Professional Documents
Culture Documents
The World Trade Organization and Its Impact On Indian Businesses
The World Trade Organization and Its Impact On Indian Businesses
Organization and
Its Impact on
Indian Businesses
Submitted By:-
Harish K. Raman
Symbiosis Law School, Pune
(Constituent of Symbiosis International University)
BBA.LL.B(C)
P.R.N. No.-13010124268
E-Mail Address - harishkraman@gmail.com;
harish.raman@symlaw.ac.in
2. Growth In Service Exports: For countries like India the WTO established the
General Agreement on Trade In Services (GATS). Indias Service Exports
increased from 5 Billion USD (1995) to 102 Billion USD (2008-09).
Agricultural Exports: Curbing of trade barriers and domestic subsidies elevated the cost
of agricultural products in the international market.
Textile and Clothing: The dissolution of MFA (Multi-Fiber Arrangements) has largely
benefited the textiles sector as the quotas limiting its trade are now eradicated. As a
result developing countries like India can have unhindered export of textile and
clothing.
Foreign Direct Investment: In accordance with the agreement on TRIMs (Trade Related
Investment Measures) which lay down the rules that restrict the preference of domestic
firms and thus allow foreign firms to operate more easily in international markets, have
compelled the member nations to withdraw the restrictions on foreign investment.
Thereby harmonizing the dominance of local and foreign firms and companies. In 20089, the net foreign direct investment in India was 35 Billion US Dollars.
Negative Impacts:
TRIPS: Protection of intellectual property rights has been one of the major concerns
of the WTO.
As a member of the WTO, India has to comply with the TRIPs standards.
However, the agreement on TRIPs goes against the Indian patent act, 1970, in the
following ways:
1. Pharmaceutical Sector: Under the Indian Patent Act 1970, only process patents
are granted to chemical, drugs and medicines. Thus, a company can legally
manufacture once it has the respective product patent.
The companies could sell good quality products at low prices. But, according
to the TRIPs agreement, product patents will also be granted which will raise
the prices of the products as a result the product in now not within the reach of
the poor people, fortunately most drugs manufactured in India are off-patents
so people will be less affected.
2. Agriculture: The TRIPs agreement covers agriculture as well so the Indian
agriculture will also be affected considerably. Since a large majority of the
Indian Population depends on agriculture for their livelihood, these
developments will have serious consequences.
3. Micro-Organisms: Under the TRIPs patenting has been extended to microorganisms as well. This will largely benefit the MNCs but not developing
nations like India.
TRIMs: Under the agreement on TRIMs the developed nations are favored as there
are no rules in the agreement to formulate international trade practices by foreign
investors. Also, by complying with the agreement TRIMs we will contradict our
objective of self-reliant growth based on locally available technology and resources.
GATS: The General Agreement on Trade in Services (GATS) favors the developed
nations more than the developing nations. The service sector in India will now have to
compete with gigantic foreign firms. Moreover since foreign firms are allowed to
transfer their profits, dividends and royalties to their present companies they will offer
a foreign exchange burden to the Indian Economy.
LDC Exports: Many member nations have agreed to allow duty-free and quota-free
market access to all products originating from Least Developed Countries (LDC).
India will now have to face the problem of competition arising due to other cheap
LDC exports internationally. Even more troublesome is the fact that the LDC exports
will also come to Indian markets and therefore provide competition to the locally
produced goods.
The WTO provides a forum for negotiating agreements aimed at reducing obstacles to
international trade and ensuring a level playing field for all, thus contributing to economic
growth and development.
Trade Policy and how is it linked to Free Trade Agreements?
For an entrepreneur in the Micro, Small and Medium Enterprise sector (MSMEs), the recent
shift in Indias trade policy from Multilateral Trade Agreements to Bilateral Free Trade
Agreements (FTAs) could significantly impact their business. Trade policy is an important
tool used by the Indian government to determine not only what India should export and
import but also to determine who will be the beneficiaries of its trade with other countries.
