How can India Avert Foreign Trade Risks With Sustainable NTMs?

REPORT

Sustainability-driven Non-tariff Measures

Assessing Risks to India’s Foreign Trade

20 September, 2023 | Industrial Sustainability

Prerna Prabhakar and Hemant Mallya

Suggested Citation: Prabhakar, Prerna and Hemant Mallya. 2023. Sustainability-driven Non-tariff Measures: Assessing Risks to India’s Foreign Trade. New Delhi: Council on Energy, Environment and Water.

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Overview

International trade has been a key determinant of global economic growth and development. To accrue maximum benefits, international trade must be kept free from trade protectionism, which can take the form of tariff and non-tariff measures (NTMs). NTMs are policy measures other than ordinary customs tariffs that can have an economic effect on trade. In recent years, numerous NTMs have been implemented by developed countries to address issues of sustainability, environment, and climate change. This paper establishes the scope of the NTM problem, and flags some of the major sustainability-driven European Union regulations, and the associated risks to the Indian industry, and finally attempts to trigger policy thinking to respond and adapt to these measures.

While developed countries have lowered their tariff levels over time, they have gradually increased the issuance of NTMs. Regulatory differences between trading partners make compliance with these complex measures difficult for countries without equivalent regulations, leading to restrictions in market access, specifically for emerging economies such as India. Some of the recent regulations that can prove to be NTMs include the EU’s Carbon Border Adjustment Mechanism (CBAM) and Deforestation-free Regulation (EUDR), and the United States’ (US) Inflation Reduction Act (IRA).

Key highlights

Sustainability-driven NTMs are increasing at a high rate and their proportion of the total NTM notifications to WTO has increased from 8 per cent in 1997 to 19 per cent in 2021.
The product categories at risk due to the proposed sustainability-focused EU regulations include textiles, chemicals, selected consumer electronics products, plastics, and vehicles.
These items accounted for 32 per cent of India’s exports to the EU in 2022, valued at approximately USD 27 billion.
If CBAM sectors are added to the list, then the exports of at-risk sectors amount to USD 37 billion, which is approximately 43 per cent of India’s exports to the EU as of 2022.

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Prerna Prabhakar

Programme Associate

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"NTMs have challenged Indian exports in the past, and the adverse effects on the chemical and agriculture sectors were well established after talking to the relevant stakeholders. With an increasing focus on sustainability, NTMs are likely to cover a wider range of export items and are going to be a key factor in determining the global competitiveness of exports. Unlike in the past, the Indian industry should prepare itself in time to address the NTM challenge."

Executive summary

International trade has been a key determinant of global economic growth and development. Merchandise trade constituted 35 per cent of India’s gross domestic product (GDP) in 2022 (World Bank 2022), and there is a continuous effort towards increasing export volumes in the future. The Government of India has set a target of USD 1 trillion by 2030 for merchandise exports (PIB 2022). To accrue maximum benefits, international trade must be kept free from trade protectionism, which can take the form of tariff and nontariff measures (NTMs).

NTMs are policy measures other than ordinary customs tariffs that can have an economic effect on trade. While developed countries have lowered their tariff levels over time, they have gradually increased the issuance of NTMs. Regulatory differences between trading partners make compliance with these complex measures difficult for countries with relatively lax regulations, leading to restrictions in market access, specifically for emerging economies such as India.

In recent years, numerous NTMs have been implemented by developed countries to address issues of sustainability, environment, and climate change. These include measures for circularity and energy efficiency, carbon footprint, waste management, water management, and sustainable forestry, to list a few. Recent examples of sustainability-driven international regulations and incentive mechanisms that can prove to be barriers to free trade include the EU’s Carbon Border Adjustment Mechanism (CBAM) and Deforestation-free Regulation (EUDR), and the United States’ (US) Inflation Reduction Act (IRA).

The proportion of environment-related NTMs (E-NTMs) in total NTM notifications to the World Trade Organization (WTO) has increased from 8 per cent in 1997 to 19 per cent in 2021 (WTO 2021).

NTMs have impacted India’s exports in the past, and case studies from the targeted sectors clearly establish this impact.

Rice: India’s rice exports have suffered due to the imposition of maximum residue level (MRL) limits, which is the highest level of pesticide residue that is legally acceptable in or on food or feed when pesticides are applied following good agricultural practices (FAO 2022). In 2017, the European Commission (EC) reduced the MRL limit for a fungicide used in rice cultivation, which led to a sharp drop in rice exports from India.
Chemicals: Chemical exports from India were met with stringent regulations in the form of Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), implemented by the European Union (EU) in 2007. According to our discussions with REACH experts in India, the regulation resulted in approximately 40 per cent of exporters withdrawing; further, compliance was costly.

