Export Strategies for Indian Businesses: Adapting to Global Trade Challenges

[Joshua Ebenezer]

In March 2018, the USA held consultations with the Government of India under Articles 1 and 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) and Articles 4 and 30 of the Agreement on Subsidies and Countervailing Measures (SCM) about certain export promotion schemes administered by Government of India. 

USA has cited Articles 3.1(a), and 3.2 of the SCM in the instant Consultations. 

• Article 3 is extracted below for ready reference: 
• Article 3: Prohibition 

3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited: 

(a) subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I; 

(b) subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods. 

3.2 A Member shall neither grant nor maintain subsidies referred to in paragraph 1. 

It is the stand of the USA that under Article 27 of the “Agreement on Subsidies and Countervailing Measures” (Agreement on SCM) covering Special and Differential Treatment of Developing Country Members, a country can no longer offer export subsidies if its per capita Gross National Income (GNI) has crossed $1,000 for three years in a row. 

In 2017, the WTO notified that India’s GNI had crossed the threshold of $1,000 in 2013, 2014 and 2015. 

As part of their Request for Consultations, dated 14 March 2018, the United States observed as follows: 

Consistent with Annex VII of the SCM Agreement, India is subject to the obligations of Article 3.1(a) of the SCM Agreement because India's gross national product per capita has reached $1,000 per annum. Through each program, as reflected in the instruments listed above, India provides subsidies contingent upon export performance. The measures appear to be inconsistent with Article 3.1(a) of the SCM Agreement, and India appears to have acted inconsistently with Article 3.2 of the SCM Agreement. 

As the consultations did not yield the desired results, a Dispute Settlement Panel has been constituted by the Director General as seen from the document NO WT/DS541/5 dated 24 July 2018, with the following Members: 

• Chairperson: Mr Jose Antonio S. Buencamino,
• Members: Ms Leora Blumberg and Mr Serge Pannatier 

It is also noticed from this document that Brazil, Canada, China, Egypt, the European Union, Japan, Kazakhstan, the Republic of Korea, the Russian Federation, Sri Lanka, Chinese Taipei, and Thailand have reserved their rights to participate in the Panel proceedings as third parties. Therefore the dispute is no longer a USA -India dispute. 

It appears to be the contention of the USA that thousands of Indian companies are receiving benefits totalling over seven billion USD annually under various export incentive programmes and had alleged that the export subsidies “unfairly” benefit Indian Companies by creating an “uneven playing field” for the US-based manufacturers and exporters and harm American workers^.

The Export incentives targeted by the USA are: 

1. The 100% EOU scheme 
2. MEIS 
3. EPCG Scheme 
4. SEZ, and 
5. Duty-free imports programme- including AA Schemes- and also reference has specifically been made to Notification 50/2017 Cus dated June 30 2017 granting an exemption for exporters in the Textiles, handicrafts, and leather sectors. 

But the focus of the USA appears to be the MEIS scheme. 

India’s Responses 

As per Article 27.2 of the agreement on SCM, the prohibition of paragraph 1(a) of Article 3 shall not apply to: 

(a) developing country Members referred to in Annex VII. 

(b) other developing country Members for eight years from the date of entry into force of the WTO Agreement, subject to compliance with the provisions in paragraph 4. 

Further Article 27.4 States as follows: 

Any developing country Member referred to in paragraph 2(b) shall phase out its export subsidies within eight years, preferably in a progressive manner. However, a developing country Member shall not increase the level of its export subsidies and shall eliminate them within a period shorter than that provided for in this paragraph when the use of such export subsidies is inconsistent with its development needs. 

It is the stand of India that countries that had crossed US$1,000 GNI at the time of the WTO’s Subsidies and Countervailing Measures

The agreement was implemented in 1994 (as part of the General Agreement on Tariffs & Trade) and had an eight-year implementation period. Therefore, India argues that developing countries crossing the thresholds subsequently should also be given the same concessions. 

The Commerce Secretary Ms. Rita Teaotia stated that in 2011 India had submitted a note to the WTO stating that the phase-out period for export subsidies should be eight years from the time a country crossed the threshold of $1,000 GNI. India has been demanding and discussing this in the WTO. 

But GOI is also aware that India’s exports have got back on track after a setback of more than two years, and any immediate withdrawal of the export promotion/incentive schemes would hurt the export sector.  

Notwithstanding their aggressive stand before the WTO, the Indian Government has started to look at WTO-compliant alternatives such as subsidies for R&D and modernisation, to replace the existing export subsidy schemes.

India suffered a setback at the WTO. On 31 October 2019, a WTO panel ruled in the case titled "India-Export Related Measures (WT/DS541/R)," where the United States challenged five Indian measures. These measures were deemed prohibited export subsidies inconsistent with the SCM Agreement's Articles 3.1(a) and 3.2. The United States had alleged that these subsidies provided by India to exporters of various products, including steel, pharmaceuticals, chemicals, information technology products, textiles, and apparel, amounted to over $7 billion annually and were detrimental to US interest.

The ruling required India to withdraw the prohibited subsidies. However, disputes such as these often lead to a series of negotiations and potential reforms in the challenged policies to align with WTO rules. The timeline for withdrawal or modification of these subsidies would be a key aspect of compliance efforts following the panel's decision. This case underscores the complexities of international trade regulations and the mechanisms in place for resolving disputes that arise when national policies are perceived to conflict with global trade norms established by the WTO.