Until about a decade ago, Indias international trade policy was largely governed by WTOs
multilateral trade framework which obliges its member countries to tariff reduction and
restrictive non-tariff barriers but does not eliminate tariffs altogether. In recent years
however, Indias trade policy is being determined by Free Trade Agreements.
A Free Trade Agreement aims at total elimination of all tariffs and contains many items that
are not part of the rules of the WTO such as changes to regulation in intellectual property,
investment, public procurement and competition. Free Trade Agreements are expected to
reduce Indias ability to choose policy in the interest of domestic enterprises.
How important are Enterprises for the Indian economy?
Micro, Small and Medium Enterprises are enterprises engaged in manufacturing and services
with investment in plant and machinery below Rs. 25 lakhs and Rs. 10 lakhs respectively.
There are about 28.5 million MSMEs in India providing employment to more than 60 million
people, mostly from the poor and disadvantaged sections of our society. Clearly, MSMEs
play an important role in Indias economic and social arena.
Why should Free Trade Agreements matter to Micro, Small and Medium Enterprises?
If India signs an FTA, Indias trade including trade with MSMEs will be subject to severe
trade related competition and conditionality emerging out of various chapter and provisions
of the FTA agreements. Out of 28.5 million MSMEs over 25 million are micro enterprises
which have extremely limited capacity to compete against the large enterprises from
developed countries.
The million dollar question then remains:
How will MSMEs cope with this complete liberalization of trade?
Will it be an opportunity or a threat?
MSMEs contribute about 45% to Indias industrial output and 40% to its exports. It is
therefore extremely important that any major trade policy-making in India should keep in
mind the trade prospects of MSMEs in both domestic and export markets.
What are the key features of the Free Trade Agreements?
The following are the key features of a Free Trade Agreement:
The trading partners must be treated equally even if they are not equal in terms of
socio-economic development indictors.
Partner countries cannot have discriminating trade policy instruments such as taxes,
subsidies, regulations, or laws) favouring their own companies over foreign
companies.
They also include chapters covering services, investments, public procurement and
competition policy.
All these features invariably influence each other and the aggregate impact on the industries
could be much deeper.
Under FTAs, markets are supposed to be fully opened up and foreigners and locals would be
treated equally. Unlike in the WTO, under FTAs, developing countries will not be technically
entitled to concessions given under the special and differential treatment and FTA partners
are supposed to engage in fully reciprocal trade, i.e. give and take of equal magnitude.
What type of FTAs is India negotiating?
In the past, India signed FTAs which covered trade only in goods for e.g. - the FTA with Sri
Lanka. However, in recent years, India is signing and negotiating FTAs which are more
comprehensive treaties covering trade not only in goods but also in services, as well as
investment, Trade Related Aspects of Intellectual Property Rights plus intellectual property
rights, and even public procurement and competition policy. FTAs with Japan, Malaysia, and
South Korea for example are of this variety. Those currently under negotiation with the
European Union and European Free Trade Association are also comprehensive.
Further, the Indian government has already begun high level talks envisaging FTAs with New
Zealand, Australia and Canada and is perhaps envisaging FTAs with the USA.
What are the key chapters in the FTAs and what are the provisions in each chapter?
Under FTAs, the key trade issues can be classified into two categories:
A brief explanation of the issues under Goods Trade Issues and Non-goods Trade Issues in
FTAs and their provisions and how these will significantly affect Indian trade and industries,
especially the MSME sector has been looked upon.
A brief explanation of the six issues under Goods Trade Import Duties:
Duty, tariff or tax that is imposed by the government on the goods entering the border of a
nation is called import duty. The government uses import duty as a policy instrument to
protect and promote its indigenous industry producing substitutes of imported goods.
The impact on MSMEs:
Increased import competition due to tariff elimination would be a big threat for
MSMEs. According to a survey, 71% of the surveyed MSMEs found that their sales
due to imports declined by 26-50 percent. Even worse, under FTAs, there are hardly
any safeguards available to protect your economy against the import surge.
Export Taxes:
Governments levy export taxes on exports of certain goods, especially raw materials to
ensure cheaper raw material supply to industries which are growing and important for the
economy. India also imposes export taxes on a number of other raw materials to help ensure
that these resources are available to domestic industry at cheaper cost.
