India has a whopping $104-billion trade deficit with the 16-member Regional Comprehensive Economic Partnership (RCEP) grouping, which was 64 per cent of India’s total trade deficit of 2017-18.

No wonder, there is a raging debate on opening up a very significant portion of the market, given the sensitivities around agriculture- and labour-intensive domestic industries. Several other trade agreements are also in various stages of negotiations.

Long-term, back-ending of tariffs or spreading tariff eliminations over a longer period of time has been our palladium of trade negotiations in the past. However, it need not continue to be so for all lines in which concessions are eliminated. The introduction of Tariff-rate quotas (TRQs) can be a more germane transitional tool; providing a degree of safeguard to the future demand growth in a rapidly expanding market. This is particularly useful while negotiating with countries which have saturated markets.

A TRQ is a mechanism that allows a set quantity of specific products to be imported at a low or zero rate of duty. TRQs are established under trade agreements between countries. They do not function as an absolute limit on the quantity of product that may be imported. The “TRQ commitment” does not apply any limits on the quantity per se of import of a product, but applies a higher rate of duty for that specific product once imports up to the “TRQ commitment” have been reached.

For example, the US cotton tariff quota protects US cotton growers while allowing textiles manufactures to import some cheaper cotton also. The quota component works together with a specified tariff level to provide the desired degree of import protection. Essentially, a TRQ is a two-tiered tariff instrument. Imports entering within the quota portion of a TRQ are subject to a lower tariff rate called the tariff quota rate or TRQ rate. The later imports that are unable to make it to the quota’s quantitative threshold face a much higher tariff rate, which is normally the MFN tariff.

(MFN tariffs are what countries promise to impose uniformly on imports from other members of the WTO.) In other words, TRQ is a limit on the quantity eligible for lower or zero duty.

The use of this instrument is globally quite prevalent. It is estimated that as many as 1,200 TRQs are operated each year by WTO members including EU, Japan, Canada and the US. This ensures that limited volumes of these sensitive products can enter their market at a low tariff, whereas the tariff outside the TRQ quantity is kept high to offer a degree of protection to the domestic producers.

Why TRQs

TRQs protect domestic producers from having to face competition from large quantities of imports. They also allow consumers and producers in the importing country to get enjoy a benefit, albeit a limited one, of lower priced products.

Tariff quotas are used on a wide range of products. Most are in the agriculture sector: cereals, meat, fruit and vegetables, and dairy products are the most common. Sugar is protected in most producing countries with tariff quotas.

TRQs have now become a way of reaching a consensus with trading partners. The EU-Japan bilateral deal was finally unblocked with a TRQ for cheeses including mozzarella, Brie, Camembert and feta. As for the proposed EU-Mercosur deal, EU TRQs for beef and ethanol are the main event as far as Brazil and Argentina are concerned, though they represent a fraction of total EU consumption.

TRQs face their share of criticism. Trade liberalisation proponents argue that while TRQs allow imports, they do so in an inefficient manner. Yet,TRQs now appear to be a permanent fixture of global trade.

The reason is not far to see. On the one hand, TRQs are used as sweeteners to help reach a consensus in trade negotiations, while on the other, TRQs help overcome traditional domestic opposition to trade deals — they are a trade-off between the broader interests of consumers and the degree of protection afforded to the competing domestic producers.

The challenge lies in addressing the concerns of domestic industry. If duties are zero, who will make in India? Does a reasonable duty wall bring in investments?

For example, global car majors invested in India on account of an import duty wall. A possible clue in addressing this concern lies in surveying the happenings in global trade, especially in regard to China.

The Chinese example

China has built its global leadership in trade on the strength of its investments. As per the recent Nomura report on Sino-US trade war, 43 per cent of China’s exports are by foreign owned companies, bringing up the pertinacious need for inducing investments in manufacturing – more so today than ever before, as industries in China are relocating or diversifying their production base.

The TRQ administration system must not ‘impair or nullify the market access commitments negotiated’. It should be transparent, minimising transactional costs for traders.

Historically, the quotas are allocated through a slew of processes. These are: Auction , where importers bid for shares or licences; first-come, first-served , where physical imports are charged in-quota tariffs until the quota is filled; licence on demand where allocation is made in relation to quantities demanded (first-come-first served with a sort of pro rata element); and finally, import by state trading entities .

Tariff arbitrage is an effective tool for inducing local manufacture or at least domestic value addition in the country.

It has been a basic tool in the country’s Phased Manufacturing Programme policy. If we are to induce investments in manufacturing, then we need not be committed entirely to a zero tariff regime, however back ended.

A quantity linked tariff elimination could also be considered in the long run, keeping aside our future demand growth as an inducement for investments and expansion of domestic manufacturing.

The writer is an Additional Secretary in the Department of Commerce. The views expressed are personal

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