Tariff Rate Quotas: A Balanced Safeguard

Free trade across the globe is the spine of a mutually benefiting world. Users of several goods rely on imports, when they are not readily available in India due to short supply. However, the influx of imports from various countries is injurious to the growth and sustenance of domestic producers. Reliance on imports without any domestic progress also hinders the economic growth and development of the country. Appropriate mechanisms are required to be in place to protect the interests of the domestic industry, while also ensuring that the demand of users and downstream industries is met.

With that in view, provisions relating to Safeguard duty have been proposed to be amended by the Finance Bill, 2020 as presented in the Lower House of the Indian Parliament on 1st February 2020. The existing provision contained in Section 8B of the Customs Tariff Act, 1975 (“Customs Tariff Act”) empowers the Central Government to impose a safeguard duty on any article which is imported in such ‘increased quantities and under such conditions so as to cause or threatening to cause serious injury to the domestic industry.’¹ The proposed amendment would expand the powers of the Central Government to implement a safeguard measure by the way of a tariff rate quota or any “other safeguard measure” it deems fit. At present, without the proposed amendment, India can either impose a safeguard measure in the form of a ‘safeguard duty’ under Section 8B of the Customs Tariff Act or a ‘quantitative restriction’ under Section 9A of the Foreign Trade (Development and Regulation) Act, 1992. A tariff rate quota acts as a hybrid of both these existing forms of measures.

In a tariff rate quota regime, if imports are coming in within a set ‘quota’, i.e. threshold for imports, a lower or no tariff rate will be charged on the imports. A higher tariff rate is charged for imports above the concessionary level. This allows for imports to freely enter the country to fill the demand-supply gap which may exist in the country. However, it protects the domestic industry and its market share by imposing a duty on imports which exceed the threshold.

The said quota is determined in compliance with Article 5 of the Agreement on Safeguards (“AoS”) and cannot be below the level of the average imports during the last three representative years of which statistics are available. The proposed amendment incorporates this requirement in its text. To illustrate, imports for ‘Item X’ have been as follows:

In such a situation, the following tariff quota regime can be introduced for Item X: 

In order to maintain an equitable system, the proposed amendment further allows the Government to allocate the tariff rate quota to exporting countries having a substantial interest in supplying the article concerned, i.e. countries which regularly and substantially export the said article to India. Article 5(2) of the AoS as well as Article XIII:2(d) of General Agreement on Tariffs and Trade 1994 (“GATT 1994”) lay down the procedure to be followed in case of such allocation: 

• Agreement with all other countries having a substantial interest in supply the product concerned; or where an agreement is not practical
• Allocate product shares based upon the proportions supplied by such contracting parties during a previous representative period.
• No conditions can be imposed on any country which would prevent it from utilizing the full share of its allotment.

The Appellate Body observed in EC-Bananas that while Article XIII:2 of GATT 1994 lays down the procedure to be followed in case of allocation of tariff rate quota to supplying countries having a substantial interest, no law dictates the allocation of tariff rate quota to countries with no substantial interest. It noted:  

“Article XIII:2(d) does not provide any specific rules for the allocation of tariff quota shares to Members not having a substantial interest. Nevertheless, allocation to Members not having a substantial interest must be subject to the basic principle of non-discrimination. When this principle of non-discrimination is applied to the allocation of tariff quota shares to Members not having a substantial interest, it is clear that a Member cannot, whether by agreement or by assignment, allocate tariff quota shares to some Members not having a substantial interest while not allocating shares to other Members who likewise do not have a substantial interest. To do so is clearly inconsistent with the requirement in Article XIII:1 that a Member cannot restrict the importation of any product from another Member unless the importation of the like product from all third countries is "similarly" restricted.”²

Therefore, it is clear that the allocation must be made to the supplying countries with substantial interest, either on the basis of (i) an agreement; or (ii) the proportions supplied by such contracting parties during a previous representative period. The remainder of the quota must be uniform and non-discriminatory.  

Tariff rate quotas are frequently used globally, especially under the Agreement for Agriculture. However, several countries such as European Union, Japan, United States and Canada are regular users of the safeguard mechanism even for non-agricultural products. For example, Canada applied safeguard measures in the form of tariff rate quota on imports of “Stainless Steel Wire” from all countries in May 2019[ Customs Notice 19-08, Final Safeguard Measures imposed on Importation of Certain Steel Goods ]. The duty table for the safeguard measure was as follows:  

As it can be seen, the safeguard measure has been progressively reduced, similar to the liberalization of a safeguard duty. 

There exists no precedent for the imposition of such measures in India. However, sub-section (10) of the proposed Section 8B allows the Central Government to create Rules under the said section. More clarity on the procedure which shall be adopted by the Authority in the imposition of such measures will come as and when the rules are framed by the Central Government. This is a welcome move since it not only protects the interests of the domestic industry, but also protects the user industry from facing a shortage of supply of their inputs and other products.  

[The author is an Associate in International Trade Practice, Lakshmikumaran & Sridharan, New Delhi]