India is shooting itself in the foot on trade — again

By Mihir Sharma

President-elect Donald Trump has renewed his threat to impose a tariff wall on Indian imports to the US. One of the few recognizable threads knitting together the tangle that is Trump’s long tenure in public life is a disdain for “unfair” tariffs. India is often singled out for failing to reciprocate America’s generally low import taxes. If India charges us 100 per cent tariffs, Trump asked, do we charge them nothing for the same goods?

Trump was, however, barking up the wrong tree. The real problem with India’s trade policy lies in a seemingly innocent administrative procedure that doesn’t sound half as dangerous as tariffs. Most people operating in India today don’t complain about import taxes so much as they do about non-tariff barriers to trade. In particular, companies are flummoxed by a new weapon in the bureaucrats’ arsenal they call “Quality Control Orders.”

QCOs are apparently innocuous demands that imports into India satisfy quality standards. In practice, however, they have become over the past two years an instrument to restrict imports and minimize competition. India’s commerce minister said in October that more than 700 have already been issued; he’s aiming for 2,500. They cover multiple goods — shoes, toys, steel, honey, chemicals. In private, officials say that something of the sort is vital to protect consumers from low-quality Chinese imports.

In practice, however, the QCOs actually target imports from everyone else as well. And they are completely unpredictable: Companies complain that new varieties and specifications are often arbitrarily added to the list. Nor are the certifying authorities — usually the sleepy Bureau of Indian Standards — in any way ready to deal with a deluge of applications from domestic and foreign companies. They simply don’t have the capacity to keep up.

If India actually wanted to protect consumers, then it would — like many other nations — simply exempt goods from this requirement that had cleared regulatory and quality barriers in tightly monitored markets such as the European Union. It would be hard for any official to claim with a straight face that India has higher and more rigorously applied standards than the EU. The absence of exemptions of this sort reveals that the real aim of QCOs is to control imports without doing anything as provocative (to Trump and others) as raising tariffs.

Indian officials should know better. This country has had decades of experience with such import restrictions before liberalization took hold three decades ago. The inevitable consequences include inflation, the growth of monopolies, failing small businesses, and a collapse in productivity and competitiveness.

Domestic industries are already beginning to point this out. Garment makers, for example, may be forced to use only local sources for their raw yarn or the chemicals with which they treat it. In effect, that would give some companies a monopoly and allow them to raise input prices limitlessly. The costs of complying with a QCO are so high, other sectors worry, that only the largest companies will be able to use imported goods in their value chain.

And yet others point out that their supply chain has now been fragmented — engineering goods exporters, for example, no longer know whether the specialty steels they might need will be imported or held at the border for failing to comply with QCOs. “Thousands of containers” of imported steel, some from China, are stuck at Indian ports — each one representing a contract that a local manufacturer has failed to fulfil.

QCOs are a classic example of an Indian specialty: self-harming policy, often produced with the best of intentions. The government knows that creating new jobs, particularly in manufacturing, must be its priority. That means nurturing small companies in the sectors that create a lot of jobs for every rupee spent. But the policies it chooses instead hurt labor-intensive sectors like garment and leather to protect big, capital-intensive firms such as steelmakers. Officials state that they know most new Indian jobs are created in petite firms; but they put into place policy that hurt them in order to protect larger ones.

And finally, they wind up causing companies to limit their ambitions, and thus the size of their factories, to match the Indian market and not the entire world — after all, who can risk signing an export deal when the imports you need to fulfil that contract might get held up by some officious port administrator?

Donald Trump needn’t worry that India’s trade policies are designed to benefit New Delhi at the expense of others. In fact, they’re set up to hurt us most of all.