India appealed against the WTO ruling on its export subsidies before the appellate tribunal of the WTO. However, there's a significant development concerning the appeal process itself. As of November 19, 2019, India appealed the panel report, but the appeal has been kept in suspension due to the non-functioning of the Appellate Body. The non-functioning of the Appellate Body is a broader issue affecting the WTO's dispute resolution mechanism, causing delays in appeals and the resolution of disputes. Consequently, until the appeal is disposed of, India is under no obligation to implement the recommendations of the Panel.

This situation highlights the challenges within the WTO's current dispute settlement system, particularly the impasse in the Appellate Body, which has been unable to function effectively due to disagreements among member countries over the appointment and reappointment of its members.

India introduced alternative schemes to the Merchandise Exports from India Scheme (MEIS by the name  RoDTEP (Remission of Duties and Taxes on Exported Products) Scheme following paragraph 4.01(d) of the Foreign Trade Policy, RoSCTL (Rebate of State and Central Taxes and Levies) scheme as per para 4.1 (c) of FTP. Also suggested replacement for EOU as MOOWR with attractive benefits and also constituted a committee to suggest an alternative for SEZ while India’ was focusing on such reformation on their existing exemption and remission scheme, let’s delve a bit more into this one scheme RoDTEP in this article.

The RoDTEP (Remission of Duties or Taxes on Export Product) Scheme was announced to replace the MEIS with effect from January 1, 2021. This move was aimed at addressing the issues raised under the WTO framework, providing a more compliant mechanism to refund taxes and duties not reimbursed under any other existing mechanism. The RoDTEP scheme aims to refund the embedded duties and taxes to exporters, such as VAT on fuel used in transportation, mandi tax, and electricity duty used during manufacturing. The benefit is given to Indian Exporters as a percentage of FOB or a fixed amount per unit of measurement as prescribed. These changes reflect India's efforts to ensure its export incentive schemes are in alignment with its commitments under the WTO, aiming to support its exporters in a manner that is sustainable and compliant with international trade regulations.

It sought to provide a more equitable and transparent incentive structure for exporters by refunding embedded taxes and duties at various production and export stages, thus addressing the issues raised by the WTO regarding the previous MEIS.

Feedback from the Indian exporter community has generally been positive, highlighting the scheme's role in making Indian goods more competitive in global markets. By reducing the overall production costs through the refund of embedded taxes and levies, the RoDTEP scheme has enabled exporters to offer their products at more competitive rates internationally. This approach has not only diversified India's export portfolio but also encouraged companies to explore new markets and opportunities.

Furthermore, the scheme aligns with the 'Make in India' initiative, supporting domestic manufacturing and exports, and by extension, reducing India's reliance on imported goods. The comprehensive coverage of the scheme, which includes a wide range of items with plans for further expansion, and its integration with the Goods and Services Tax (GST) regime, has reduced the administrative burden on businesses and facilitated a smoother process for obtaining refunds

However, it's important to note that while the scheme offers numerous benefits, there are exclusions and restrictions. RoDTEP incentives are not available to certain businesses or goods, aimed at preventing abuse of the scheme and ensuring that it benefits the intended participants. Some industries that are export-oriented but face restrictions due to international obligations and trade agreements may not be eligible for RoDTEP benefits, particularly if they are already receiving other government incentives.

Overall, the RoDTEP scheme represents a strategic effort by the Indian government to enhance export competitiveness while adhering to international trade norms and regulations. Its implementation has been a critical step in promoting export growth and supporting the broader 'Make in India' initiative by incentivizing domestic manufacturing and reducing the cost disparities caused by embedded taxes and duties.

Here comes another challenge for India from the same USA and EU on Nov 2023

The imposition of countervailing duties (CVD) by the United States and the European Union on Indian products over the Remission of Duties and Taxes on Exported Products (RODTEP) scheme represents a significant development in international trade relations involving India.

The US recently imposed CVD on Indian file folders, rejecting the arguments presented by the Indian government regarding WTO compliance with the RODTEP scheme. This decision by the US came after similar actions by the EU, which concluded that certain graphite electrode systems from India were being subsidized through the RODTEP scheme, leading to the imposition of countervailing duties.

These actions highlight ongoing concerns and disputes over the compatibility of India's export incentive schemes with World Trade Organization (WTO) rules. The RODTEP scheme was introduced as a replacement for the earlier Merchandise Exports from India Scheme (MEIS) to address compliance issues raised under WTO regulations. However, the recent imposition of CVD by the US and EU indicates that concerns regarding the compliance of such schemes with international trade rules persist.

The imposition of countervailing duties can have significant implications for exporters, potentially affecting their competitiveness in these key markets. It reflects the broader challenges countries face in balancing domestic policy objectives with the requirements of international trade law, especially in areas like export incentives, which are closely scrutinized for their potential to distort trade.

We as a country now need to prove to the world how we won a case against the USA by giving the correct calculation on the imposition of Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India, reported in DS 436. The USA lost the battle and finally reached a mutual solution on the 13^th of July 2023 the USA withdrew its notification to the DSB (Dispute Settlement Body) of an appeal and the parties confirmed their agreement that the compliance panel report may not be adopted by the DSB, as through their mutually agreed solution the dispute had been terminated.

In the same way, India needs to present an irrevocable defense to bring the USA to the table to settle the dispute to protect our exporters from the ongoing threat.

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By Dr. Joshua Ebenezer, Principal Consultant, NuCov Facili-Trade, Mumbai.