheme.
Ultimately, India will have to make tough choices. The international trade system could resort to other alternatives based on the principles of mutual cooperation and consensus that are required to develop a comprehensive and long-lasting solution to this problem. Open dialogue, responsible leadership, and decision-making based on cooperation may help to overcome these obstacles present in the current framework.
Divyanshi Shukla is a second-year law student from the National Law Institute University, Bhopal
Image Credits: Fabrice Coffrini