By Reena Asthana Khair, Senior Partner, and Head, International Trade & Indirect Taxation, Kochhar & Co., & Shreya Dahiya, Senior Associate, Kochhar & Co. ,
One of the stated objectives of the Comprehensive Economic Partnership Agreement (CEPA) between India and Japan is to liberalise and facilitate trade in goods and services between India and Japan. While India’s exports to Japan have not shown any significant increase consequent to CEPA, Japan’s exports to India have gone up by more than 50% in the pre-Covid period, resulting in a significant trade deficit for India.
Japan is the 5th largest investor in the Indian economy with cumulative FDI inflows of $35.98 bn during April 2000 and June 2021, contributing nearly 6.58% to India’s total FDI inflows during the same period: Invest India.
The main exports from Japan have been of Machinery, nuclear reactors, boilers, electric and electronic equipment, copper, plastics, and chemicals. With a view to regulate the increasing exports from Japan, the Directorate General of Trade Remedies, Ministry of Commerce, Government of India, initiated its first investigation under Article 23 of CEPA, on September 8, 2020, against imports of PVC Suspension Resin from Japan.
The imports to India from Japan stood at $9.5 bn and exports from India to Japan stood at $2.9 bn, in 2020-21 (Apr – Feb), making Japan India’s 12th largest trade partner: Invest India.
Under Article 23 of CEPA, India can apply a bilateral safeguard measure, to prevent or remedy the serious injury to a domestic industry. India can not only suspend the further reduction of the rate of customs duty on PVC Suspension Resin but can also withdraw in full or in part the duty concession under CEPA. For imposing a safeguard duty, India has to conduct an investigation, collect evidence and to make a determination after giving opportunity to Japanese Companies, to demonstrate, that the increased imports from Japan have not caused or are not threatening to cause serious injury to local Indian industry. Injury is examined with reference to parameters such as decline in sales, or a fall in sales relative to consumption in India, or even changes in the levels of sales, production, profits, and employment.
India’s imports from Japan showed a growth of almost 100% in a span of 12 years, reaching $12.4 bn in 2019-20 from $6.3 bn in 2007-08. Key imports from Japan include nuclear reactors, electrical machinery, iron & steel, and organic chemicals: Invest India.
While no duty has been imposed in the PVC case, and the investigations have been terminated, the door for future safeguard investigations against Japan is now open. Not many anti-dumping or anti-subsidy investigations have been initiated against Japan in the past, mainly because Japanese exports are not low priced, and do not usually constitute an unfair trade practice. Safeguard investigations are not triggered by an unfair trade practice, but by a sudden increase in imports from Japan, which results in serious injury or a threat of serious injury to a domestic industry in India. With the increase in imports from Japan since CEPA was entered into, more safeguard investigations can be expected in the future.
India’s exports showed a growth of 26.2% in a span of 12 years, reaching $4.86 bn in 2018-19 from $3.85 bn in 2007 08. Key exports to Japan include mineral fuels and mineral oils, organic chemicals, and natural or cultured pearls: Invest India.
With the challenges created by the pandemic, there is a shift towards greater protectionism in India and around the world. India has recently issued a list of about 100 customs duty exemption notifications under review, which if withdrawn could increase the effective customs duty on import of many items. https://innovateindia.mygov.in/suggestions-for-review-of-customs-duty-exemptions/ The focus of the Government is to encourage import substitution and to give a boost to manufacturing, with schemes like “Atmanirbhar Bharat Abhiyaan” (‘Self Reliant India Campaign’) and ‘Production Linked Incentive Scheme’ which provides direct financial incentives and cash backs to eligible manufacturers, in sectors such as drug / pharmaceutical intermediates, steel, telecom, electronic components, white goods, textile products, solar modules, etc.
India’s exports to Japan showed a growth of 16.8% in a span of 12 years, reaching $4.5 bn in 2019-20 from $3.85 bn in 2007-08. Key exports to Japan include mineral fuels & mineral oils, organic chemicals, fish & other aquatic invertebrates, and natural or cultured pearls: Invest India.
In the present climate, where any surge in imports is discouraged, possibility of more investigations being initiated under the Agreement can not be ruled out. Japanese Companies will need to take preventive steps to protect themselves from such actions, by regulating the quantum and prices at which exports are made to India in the immediate term. Japanese companies will also have to evaluate the benefits of investing for manufacture in India, in light of the recent initiatives of the Indian Government, which confer significant advantages.
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