Stuck in the US Trade Standoff: Thinking About Cross-Retaliation?
SpicyIP
In light of US tariffs on Indian imports hitting unprecedented levels, how far can India go in responding to these steep measures? Exploring cross-retaliation as a possible response, Srishti Gaur explains the concept and assesses its feasibility. Srishti is a third-year student at National Law University, Delhi.
Image from hereStuck in the US Trade Standoff: Thinking About Cross-Retaliation?
By Srishti Gaur
At a time when tariffs on US imports from India reached a staggering 50%, India found itself in a high-stakes conflict with the United States. In such an environment, the proverbial wisdom of “he who has nothing to lose has everything to gain” rings true, and it raises a question: what is the length India can hypothetically walk to counter such measures?
Prashant Reddy T, in his article on Scroll.in, discussed several measures that India can potentially adopt through which India can manoeuvre the trade war using the IPR regime. He added that India’s intention behind signing the TRIPS was to bring in greater benefits for textiles export, however, since then, the benefits guaranteed by the US have eroded one by one, starting from removing India from the Generalised System of Preferences, followed by the current imposition of discriminatory tariffs on India. To counter this, Prashant Reddy argues that while India cannot simply walk out of the TRIPS but it can target the intellectual property held by American companies.
Against this backdrop, one might consider the number of arrows in India’s quiver to respond to the USA’s discriminatory tariffs. In this line of thought, one mechanism the World Trade Organization (“WTO”) provides is ‘cross-retaliation’, which could also be taken in consideration. Rather than examining solutions that could be implemented immediately, this blog post will approach the said mechanism as a thought experiment and assess its viability (leaving aside political calculations). The analysis will focus on how and under what circumstances cross-retaliation can be, in theory, employed by India or similarly aggrieved countries.
What is the IP Suspension Model?
In response to the increased tariffs levied on India, the Indian government notified the WTO of its inclination to impose retaliatory tariffs on selected goods originating from the US. Imposing tariffs against the US is one of the ways to go forward, but the asymmetries between developing and developed countries are such that such actions are essentially ineffective. The asymmetry can be better reflected by the fact that while the USA is one of the largest markets for India, the same is not true for the US, which maintains a goods trade deficit with India. Thereby, the quantum of pressure that tariffs exert on Indian exports cannot be neutralized by tariffs imposed on the US imports.
Further, as Prof. Basheer puts it, imposition of duties does more harm than good for developing economies (see here). Traditional retaliation through tariffs is a self-destructive tool for developing economies, like India, as tariffs tend to raise the prices of the imported inputs, raising costs for local industries and, in return, affecting export competitiveness. Worse still, consumers bear the brunt of higher prices; there can only be a slight chance that the retaliation affects the developed economies.
On the flip side, cross retaliation, though a last-resort remedy in the dispute settlement system of the WTO, allows a complaining member state of the WTO to suspend its trade obligations under TRIPS or other agreements with respect to a non-complying member state, making it distinct from the traditional form of retaliatory measure. Economically speaking, such an IP suspension model cuts off the outflows of rents or royalties from the country to foreign IP rightsholders, thereby saving foreign exchange. Additionally, it is precise in its approach as the complaining country can specifically target areas where the violating economy has greater stakes. Contrary to the tariffs, the cross-retaliation does not affect the innocent industries of the developing country. IPRs in developed countries, as Prof. Rajec notes, are generally valued highly, and retaliation that targets them will result in stronger lobbying for making those countries comply. However, unlike the traditional method, the application of cross-retaliation has to be pleaded in every case and has been authorized only a few times till today.
How to Get it Approved?
First of all, cross-retaliation under the WTO can arise only if a dispute is initiated by a complainant through the formal dispute settlement process. In a case that the complainant wins, and the respondent fails to comply with the ruling “[within] a reasonable period of time” (Art 21.3, DSU), can retaliation be sought? In the current circumstances, India has not initiated any such complaint, but if it were to initiate a complaint, and the respondent, the USA, does not follow through with the ruling, can a plea for retaliation theoretically be considered?