The impact on MSMEs:
If India is forced to remove existing export taxes as a FTA requirement on a number
of products including raw leather and wood, MSMEs could face severe shortage of
raw material and they will no longer be able to trade competitively. Livelihoods of
millions of people dependent on these MSMEs will be adversely affected
Non-Tariff Measures/Barriers:
All measures other than normal tariffs, namely trade procedures, regulations, standards,
licensing systems etc. are called Non-Tariff Measures (NTMs). Those NTMs that cannot be
justified under WTO law are generally termed as Non-Tariff Barriers (NTBs). MSMEs
generally find it extremely difficult to meet all these high standards because meeting these
quality standards requires huge investment. Also, compliance requirement and procedures are
often very complicated, time consuming and costly.
The impact on MSMEs:
By agreeing to stringent NTM/NTBs in FTAs, it would become compulsory for
MSME exporters to meet high health, safety, labour and environment standards for
exports to developed country markets. Majority of MSMEs in India neither have the
capacity nor the facilities to match the high standards of developed countries nor
cannot hope to gain from FTAs also because these do not ensure lower standards or
easier processes of quality certification. Consequently, MSMEs exports may face very
high rate of rejection in importing countries.
Rules of Origin (ROO):
Essentially, the Rules of Origin mean that for a product to be exported to a FTA partner
country, the product must have enough local content, as specified by the ROO to qualify for
preferential duty (zero or lower than the general duty).
The impact on MSMEs:
The Indian MSME often want to import cheap inputs as intermediate goods from
neighbouring countries like China and MSME products often have huge import
content. Due to stricter ROO, MSMEs will not be able to import at cheaper rates
these intermediate goods and their products will no longer qualify for exports and
additional market access.
Moreover, As ROO specifications vary from country to country, it will be difficult
for micro and small enterprises to calculate the local content and to meet the
cumbersome procedural requirement in obtaining the ROO certificate.
Anti-Concentration Clause:
There are certain industries which are sensitive such as where MSMEs are dominant and
these would benefit from protection through a sensitive list where there is no obligation to cut
tariffs. However, an Anti-Concentration Clause allows only some products in the sensitive
list and not the whole sector. As a consequence, India would lose its flexibility to protect
whole sectors and FTA partners would gain market access to all sectors.
resources to spend on R&D and patent applications. It also threatens products which
are based on traditional knowledge such as herbal medicines.
Investment Policy:
A countrys investment policy determines to a large extent the nature, magnitude and pace of
investment, along with ownership pattern of domestic enterprises. Because of the obvious
sensitivity of this issue, full opening up for foreign direct investments in all segments of the
economy was kept out of the WTO. However, investment has been included in the FTAs.
According to the investment chapter in FTAs, foreign investors will be treated equal to
domestic investors. Also, foreign investors can enter and operate largely without constraints
and conditions they were subjected to until now. In addition, foreign investors can sue
governments directly if their rights or profits are infringed upon. Under FTAs, foreign
investors cannot be asked to have Indian board members, invest a minimum amount, have
local labour, or for technology transfer either.
The impact on MSMEs:
In most industries in India, foreign direct investment is already allowed (given
certain restrictions or caps) so additional FDI may not necessarily be forthcoming
after opening up of Investment in FTAs. But, after an FTA, wholly foreign owned
enterprises may be set up in many more areas without any performance requirements
and it could also lead to mergers and acquisitions in certain MSME segments. Small
entrepreneurs and small business could be taken over by the large enterprises. In the
pharmaceutical industry, for example, such acquisitions are already taking place.
Public Procurement:
Public procurement is the procurement of goods and services on behalf of a public authority,
such as a government agency. India uses government procurement as a development policy
tool to address economic and social inequalities by giving certain preferences to vulnerable
groups such as MSMEs, womens groups, village enterprises, minorities, backward
communities.
