Are Quality Control Orders Making Indian Trade Policy Protectionist?
India has made some unilateral tariff reductions for imports from the US so far and is negotiating a multi-sector bilateral trade agreement. However, discussions have also begun within the government on non-tariff import barriers, which the US is equally concerned about. Trump's trade advisor Peter Navarro has said non-tariff barriers imposed by most countries are much worse than tariff walls.
A recent statement by NITI Aayog vice chairman Suman Bery on quality control orders (QCOs), which are a non-tariff barrier, has given new momentum to the ongoing debate on the commerce ministry’s blanket approach to QCOs.
The overarching objective of QCOs is to ensure that imported products comply with domestic technical regulations. The WTO Technical Barriers to Trade Agreement allows members to introduce technical measures and standards to regulate imported products to protect public health, the environment, etc.
However, such measures are not supposed to create unnecessary obstacles to trade. High levels of subjectivity and complexities in technical regulations give significant leeway to countries to use them as disguised barriers to trade.
QCOs are part of the broader “self-reliant India” initiative, with the objective of regulating imports and fostering an ecosystem for manufacturing high-quality products. The Union government introduced more than 732 QCOs to regulate the import of low-quality products.
Policymakers, policy experts and industry experts have flagged their concerns regarding the intent and content of QCOs and labelled them as protectionist instruments. There is a broad consensus that India’s decision to roll out a large number of QCOs aims to reduce imports and provide protection to the domestic industry to ramp up domestic production in specific product categories.
It is also contended that they are aimed at protecting the interests of large corporate houses in specific sectors such as steel, chemicals, textile and clothing.
Furthermore, QCOs can emerge as bone of contention in our ongoing trade negotiations with the EU and the US.
Double-edged sword
QCOs in international trade act as a double-edged sword.
First, enhanced standards improve the quality of manufacturing in the country and allow domestic firms to join sophisticated production networks.
Second, they can curtail access to competitive imported inputs and undermine opportunities to participate in value chains.
Furthermore, higher standards can escalate the cost of manufacturing owing to high regulatory and compliance costs, which in turn can affect the competitiveness of manufactured exports.
The contemporary debate on QCOs in a country needs to be examined in the context of these factors and other interrelated issues.
Striking a balance
First, QCOs can be an effective instrument to improve the overall ecosystem for quality manufacturing in the country, but they pose significant challenges for firms that rely on competitive imported raw materials and intermediate inputs for domestic and export manufacturing. This can significantly affect downstream manufacturing.
This issue becomes more challenging in the world of global value chains (GVCs), where lead firms mandate their suppliers to source raw materials and intermediate inputs from their nominated suppliers in third countries. Delays in import clearance due to mandatory quality standards not only increase the cost of imported raw materials and intermediate inputs, but also disrupt the functioning of value chains.
Therefore, it is important to understand that QCOs must be made considering the complex nature of globalised trade. A QCO can transform the quality of manufactured products if implemented by understanding the product-specific value chain and its inputs. A blanket approach to OCQs harms domestic manufacturing and produces unintended economic consequences.
Second, QCOs should not always be considered protectionist instruments. Studies have demonstrated that quality standards can facilitate domestic firms’ integration into high-end value chains, where products, processes and technical standards play a crucial role in enabling entry into value chain networks.
There is a need to identify product items where manufacturers solely miss the opportunity to plug into GVC networks due to quality standards-related concerns. Industry associations and export promotion councils need to step in to identify specific product items where the improvement in quality standards can create possible opportunities to join GVC networks.
Also read: As India Bends to Trump, the WTO Paves Way for the Washington Trade Organisation
Neglecting sectoral complexities
Third, QCOs have failed to recognise the diversity and complexity of the Indian industrial sector. This is particularly vital in the context of organised versus unorganised sectors, where firms’ capabilities to comply with the QCO vary considerably.
The toy is an unorganised sector and constitutes a large number of tiny firms that face considerable capacity-related constraints to adopt and comply with mandatory QCOs. A one size fits all approach may not be appropriate, particularly in sectors in which firm-level heterogeneity is significant. If QCOs place more regulatory and compliance-related burdens without improving their capacities, they will prove detrimental rather than strengthen domestic industry.
Fourth, QCOs apply to a broad range of product groups such as steel, electrical machinery, toys, light engineering, consumer industry, plain copier paper, toys, cement, linoleum rubber and miscellaneous products.
QCOs provide comprehensive information regarding technical standards that need to be adhered to by importers and domestic manufacturers, but they do not provide any harmonised system of nomenclature (HSN)-wise information to understand specific product items covered under QCOs.
HSN-wise information is available only in a few product groups such as steel and articles of steel. Absence of HSN-level information not only creates challenges for importers in determining the applicability of QCOs to their product items but also leads to information asymmetry, thereby compromising effective regulatory compliance and informed decision-making.
Review and reform
In light of growing concerns regarding QCOs and their emerging role as disguised trade barriers, it is imperative that the Department of Commerce and Industry undertake a comprehensive review of all QCOs to identify and rectify existing anomalies, thereby making our legal and regulatory trading environment more transparent and predictable.
This is more needed than ever when the multilateral trading system has been put on a ventilator by the US.
Surendar Singh is an associate professor at the Jindal School of Liberal Arts and Humanities, O.P. Jindal Global University. This piece is based on the author’s article titled “Reliance on Non-tariff Measures for Self-Reliant India: An Analysis of India’s New Trade Policy Orientation”. Views are personal.
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