A. Key findings: Indian exports at risk due to proposed EU regulations

Informed by past experiences of adverse NTM-driven implications, it is imperative to assess the potential risk that Indian exporters could face and prepare them for adverse market scenarios. While Indian exports face NTM-related risks from most key trading partners, this paper focuses on EU NTMs as a brief and indicative exercise. Some of the EU regulations that were at the proposal stage at this paper’s inception have now been passed and notified to the WTO. Our analysis of the product categories targeted by the proposed EU regulations indicate the following -

India’s export of CBAM-affected sectors to the EU is approximately USD 9.5 billion, as of 2022.
The other product categories at risk due to the proposed EU regulations include textiles, chemicals, selected consumer electronics products, plastics, and vehicles.
These items accounted for 32 per cent of India’s exports to the EU in 2022, valued at approximately USD 27 billion.
If CBAM sectors are added to the list, then the exports of at-risk sectors amount to USD 37 billion, which is approximately 43 per cent of India’s exports to the EU as of 2022.
Concerning sectoral focus, some proposed regulations are generic, such as the Green Claims Initiative, which aims to introduce specific rules to verify the environmental claims by manufacturers selling their products in the EU market. Other proposed regulations have a sectoral impact, such as the EU Strategy for Sustainable and Circular Textiles, which is focused on the textile sector.

B. Policy recommendations

With an increase in the issuance of E-NTMs by developed countries, India faces a serious challenge concerning its key export items. While India has taken significant steps to address this challenge, it still needs to develop a structured approach to deal with these measures to ensure that its exports are not impacted.

There are multiple ways in which we can ensure this readiness.

Use bilateral free trade agreements (FTAs): India can resort to bilateral FTA to develop mutual recognition of compliance assessment activities in the respective countries. Few EU trade agreements, such as the EU-Canada Comprehensive Economic and Trade Agreement (CETA) and the EU-Vietnam Free Trade Agreement, exemplify how this can be achieved. Existing India-specific bilateral agreements also provide examples for how to deal with NTM-related issues through the bilateral route. For instance, the Comprehensive Economic Partnership Agreement (CEPA) between India and the United Arab Emirates (UAE), which was signed on 18 February 2022, entails a commitment to fast-tracking product registrations for exporting Indian pharmaceutical products to the UAE that have received similar approvals from regulatory authorities in Australia, the EU, Japan, the United Kingdom (UK), or the US.
Raise specific trade concerns (STCs) at the WTO: India needs to act quickly in utilising the WTO framework to raise specific concerns with respect to NTM notifications by other WTO member countries. Though India’s participation in the WTO has increased in recent times, strategies should be formulated to use the WTO mechanism in the future for raising concerns and seeking solutions. To address technical barriers to trade (TBTs), STCs can be raised against draft TBT measures (the ones that have not yet been notified) and those that are already in force. STCs offer an effective way for WTO members to share their concerns, develop an understanding of the regulations, and exchange details relating to the compliance mechanism.
Strengthen the compliance mechanism: India needs to prepare its industry to comply with these strict regulations. The first step in this regard is to make the export firms aware of the possibility of such regulations being notified to the WTO by India’s trading partners. This should be followed by providing the firms with information regarding the compliance steps involved in each regulation. This calls for developing a common information-sharing platform where firms can be registered and the information can be tracked. The Government of India has already designated the Bureau of Indian Standards (BIS) as the TBT inquiry point for the Indian industry. It also holds regular meetings with the industry with updates about new TBT and sanitary and phytosanitary (SPS) notifications. A comprehensive approach with mechanisms to support affected exporters in dealing with expected NTMs should be adopted for better outcomes. This may also require specialised working groups with representation from various stakeholders, including exporters, line ministry representatives, accreditation and auditing agencies, and entities upstream of the exporter providing the input materials to the exporters.
Develop independent standards: India needs to ramp up its regulatory mechanism to introduce its own standards and NTMs, and use these to ensure the quality of its manufactured items. This will improve product quality in terms of sustainability impacts and strengthen India’s capacity to comply with the complex regulations of its trading partners. The adoption of the Indian National Strategy for Standardization (INSS) in 2018 is a welcome regulatory initiative recognising the essential elements for domestic quality control and foreign market access. The challenge remains in the effective implementation of the strategy. Standard-setting agencies in India should also ensure that the standards and conformity assessment procedures align with global standards (such as the International Organization for Standardization and International Electrotechnical Commission) and procedures.

FAQs

What are non-tariff measures?

Non-Tariff Measures (NTMs) are policy measures other than ordinary customs tariffs that can have an economic effect on trade. Technical barriers to trade (TBT) and Sanitary and Phytosanitary (SPS) measures are the two widely used NTMs. TBT includes measures such as labelling, standards on technical specifications and quality requirements, and other measures protecting the environment. SPS measures include restrictions on substances, ensuring food safety, and those for preventing the dissemination of diseases or pests.
What is an example of non-tariff measures?

TBT and SPS are two widely used NTMs. Examples of TBT and SPS measures faced by India include registration, evaluation, authorisation and restriction of chemicals, eco-design requirements for power transformers, and control of wood packaging material used in the transport of specified commodities originating from India.
How are non-tariff measures hindering India’s exports?

NTMs can result in exporters withdrawing from the foreign market or an increase in the exporting cost through additional compliance formalities that an exporter has to undergo.
Why do non-tariff measures matter for sustainable development?

Sustainability goals requires changes in the manufacturing processes, like a move towards circulaity, energy efficiency. A transition to these methods involve setting up of new rules, labelling, certifications etc, for the domestic industry. NTMs ensure similar quality standards for the imported items, and are therefore important for the overall sustainable development at the global level. If these measures are not consistent with the free trade rules, set by the World Trade Organisation (WTO), these can then prove to be barriers to trade.