Import restrictions: Explained, pointwise

Introduction

The government has recently imposed restrictions on the import of laptops, tablets, and personal computers. According to a notice issued by the Directorate General of Foreign Trade, the import of electronic goods falling under HSN 8471 (a category) will now be classified as “Restricted,” allowing imports only against valid licenses for restricted imports. Earlier, imports were allowed without restrictions. This sudden policy reversal warrants a discussion on import restrictions. 

Note: Under Section 3 of the Foreign Trade (Regulation and Development) Act, 1992, the Central Government is empowered to make provisions related to imports and exports. 

What are some recent instances of import restrictions? 

Laptops, tablets, and personal computers: To promote domestic manufacturing and boost national security by curbing imports from China. The items under licensing accounted for about $8.8 billion of imports in 2022-23, about three-fifths of it from China.  

Gold jewelry and articles: In July 2023, the government restricted imports of certain gold jewelry and articles to control swelling trade deficit. 

Pneumatic Tyres: In June 2020, the government had imposed curbs on the imports of certain pneumatic tires due to continuing rise in import of tires from China. The decision was made to promote domestic manufacturing. 

Colour televisions: In July 2020, the government had imposed restrictions on imports of colour televisions. This was aimed at promoting domestic manufacturing and cut inbound shipments of non-essential items from countries like China. 

What are the WTO rules on import licensing? 

The WTO Agreement on Import Licensing Procedures (Import Licensing Agreement) sets out rules for all Members on the use of import licensing systems to regulate their trade. 

The agreement’s main purpose is to promote transparency, predictability, and fairness in the administration of import licensing procedures.  

The agreement aims to prevent the arbitrary use of import licensing by member countries, which could potentially create barriers to trade and undermine the principles of the WTO. 

 The agreement says import licensing should be simple, transparent and predictable. For example, the agreement requires governments to publish sufficient information for traders to know how and why the licences are granted.  

It also describes how countries should notify the WTO when they introduce new import licensing procedures or change existing procedures.  

The agreement offers guidance on how governments should assess applications for licenses. 

WTO provides certain exceptions and flexibilities to its member countries which allow members to take certain measures that might otherwise be considered trade-restrictive under specific circumstances. 

Article XXI of the GATT allows members to take measures that they consider necessary for the protection of their essential security interests.  

Article XII of the GATT allows members to impose restrictions on trade to safeguard their external financial position and balance of payments. 

What are the positive impacts of import restrictions? 

Self-reliance: One of the main goals of import restriction policies is to protect domestic industries from foreign competition. By making it more difficult to import goods, these policies can help to level the playing field for domestic businesses. This can allow them to grow and prosper. 

Job creation: Import restrictions can also help to create jobs in the domestic economy. By making it more difficult for businesses to import goods, these policies can encourage businesses to produce these goods domestically. This can lead to an increase in employment as businesses expand their operations. 

National Security: If a nation becomes reliant on international imports, it also becomes defensively weak due to the possibility of disruption of critical supplies. Import restrictions and substitution is used as a policy tool so that a country is largely self-reliant in order for it to be able to react in a time of war. In case of electronics, there is also possibility of exposure to hidden spyware. 

What are the negative impacts of import restrictions? 

Higher prices: Import restrictions can affect the final price of a product as it can limit the supply and competition. Consumers will have to buy from more expensive domestic suppliers. Because the supply is limited, the level of demand will drive up prices. 

Harm domestic industries: Domestic industries neither get the opportunity nor the incentive to grow due to lack of competition. This means more and more dependence on protectionist policies for survival. Once these policies are in place, it could get difficult to remove them. 

Transfer of welfare: The Indian experience of pre 1991 reforms suggests that state support for enterprise can  remain longer than needed as sunset clauses are rolled over, resulting in a net transfer of welfare from people to favoured parties.

Stagnation of technological advancements: As domestic producers don’t need to worry about foreign competition, they have no incentive to innovate or spend resources on research and development (R&D) of new products. 

Rollback from 1991 liberalisation: Import licensing could increase the space for bureaucratic discretion. Such controls on economic activities will only diminish the vibrancy of the economy that was unleashed after the ’91 reforms. 

Global image: The world needs a reliable supply chain and there is a growing global trust in India. But arbitrary and inconsistent restrictions will undermine the country’s efforts to entice value chains away from China.  

What should be the way forward? 

The government should focus on creating conditions that encourage integration of India with global value supply chains and take advantage of the ‘China plus one’ approach being adopted by many multinationals. 

Trade relations have acquired a geopolitical dimension and opportunities should be grabbed while global value chains move away from China.

Once a global edge is achieved for domestic industries, public support should be rolled back and the focus should be on promoting exports.

The emphasis should be placed on fostering innovation, advancing research and development, and promoting entrepreneurship within the nation. These efforts will equip Indian enterprises to effectively vie in the industries that will define the future. 

A trade policy that is both clear and consistent is needed attract multinationals to Make in India. 

Strengthen domestic manufacturing while also prioritizing export growth and fostering research to achieve greater self-reliance. 

Trade barriers must be deployed with caution. Import licensing but could work for India if wielded well as part of a strategy for local manufacturing.

 Sources: Business Standard, Times of India, Indian Express