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VIEWPOINT: ECONOMIC GRAFFITI
Requiem
For the QR
Trade
floodgates will be flung open on March 31, but there's no need to be anxious.
By Kaushik Basu
 On
March 31, India will witness a dramatic change in its foreign trade regime,
when quantitative restrictions on the import of virtually all goods are
removed. The only permitted exceptions will be a few special goods on
grounds of security and religion. Broadly, there are two methods of curbing
imports-the first is to charge a tariff on the commodity and the second
is to rule that the commodity is not allowed to be imported. The latter
is described as a "quantity restriction"; and it is just as
well it has a popular acronym, QR, since it has been used so widely in
India. A whole range of agricultural, consumer and also some capital goods-a
total of over 700 goods-are stopped from entering the country under this
criterion.
Once QRs are removed on all items, there will
be a host of new goods flowing into India. It is understandable that a
whole lot of Indian businessmen are exercised about this imminent policy
shift.
It is true that, left to ourselves, we would
have phased out the QRs more gradually. But ever since the conclusion
of the Uruguay Round of GATT in 1993 there has been pressure on India
to open its boundaries. In 1997 India proposed a nine-year phase out plan
to the WTO, arguing that it should be given temporary shelter under article
XVIII B of GATT which allows developing countries to use QRs to counter
balance-of-payment problems. But the industrialised nations contested
this, referring the matter to a WTO panel, which ruled against India,
giving it up to March 31, 2001, to end all qrs.
In assessing the imminent regime change, it
is worth noting that it will not be as momentous as some fear. Since July
1991 India has been steadily dismantling its trade barriers. India's total
foreign trade-export plus import-as a percentage of national income has
risen from less than 16 per cent in 1990 to 21 per cent in 1999. Further,
when these QRs are removed, we will still have the right to slap a tariff,
subject to some upper bounds, to protect indigenous industry. And the
Government should provide a reasonably high tariff cover for the new product
lines being opened up for imports, along with a commitment to lower these
over the next few years.
The benefits of this opening up can be numerous
and, in my opinion, outweigh the costs. First, there is the standard benefit
of trade, which allows for specialisation and thus greater production.
This also helps improve the quality of domestic production, which in the
long run should enable us to increase our exports. Secondly, the use of
a tariff generates revenues through customs collections.
There is another benefit of openness that is
often overlooked. It draws our attention to the failings of our government
and domestic policies. When products from other nations come in at a lower
cost, we will be forced to examine our comparative failures. Our indigenous
producers will become conscious of the fact that they may not have access
to as much credit as Chinese producers do, or have to face more bureaucratic
hurdles than Korean firms. We will realise that subjecting indigenous
producers to the restrictions of small-scale industry (SSI) and expecting
them to compete against large-scale Chinese manufacturers is patently
unfair. As these pressures build up, this becomes an opportunity for the
government to clean up its act by curtailing bureaucracy and corruption,
relaxing SSI regulations, etc-so that our own producers are not handicapped
in competing against the new foreign entrants.
Nimbleness and efficiency on the part of the
Government will be very important in this new regime. It is naive to think
that openness has no negative consequences. With openness we will encounter
a variety of damaging business strategies that companies and governments
use in breaking into new markets. Much ink has been spilled on the problem
of dumping. Dumping pertains to the act of unfairly lowering prices to
win over customers. If a country consistently keeps the price low (perhaps
because its government subsidises its exports), this should be no problem.
We should simply make room for the foreign producers and allow them to
subsidise our consumers. The problem arises when prices are lowered temporarily,
to out-compete indigenous producers, with the idea of putting prices back
up after these competitors are driven out. The Government will have to
be vigilant of such practices.
Apprehension is often expressed in India that
the WTO is a rich-country's hand-maiden. There is some truth to this.
The WTO procedures are so expensive and so knowledge-intensive that rich
countries are better able to exploit them. But despite this, it is important
for us to participate in the global system. First, our indigenous businessmen
are no fonts of virtue. Secondly, even if the global system is unfair,
it is better to engage and try to change it than to withdraw and make
sure that it will never be changed.
(The author is professor of economics at Cornell
University.)
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