Rethink trade levies for global value chain integration

FTAs and trade remedial measures with saturated fatty alcohol as an example: There are several advantages of being party to an FTA. Zero duties on intermediate products can reduce production cost, thereby giving domestic manufacturing, employment and investment a boost. However, if ADDs/CVDs are imposed after zero duty has been agreed upon under a trade agreement, it can lead to higher cost of manufacturing for domestic producers that use intermediate goods. The question, then, is why should such ADDs/CVDs be imposed? Ideally, trade remedial measures should be adopted only when the import price is lower than what is in the domestic market of the exporting country; that is, in clear cases of dumping. If ADDs/CVDs are imposed to counter higher import volumes or to protect some domestic industry players, the user industry of intermediate goods would suffer.

In some of India’s past agreements, like the one with ASEAN, intermediate goods and raw materials have either attracted higher import duties than the final products or have faced ADDs/CVDs, adversely impacting ‘Make in India’. Let us take up the example of safeguard duties/ADDs on imports of saturated fatty alcohol, the basic raw material used by the Indian surfactant industry for manufacturing ethoxylated fatty alcohol, sodium lauryl sulphate (SLS) and sodium lauryl ether sulphate (SLES), which are used to make products like shampoos, hand-wash, toothpaste and detergents. According to industry estimates, the demand of SLES in India was 236,000 tonnes in 2019-20 and is expected to have a compound annual growth rate of over 7%. India’s surfactant industry has annual revenues of around $2.5 billion, supports $21 billion worth of India’s home and personal care industry, and employs over 9,000 people directly. Thus, there is a large and growing user industry for saturated fatty alcohol.

Globally, ASEAN countries Malaysia, Indonesia and Thailand are among the top producers and exporters of saturated fatty alcohol, attributable to their topographical and climate advantage in the production of palm fruit, together with significant capacity and economies of scale in producing palm-based derivatives. In addition to scale, they have the benefit of proximity to feedstock (palm kernel oil).

Indian users of saturated fatty alcohol could have benefitted from the nil duty under India’s FTA with ASEAN. However, even before the user industry could enjoy the benefits of zero duty, saturated fatty alcohol imports came under the radar of trade remedial measures. A safeguard duty was levied on the product from 2014 to 2017, and ADD from 2018 till 2023, which took away the entire benefit of nil-duty under the trade agreement. This led to an increase in production cost and an associated decline in the user industry’s cost competitiveness. How would this have served the cause of ‘Make in India’?

What is the right trade policy to adopt?: There can be several reasons for imposing trade remedial measures. It could be that ASEAN countries are giving actionable subsidies to their producers. In this example of saturated fatty alcohol, though, countries like Indonesia and Malaysia have an export tax on palm kernel oil. This was imposed to encourage domestic value addition and export locally-made value-added products. As this is not an export subsidy, but imposed to discourage exports, responding with CVDs/ADDs may not be correct.

Products like SLS, SLES and ethoxylated fatty alcohol are exported from India. Imports of saturated fatty alcohol from countries like Malaysia, Indonesia and Thailand are not only crucial for fulfilling domestic demand, but also for enhancing our exports, given that India’s manufacturing capacity of fatty alcohol may not be adequate to meet demand for domestic end-uses as well as eventual exports. Therefore, imposing a ADD/CVD can go against the objectives of Aatmanirbhar Bharat and integration with GVCs.

Before imposing trade remedial measures, it is important to examine the number of firms that are adversely impacted. If imports adversely impact 1-2 firms, then it is important to estimate their production capability, match it with market requirements and study the reasons for their lack of competitiveness vis-a-vis imports, if any. If there is a demand-supply gap in the value chain, and zero-duty imports can help bridge this gap, it should be encouraged till Indian companies develop back-end manufacturing capacity. Indian players at the back-end of the value chain may be supported through subsidies like production-linked incentives to scale up. If Indian manufacturers are not competitive vis-a-vis an international firm, it may be due to firm-level issues like operational inefficiency and old technology, or country-level issues like high logistics costs, none of which can be a reason to impose CVDs/ADDs.

These are the authors’ personal views.

Arpita Mukherjee & Eshana Mukherjee are, respectively, a professor at the Indian Council for Research on International Economic Relations (ICRIER) and a research associate at ICRIER.