The impact on MSMEs:
If the government gives market access to Indias public procurement market, foreign
companies will have a legal right to be treated equally with domestic companies
under the national treatment clause when they apply for public procurement
contracts. If this happens, Indian MSMEs which supply many products to the
government such as leather, plastic and metal products will have to compete with
foreign companies. This is likely to result in MSMEs losing out in terms of market
share for their products. India is not keen to include its government purchase (GP)
market under FTAs especially when it is not likely to get much access into developed
country procurement markets where a host of NTBs block foreign suppliers. Even
though the Indian government may not have agreed to directly give away its public
procurement market to foreign entities, indirect pressure of the FTA regime is
clearly evident. For example, in the pharmaceutical segment, the minimum turnover
required to be considered as a supplier is now 25 crores in some states and at the
Centre. This has been automatically eliminating MSMEs from this segment of
government purchase.
Competition Policy:
Competition Policy was also kept out of the WTO because of its critical role from a
development perspective. However, developed countries now demand that competition policy
should be included in FTAs and companies should be given equal treatment regardless of
their nationality. Until now, India has not made major concessions under this chapter.
The impact on MSMEs:
If Competition Policy clause in is included in FTAs and the Indian Government
agrees to adhere to a high and enforceable standard of competition, hence,
Government of India cannot discriminate between foreign enterprise and Indian
enterprises , and it would be extremely difficult for her to pursue some of her
preferential policies such as in public procurement to Indian MSMEs. Allowing free
competition often allows smaller enterprises to be eaten up by larger ones.
Competition Policy often prevents state aid and limits the activities of state trading
corporations. Competition policy in FTAs will lead to reduced policy choices for the
Indian government. The Indian government may not be able to treat Indian MSMEs
preferentially over bigger and foreign industries and also may not be able to offer
development schemes for the Indian MSMEs.
The Goods Trade and Non-Goods Trade issues contained in FTAs significantly impact
Indias trade prospects, and therefore MSMEs economic future. MSMEs, and not only those
which are engaged in exports and imports, but even those which trade only domestically need
to be aware and alert of the policy changes in international trade rules that the Indian
government is signing up to.
Conclusion
WTO is reality, which has come to stay. We have to face the emerging challenges and grasp
the opportunities.
The World Trade Report 2007 has traced sixty years of multilateral trade co-operation,
starting with the birth of the GATT on 1 January, 1948. The world has changed a great deal
over these six decades and so has the multilateral trading system. Globalization has brought
economic interaction among nations closer than ever before, thanks in no small part to
revolutions in information and transport technology and growing openness in government
policy. The trend towards increased inter-dependency has rendered international economic
co-operation more complex and multi-faceted. Co-operation among nations has become
harder to manage and more influential in shaping the circumstances in which people live. The
subject matter covered by the system has expanded significantly and many more players are
involved in shaping the system. The 23 original signatories of the GATT have now become
the 151 Members of the WTO.
Still, the landscape for international trade talks looks much different with a uniform deal than
without one. There need to be a system of checks and balances in accordance with aspects
affecting trade. The completion of a WTO agreement reflects a broad appetite for trade
integration and reduces the risk that regional deals degenerate into a world of Balkanized
trade. Not before time that countries accept the fact that just mere exploitation is not the route
for the betterment of humanity and the world as a whole has to integrate and form a
marketplace where every country gets opportunities and protection.
REFERENCES: 1. Macrory, Patrick F.J.(Ed.) & Appleton, Arthur E. (Ed.) & Plummer, Michael G. (2005).
The World Trade Organization: Legal, Economic and Political Analysis Volume I,
Springer
2. Macrory, Patrick F.J.(Ed.) & Appleton, Arthur E. (Ed.) & Plummer, Michael G. (2005).
The World Trade Organization: Legal, Economic and Political Analysis Volume I,
Springer
3. Macrory, Patrick F.J.(Ed.) & Appleton, Arthur E. (Ed.) & Plummer, Michael G. (2005).
The World Trade Organization: Legal, Economic and Political Analysis Volume III,
Springer
4. Goyal, Arun & Mohd, Noor (2001) WTO in The New Millennium. Delhi: Academy of
Business Studies
15. James, Paul (Ed.) & Palan, Ronen (Ed.) (2007) Globalization and Economy: Volume
4: Transnational Conflict, Sage Publications
16. Anderson, Kym (Ed.) & Josling, Tim (Ed.) (2005) The WTO and Agriculture:
Volume II, Edward Elgar Publishing Ltd.
