Why in News?

• The United States has imposed 10% additional tariffs on imports from India under Section 301 of the US Trade Act, lower than the 12.5% initially proposed.
• The reduction follows India's decision to prohibit imports of goods produced using forced labour, aligning with US concerns while India and the US continue negotiations on a bilateral trade agreement.

What’s in Today’s Article?

• Why the US Imposed Section 301 Tariffs
• India's Policy Response
• Tiered US Tariff Structure
• Impact on India's Export Competitiveness
• Textile Tariff-Rate Quotas (TRQs) - A Competitive Concern
• Major Exemptions from Section 301 Tariffs
• Future Trade Risks
• Conclusion

Why the US Imposed Section 301 Tariffs?

• Section 301 of the US Trade Act:
  • It authorises the US to investigate and respond to unfair foreign trade practices.
  • Remedies include additional tariffs, import restrictions or negotiated settlements.
  • Unlike Section 122, Section 301 measures remain effective until modified or withdrawn.
• Earlier, the US Trade Representative (USTR) initiated an investigation against 60 trading partners, alleging inadequate measures to prevent imports of goods produced through forced labour.
• The tariffs replace temporary Section 122 tariffs, which could remain in force only for 150 days, whereas Section 301 tariffs are permanent unless reviewed by the US administration.
• The measure seeks to protect American industries from unfair trade practices linked to forced labour.

India's Policy Response:

• Ahead of the US decision, the Directorate General of Foreign Trade (DGFT) amended the Foreign Trade Policy by prohibiting the import of goods manufactured wholly or partly using forced labour.
• Significance:
  • India's compliance reduced the proposed tariff from 12.5% to 10%.
  • It strengthened India's image as a responsible trading partner.
  • The move complements ongoing India-US Free Trade Agreement (FTA) negotiations.
• DGFT: Functions under the Ministry of Commerce and Industry, DGFT implements India's Foreign Trade Policy, and regulates exports and imports through notifications and licensing mechanisms.

Tiered US Tariff Structure:

• Most favoured category:
  • The European Union (EU) and Taiwan receive the most favourable treatment. Additional Section 301 tariffs apply only where existing Most Favoured Nation (MFN) tariffs are below specified thresholds.
  • MFN: A core World Trade Organization (WTO) principle requiring members to extend the same tariff treatment to all WTO members unless covered by FTAs or other recognised exceptions.
• India's category (10% tariff): India joins 17 economies, including Bangladesh, Pakistan, Sri Lanka, Malaysia, Indonesia, Canada, Mexico, and the United Kingdom.
• Least favoured category (12.5%): Countries facing higher tariffs include China, Vietnam, Russia, Brazil, Australia, Türkiye, Saudi Arabia, and Philippines. Thus, India enjoys a relative tariff advantage over several major export competitors.

Impact on India's Export Competitiveness:

• Positive outcomes:
  • Indian exporters retain competitiveness in labour-intensive sectors such as textiles, garments, leather, and footwear.
  • India's tariff burden is lower than that of China and Vietnam, improving export prospects.
• Limitations:
  • Around 70% of India's exports to the US will now attract existing MFN tariff, plus 10% Section 301 tariff.
  • Products already covered under Section 232 (steel, aluminium, copper, automobiles and auto components) continue to face 25–50% tariffs.

Textile Tariff-Rate Quotas (TRQs) - A Competitive Concern:

• The US introduced TRQs for Bangladesh, Cambodia, Indonesia, and Malaysia.
• Features:
  • Limited quantities of textiles and apparel from these countries can enter the US without Section 301 tariffs for three years.
  • These countries are also encouraged to source US cotton and textile inputs.
• Implications for India: India has not received a TRQ, potentially reducing its competitiveness in textile exports. Bangladesh, a major importer of Indian cotton and fibre, may increasingly shift towards US inputs.

Major Exemptions from Section 301 Tariffs:

• The US has exempted several categories from additional tariffs, including -
  • Aircraft and aviation equipment.
  • Pharmaceutical products and pharmaceutical ingredients.
  • Certain fertilisers, pesticides and industrial chemicals.
  • Pig iron, aluminium scrap and strategic minerals.
  • Semiconductor manufacturing equipment.
  • Battery waste and recyclable materials.
  • Agricultural inputs, seeds and selected food products.
  • Medical devices such as MRI machines, ECG equipment and defibrillators.
  • Selected artworks, antiques and collectibles.
• These exemptions aim to prevent supply disruptions and inflation while safeguarding critical industries.

Future Trade Risks:

• Apart from forced labour concerns, the USTR is conducting another investigation into excess manufacturing capacity involving India, China, the EU, Japan, Singapore, Switzerland and others.
• Possible consequences include - Additional trade restrictions or tariffs, greater scrutiny of industrial subsidies and manufacturing policies, and new challenges for India's export sector despite ongoing FTA negotiations.

Conclusion:

• India's prohibition on imports produced through forced labour enabled it to secure a lower 10% US Section 301 tariff, preserving its competitiveness relative to major rivals such as China and Vietnam.
• It strengthens India's position in labour-intensive exports and supports ongoing India-US trade negotiations.
• However, the absence of textile TRQs and the possibility of further US investigations into excess manufacturing capacity indicate that trade relations will continue to evolve, requiring sustained policy reforms and strategic engagement.