Preferential Market Access: A Policy Lost in Translation?

A newly elected government needs to start over on high-technology manufacturing and procurement.

Shyam Ponappa  |  April 3, 2014

Over the last two years, the government sought to promote domestic manufacturing in high-technology products through ordinances for procurement titled "preferential market access". There has been strong opposition particularly from the United States, but also from Australia, Canada, Japan, South Korea and Taiwan. My take is that these regulations seek access for qualified local manufacturers to domestic markets, which are, ironically, open only to established (therefore, foreign) manufacturers. They aim to do so without protection, price preferences, or lowering of quality ("Breaking into the closed circle", Business Standard, August 1, 2013). The counter-arguments are, for example, as in a recent article titled "Why India's PMA will harm the Indian and global economies", that this policy: 1

• will entail a price/quality preference for local manufacturers;
• that it will make government procurement more expensive; or
• compromise the quality of procured equipment.

Reading the ordinance shows that (a) these points are explicitly covered, and (b) these apprehensions are either a genuine misunderstanding, or actual misrepresentations. 2 This leads one to wonder whether such objections arise because of the imprecise terms and opaque language of the regulations, or as reactions to interpretations (for example, 
http://icrier.org/ICRIER_Wadhwani/Index_files/Policy_Report_1.pdf), or if they are disingenuous advocacy without factual basis.

Indian manufacturers need supportive policies because, to quote from the first article cited above, "In high-technology procurement, large international vendors, of whom there are relatively few, form long-term relationships with the relatively few large buyers in oligopolistic markets in telecommunications or electricity. This holds whether the buyers are government entities, state-owned enterprises, or private sector companies. Often, the international vendors have strong home government support. This is why domestic manufacturers [in India] need mandatory access to break into a closed circle. There is no ambiguity in this, nor is it protectionist, and there are no price preferences - in contrast to the 15 per cent allowed by the World Bank, or 10 per cent for minority-owned businesses in the United States".

In any case, Article III:8 of the General Agreement on Tariffs and Trade (GATT) excludes government procurement. As for private procurement, Article XII enables a country's actions "to safeguard its external financial position and its balance of payments" with certain provisos (XII:2(b), "to apply quantitative restrictions for balance of payments purposes in a manner which takes full account of the continued high level of demand for imports likely to be generated by their programmes of economic development"); Article XVIII allows for governmental assistance to economic development; and Article XXI permits security exceptions, as in the US' blocking of Huawei and ZTE.

If this reasoning is correct, and a number of advanced economies, including the US, nurture local capacity building, why the hostility? Does self-interest dictate a biased advocacy position for the US and other countries, or could there be a genuine misunderstanding?

“PMA”: Confused Terminology?

As explained above, what the Indian government sought to do seems unexceptionable under WTO rules.  But was the problem that the language roused anti-protectionist sentiment?  This may be an instance where the substance of the regulation is lost sight of because of its confusing vocabulary and syntax.

Consider the semantics: until this bid by India to enable local companies to access their own markets, "preferential market access" meant access to foreign markets, not access for domestic providers to local markets. Here's an example from a World Trade Organisation report: "Preferential access can be thought of as a policy - given comparative advantage where countries discriminate across trading partners by providing some countries with a relative advantage." The report then cites the preferential access that Mexico enjoys in the US.3 Here's another from UNCTAD: "...the low performance of investors in the manufacturing sector ... has eroded the preferential market access of LDCs [least developed countries]".4 In other words, preferential market access refers to lower barriers offered to trading partners, not preferences to domestic companies in markets in their own countries.

While GATT ordinarily prohibits market access restrictions such as quotas on imports, it limits domestic policies and regulations only when they are discriminatory or more restrictive than necessary, while allowing exceptions for developing economies. So the first requirement is the need to distinguish between "domestic regulation" and "market access restrictions". An article in the World Trade Review in 2005 about the US' ban on online gambling illustrates a case in which the terms/language concerning domestic regulatory actions were misperceived as restrictive practices.5 The relevant point is that the ban was subsequently found not to be a prohibited "market access restriction", but a "domestic regulation" not subject to proscription.

It's possible that advanced economies may seek to preserve their market shares when a large developing economy like India attempts to build its own manufacturing capacity. Therefore, such initiatives may fare better if due care is exercised in developing and articulating policies as well as in communicating them, so that they are not construed as being protectionist. The two areas in our approach to domestic high-technology products that need improvement are:

• in drafting regulations so as to minimise ambiguity and emphasise clarity under the appropriate category (that is, domestic regulation); and
• drawing on the diverse skills, that is, technology, law, finance, and lucid communication - a distinct skill, required for well-drafted regulations and effective presentation.

As for India's efforts to develop high-technology manufacturing capacity, the need is compelling, because of the massive imports of these products on the scale of our energy imports, as well as for security reasons. This requires taking stock of the status without delay, and developing and executing an approach that persuasively articulates our needs and plans. The thrust could be changed from preferential market access to something like a "domestic high-technology manufacturing mission". The government needs to provide strong leadership and coordination in this process as soon after the elections as possible.

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Shyam Ponappa at gmail dot com

1 Stephen J Ezell, March 2014: http://www2.itif.org/2014-why-india-pma-harm-global-economies.pdf

2 http://deity.gov.in/sites/upload_files/dit/files/Preferential_Market_Access_Notification_1232012.pdf

3 "The Value of Preferential Market Access", Marco Fugazza and Alessandro Nicita, June 2010: wto.int/english/res_e/reser_e/gtdw_e/wkshop10_e/nicita_e.pdf" target="_blank">http://www.wto.int/english/res_e/reser_e/gtdw_e/wkshop10_e/nicita_e.pdf

4 "Foreign Direct Investment in LDCs: Lessons Learned from the Decade 2001-2010 and the Way Forward": http://unctad.org/en/docs/diaeia2011d1part1_en.pdf

5 "Rien ne Va Plus? Distinguishing Domestic Regulation from Market Access in GATT and GATS", Joost Pauwelyn, April 1, 2005: http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1725&context=faculty_scholarship