Wednesday, May 18, 2011

What do you understand by the term `Removal of Quantitative Restrictions’ and what are their implications?

What do you understand by the term `Removal of Quantitative
Restrictions’ and what are their implications?

Answer. Quantitative restrictions or QRs are specific limits imposed by countries
on the quantity or value of goods that can be imported or exported. QRs can be
in the form of a quota, a monopoly or any other quantitative means. In other
words, QRs refer to non-tariff measures, which are taken to regulate or prohibit
international trade. According to the WTO notification procedures for QRs, these
measures specifically include: licensing requirements (i.e., both automatic
licensing and non-automatic licensing); global quotas allocated by countries;
bilateral quotas, quantitative restrictions made effective through state trading
corporations; minimum prices triggering a quantitative restriction and "voluntary"
export restraints.
Removal of Quantitative Restrictions
GATT/WTO does not allow imposition of quantitative restrictions (QRs).
However, India (and few other countries) had maintained quantitative restrictions
on its imports under provisions of article XVIII:B of GATT system/WTO. This
article allows member countries whose economies are in the earlier stage of
development to 'apply quantitative restriction for balance of payment position'.
Before the launch of WTO, dispute settlement mechanism of multilateral trading
system was loose. India had been maintaining QR regime, despite the fact that
Article XVIII:B, relating to Balance of Payment (BOP), mentions that a member
country has to publicly announce the time-schedule for elimination of QRs. After
the formation of WTO, the U.S. filed a dispute against India that the continued
maintenance of QRs on India's import was inconsistent with her obligations under
the WTO agreement. A number of other developed countries, Australia, Canada,
Japan, the EU, New Zealand, and Switzerland, later joined in this dispute against
In November 1997, a panel by the WTO was constituted to examine this U.S.
allegation against India's quantitative restriction on imports for agriculture, textile
and industrial products. The panel report was not favourable to India; but it
challenged the finding of panel, leading to formation of an appellate body. In
August 1999, the report of the appellate body1 of WTO ruled that 'India maintains
quantitative restriction on agricultural, textile and industrial products falling in
2714 tariff lines' and recommended that 'India bring its balance-of-payments
restrictions, which the panel found to be inconsistent with articles… of the
GATT… into confirmatory with its obligations under these agreements'. After this
report, India had no option but to reach a mutual agreement with the U.S., or face
arbitration. India signed an agreement with the U.S. on December 28, 1999, for
phasing out of quantitative restriction (QRs) on all imported items by March 2001,
i.e. within 15 months.
India started its economic reforms in early 1990s. In the pre-reform era, India's
import policy was highly protective with different categories of importers, different
types of import licenses and alternate ways of importing. A number of concrete
steps towards liberalization had been taken during the 1990s within the
framework of economic reforms.
After the removal of QRs, as per India-U.S. agreement under provisions of the
WTO, there was panic that India's import of some sensitive products may
significantly increase. There were many reasons for this. First, Indian industry
was subject to a high level of protection for a long time. Second, India had not
bothered to bound its tariffs appropriately in the Uruguay round because it was
possible to put restriction on imports through QR. Thirdly, there can be adverse
impact of increased import on welfare indicators like employment, out put, etc.
Removal of QRs is not an end-game
 With the QRs removed, it is not an end-game. A country has various WTO
compatible ways for monitoring imports to protect its national economic
interests. All countries, even the Quads (i.e. USA, EU, Canada and Japan) do
it; India also does it and will continue to do so, in a WTO-compatible manner.
 A section of Indian industry has been crying wolf because they are afraid of
increasing competitive imports due to the removal of the QRs, particularly
relating to these 1,429 items.
 But the removal of QRs itself is not likely to increase imports instantaneously.
It is the removal of QRs, plus the prospect of further reduction of tariffs in the
coming three years, which may eventually accelerate import competition.
During this transition period, both the Indian economy and the Indian
corporate sector will have to put their house in order and prepare to become
globally competitive. In this broad sense, there is a serious concern, not just
because of the removal of QRs per se.
There are several ways the government can monitor imports even when QRs are
 By keeping tariffs high during the transition period
 By imposing anti-dumping duties
 By amending the Foreign Trade Act, 1992
Economic Implications
(i) Short Term Results of Import Restrictions
Because quantitative import restrictions, including de facto restrictions and
voluntary export restraints by exporting countries, protect particular domestic
products from competition with foreign products having a high level of
competitiveness, they may be beneficial in the short-term in protecting and
increasing profits of the domestic industry producing competing products and
maintaining stable employment in that industry. In order to establish sales
channels, foreign companies frequently respond to such restrictions by
increasing their direct investment in import-restricting countries and by
commencing production, which might create jobs and encourage technology
transfer. Quantitative restrictions, however, distort the distribution of economic
benefits between importing and exporting countries in favour of the producers in
the importing country. The restrictions also harm consumers and downstream
industries in the importing countries, which have to bear the economic cost of
losing access to competitive imported products.
(ii) Mid and Long Term Results of Import Restrictions
Quantitative restraints impose mid- and long-term costs that clearly outweigh the
benefits of protecting domestic industries. For example, quantitative import
restrictions may impede efforts of domestic producers to improve productivity or
streamline operations in order to survive a tough business environment,
depending on the operation of the quantitative restriction. Unless it is clarified
that the restrictions are temporary, and appropriate measures are taken to
ensure that protected producers acquire sufficient competitiveness, quantitative
restrictions could harm the mid- or long- term development of the affected
industry and the economic benefits of the country employing such restrictions.
Without mid-term plans to eliminate restrictive measures, domestic producers will
be unlikely to develop the ability to earn foreign currency through exports, which
is the true indication of competitive strength.
The quantitative restrictions leave, at best, an import-substitute effect, and
consumers and downstream industries in the importing country also suffer from
higher prices and other disadvantages that are the immediate results of import
restrictions. Therefore, such measures may cause a negative overall effect on
the importing nation's economy in the mid- or long term.
Impact on Exports and Imports
The Quantitative Restrictions (QR) regime inflicted very high costs on most
Indian exports. In comparison, India's competitors used to obtain basic inputs at
world prices and could import any input without delay. Products that required a
quick export response and complex backward linkages were heavily penalized by
the trade regime. Unfortunately, it is precisely these products that had high value
added large export markets and high unit value. Thus, India's exports tended to
be simpler and with very low unit value. Furthermore, Indian firms tend to hold
much larger inventories due to uncertainties in the availability of imported inputs
and local supplies. This raised their costs of production significantly above the
competitors that followed just-in-time inventory policies. Keeping this in mind, the
new policy packages of the post-reform period aimed to reform the tax and the
QR system.
The statistics show that India's trade has increased significantly during the postreform
period. To be precise, the share of India's export in world mercantile trade
has increased from 0.52 per cent in 1990, to 0.8 percent in 2002 (Table 1).
During the reform period India's exports have increased from US$ 18.1 billion in
1990-91 to US$ 52.8 billion in 2002-03, while India's imports have increased from
US$ 24.1 billion in 1990-91 to US$ 61.6 billion in 2002-03. The higher growth in
India's exports over imports has led to a decline of India's trade deficit. The
composition of India's export/import by commodities and destination markets also
changed significantly

No comments:

Post a Comment

Blog Archive