17. Koul, Autar Krishen (2010) Guide to The WTO and GATT: Economics, Law and
Politics, Satyam Law International
18. Bossche, Peter Van Den & Zdouc, Werner (2013) The Law and Policy of The World
Trade Organization: Text, Cases and Materials, Cambridge
19. Understanding the WTO Retrieved From the World Trade Organization Website
http://www.wto.org/english/thewto_e/whatis_e/tif_e/tif_e.htm
20. 10 things the WTO can do Retrieved From the World Trade Organization Website
http://www.wto.org/english/thewto_e/whatis_e/10thi_e/10thi00_e.htm
21. About the WTO A statement by former Director-General Pascal Lamy From the
World Trade Organization Website
http://www.wto.org/english/thewto_e/whatis_e/wto_dg_stat_e.htm
22. Ministerial Conferences Retrieved From the World Trade Organization Website
http://www.wto.org/english/thewto_e/minist_e/minist_e.htm
23. Integrated Trade Intelligence Portal (I-TIP) Retrieved From the World Trade
Organization Website http://www.wto.org/english/res_e/statis_e/itip_e.htm
24. Rules of origin Retrieved From the World Trade Organization Website
http://www.wto.org/english/tratop_e/roi_e/roi_e.htm
25. Preshipment Inspection Retrieved From the World Trade Organization Website
http://www.wto.org/english/tratop_e/preship_e/preship_e.htm
26. Safeguard measures Retrieved From the World Trade Organization Website
http://www.wto.org/english/tratop_e/safeg_e/safeg_e.htm
27. Tariffs Retrieved From the World Trade Organization Website
http://www.wto.org/english/tratop_e/tariffs_e/tariffs_e.htm
28. Trade facilitation Retrieved From the World Trade Organization Website
http://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm
29. Agreement on Trade-Related Investment Measures (TRIMs) Retrieved From the
World Trade Organization Website http://www.wto.org/english/tratop_e/trims_e.htm
30. TRIPS [ trade-related aspects of intellectual property rights ] Retrieved From the
World Trade Organization Website
http://www.wto.org/english/tratop_e/trips_e/trips_e.htm#issues
31. Interaction between Trade and Competition Policy Retrieved From the World Trade
Organization Website http://www.wto.org/english/tratop_e/comp_e/comp_e.htm
32. Government procurement From the World Trade Organization Website
http://www.wto.org/english/tratop_e/gproc_e/gproc_e.htm
33. Database on Preferential Trade Arrangements From the Preferential Trade
Arrangement Website http://ptadb.wto.org/?lang=1
34. Regional trade agreements and preferential trade arrangements Preferential Trade
Arrangements http://www.wto.org/english/tratop_e/region_e/rta_pta_e.htm
35. World Trade Organization Conclusions And Recommendations retrieved from Zee
Pedia Website
http://www.zeepedia.com/read.php?world_trade_organization_wto_conclusions_and
_recommendations_sme_management&b=57&c=44
36. Successful conclusion of the WTOs government procurement negotiation: EU
succeeds in gaining more market access (15 December 2011) Retrieved from Website
of Trade in European Commission
http://trade.ec.europa.eu/doclib/press/index.cfm?id=768
37. Chairman, Ambassador B.K. Zutshi of India (28 January 1994) - Chairman of
Contracting Parties sees Better Prospects for World Economic Recovery with the
Successful Conclusion of the Uruguay
Roundhttp://www.wto.org/gatt_docs/English/SULPDF/91750148.pdf
38. World Trade Report 2010 Retrieved From the World Trade Organization Website
http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr10-2f_e.pdf
39. World Trade Report 2007 Retrieved From the World Trade Organization Website
http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr07-2e_e.pdf