Retaliation under the WTO is the last resort when the losing member refuses to comply or compensate for the damages caused. Even then, this retaliation takes place in three stages: first is the same-sector retaliation, where the complaining member can retaliate only in the same sector(s) where the violation occurred, second is cross-sector retaliation, and last is cross-agreement retaliation – the last two are allowed only in exceptional circumstances.
To effectuate cross-retaliation, the complainant has to prove that retaliation in the same sector is not “practicable or effective” and the seriousness of the situation warrants going beyond the affected sector. For the first requirement, India would need to establish that retaliation in the same sector will not be economically significant in pressurizing the US to comply.
Seriousness of the situation can be demonstrated by factors enumerated in Article 22.3(d) of DSU: first, volume of trade in the affected sector and its importance to the complainant, and second, broader economic elements and consequences.
To put such a measure into practice, the State must have domestic legislation authorizing suspension of TRIPS obligations or other covered commitments in retaliation. Given the current hostile trade war India is in or can be in the future, it is no exaggeration to suggest that India should work out such a legal framework.
Stumbling Blocks on this Path…
While the WTO has allowed cross-retaliation on three occasions – EC- Bananas III, US – Gambling (US v Antigua), and US – Upland Cotton (US v Brazil) dispute – the IPR suspensions never actually materialized. The political embroil in which India finds itself is similar, if not worse, to the aforementioned cases. In the first, compliance was achieved twenty years after the dispute began, and the third reached a financial settlement post authorization, while the second was left with nothing but hope for a payout, respectively.
In my view, cross-retaliation by a developing country is rarely used due to its limited effect as an enforcement mechanism on scofflaw countries. First, the retaliatory action will be instrumental only if the action produces a marginally positive effect for the complainant – the violator will only comply if the retaliation affects its economy. Though India is larger than Ecuador or Antigua but compared to the US, its retaliatory capacity is not that efficacious.
Second, suspension of IP rights of the violating country allows the nationals of the complaining state to pirate, but within the domestic borders, making it difficult to prevent the violator from continuing commercial activity elsewhere. This is technically and legally difficult to implement.
Lastly, such a measure can also invite political backlash. Abott notes that suspension of IPR could scare off foreign investors if the measure comes off as “piracy” or weakening of IP protection. Aravind Subramanian and Jayashree Watal argued, while discussing retaliatory legislation in general, that it could disincentivise FDI depending on the manner and frequency of such IP suspension measures. In case the measure is transitory and limited to a narrow and specified circumstance, such a risk remains low. Further, they emphasized that investment is contingent on several factors, with IP being only one of them.
For these reasons, cross retaliation is seen as more of a theoretical weapon than a practical tool. Out of the three accounts of cross-retaliation, only EC-Bananas III achieved compliance, even though that, too, was with negotiated acceptable tariffs. This is the reason it is considered to provide merely a symbolic leverage. For India, on paper, it might appear that cross-retaliation could strengthen its position its practical utility is largely speculative due to the lack of precedents.
But this does not belittle the threat value such a mechanism holds, considering that Brazil was one day away from enforcing cross-retaliatory measures against the US when both countries reached an agreement (see this). It is the credible threat that Brazil posed against the pharmaceutical industry of the US that spurred the settlement. In practice, even though cross-retaliation may be rarely executed, the leverage and pressure it can create for India is something that makes it a powerful negotiating tool.
In such times, India was not the only one at the receiving end of this tariff(ic) war; Brazil was also, at one point in time, sailing in the same boat with a 50% tariff, which is now slashed down for several products. As for China, it once had a staggering 145% tariffs, which, after rounds of negotiations, have been scaled back to 10%. At the time when geopolitical tensions were at their highest, Brazil had been vocal against this, pushing back against these unilateral tariffs, and China had shown its support, and India and China’s dynamics were taking a turn. To think of, hypothetically, retaliatory steps in the form of IP suspensions from such major economies certainly had the potential to create a domino scare, pressurizing the US into relenting, but it was entirely contingent on how countries play their cards.