India’s Trade War With China and the GATT Agreement (1947)

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“The trade war with China could end up doing more harm to the Indian economy”, Arvind Panagariya recently said in an audio interview.

China’s exports to India are only 3% of their sum total. This 3% makes up for about 15% of India’s total imports. These imports are significant to India. Imposition of sanctions will hit with force the Indian producers. The same could drag India’s economic growth back several years, as Panagariya explained.

Arvind Panagariya is the former Niti Aayog chairman. He is also the professor of economics at Columbia University.

Background  

The June 15 incident left 20 Indian soldiers dead. The Indian and Chinese armed forces had a standoff in the disputed Galwan Valley of Ladakh. What followed was a decision to reduce dependence on Chinese imports. The aim has been to axe the Chinese economy. The Government of India hasn’t announced any such policy yet. But, problems on custom clearances have started cropping up.

This has fanned several discussions. Such as, Import substitution is being confused with retaliation that China deserves, considering India’s national security. Boycott of Chinese products and cuisine are also taking place. Furthermore, there is also cutting of trade ties with China. We anticipate that there’s more to come. The question still remains. How can the India-China trade tie change?

The General Agreement on Tariffs and Trade (GATT 1947)

India and China, both are parties to the World Trade Organization (WTO) agreements. The world trading regime functions on the principle of non-discrimination. This principle regulates international trade between countries. The two sub-principles included herein are: 

1. The most-favored-nation (MFN) treatment obligationArticle I, GATT. A similar favorable treatment must be meted out to all the WTO members.

2. The national treatment (NT) obligation- Article III, GATTA WTO member must treat foreign products, services and service suppliers at par with the domestic ones. 

These two principles have a general implication. They are applicable to all the member countries. The exceptions are only a few under the GATT. Thus, if India altered its trade relationship with China, other countries might follow suit against India. 

But, Article XXI of GATT provides for Security Exception. A state can take necessary measures for the “protection of its essential security interest”. The first line of Article XXI begins with- “Nothing in this Agreement shall be construed…”. It means there is no limitation upon the member states. This means that this provision can be used for the protection of national interests. The GATT drafters have granted an absolute right. 

Article XXI of GATT

To limit or do away with the trade relations with China, India will have to trigger Article XXI (b) (ii) and (iii). It is as under:
“Nothing in this Agreement shall be construed
(b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests
(ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;
(iii) taken in time of war or other emergency in international relations;”

Can India Act Unilaterally?

The threat to India’s security is still lingering. The Chinese troops have been setting up military bunkers along the LAC. The situation has not yet called for a war. But, it does fall within the ambit of “other emergencies in international relations”.

Thus, under these provisions, India can use a protectionist trade policy. In fact, various public sector undertakings are already deciding along these lines. For instance, BSNL and the Railways cancelled contracts given to the Chinese firms.

There’s another aspect to this Article. An ‘objective test’ laid down, in 2019, to fathom the justifiability of Article XXI, is important to note here. The current situation qualifies the test. Thus, these provisions will protect India from a breach of the non-discrimination principle. This is for the sake of territorial sovereignty and national security. Any unilateral act under Article XXI cannot be considered a dereliction of India’s GATT’s obligations.


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