Indo-US Spat Over GSP

By Anuraag Shyamsunder

The Generalized System of Preferences or GSP is simply a trading program based out of the United States, which is designed in such a way that it promotes economic growth in today’s developing world by providing preferred, duty-free entry to up to 4,800 different products from 129 different beneficiary developing countries as well as territories. This system provides preferential access to a wide range of industrial and agricultural products by imposing extremely low, or no tariffs. It was introduced on the 1st of January 1976, under the US Trade Act, 1974 and this is considered to be an exception to the principle of the Most Favoured Nation (MFN), according to which, World Trade Organization (WTO) member countries are not allowed to discriminate between their trading partners. For India in particular, it enabled duty-free entry of almost 3,500 product lines, which provided benefits to exporters in the fields of textiles, gems & jewellers, engineering and chemical products.

 

ahead yet again, his “America First” front as a part of his recent protectionist policy regime, Donald J. Trump put forward in a letter addressed to the U.S. Congress that he intended to terminate India as a beneficiary under the GSP program provided to India. It refers to, and questions the status of India under the GSP, as a developing country. This decision taken by the U.S. is predicted to affect almost $5.6 billion worth of exports. This step was apparently taken by Trump after intensive discussions with the Government of India, through which he determined the fact that India hadn’t assured the U.S. of providing “equitable and reasonable access” to the Indian markets.

The review and decision of excluding India from the GSP was mainly motivated by certain complaints from the dairy sector of US, in specific, the National Milk Producers Federation and the U.S. Dairy Export Council, who filed petitions that they were facing barriers to Indian market access. Another sector affected was the Medical Device Sector, to whose discomfort, India had capped the maximum price for its stents, thus making it cheaper in the Indian market as compared to the stents being imported from the U.S., thus hurting the American exporters. India said that it had tried hard to deliver on most the U.S.’ demands in order to reach some understanding between the two countries, but to no avail.

In October 2018, Trump’s government made an announcement about withdrawing GSP benefits which covered approximately $70 million over almost 94 different categories of products. The United States Trade Representative (USTR), in 2017, stated that India was the ninth largest trading partner with the United States in terms of goods. But at the same time, the U.S. incurred  a $22.9 billion deficit in trades with India that same year. This meant that India exported a greater amount of domestically produced goods than it imported American goods.

The GSP scheme has employed thousands of people in the U.S. By revoking these GSP benefits of certain countries such as India, the government might indirectly affect the country’s employment negatively. Since this leads to tariff on imports, the price of the imported goods in the American market increases, ultimately being bad for both producers and consumers. It affects producers by increase in cost and decrease in their profit margin, while it affects consumers mainly by high prices. Thus, on the whole, there might be major impacts on the U.S. economy.

As soon as this announcement was made by the U.S., the Commerce Ministry of India reacted  quickly by downplaying the impact of this withdrawal, stating that the benefits received through the GSP amounted to a total of just $190 million, which was barely anything in comparison to the total exports to the U.S. It was stated that in the absolute sense, the benefits and percentage of trade involved was minimal to moderate. The value of exports from India to the U.S. was calculated to be $50.57 billion in the year 2017, and as mentioned before, had a GSP tariff advantage of just $190 million, which came out to be less than 0.4% of the total export value, thus having only a marginal impact. The USTR office announced that it had also decided to withdraw the GSP status for Turkey also. Hence, this was one of the decisions of the U.S. which the Indian government couldn’t counter by accusing them of being unfair or biased only towards India.

On the one hand, India argued that the very fact that the U.S. expected any reciprocal benefits from the GSP system which was envisaged as a system with non-reciprocal benefit was a violation of the obligation to maintain a code of non-discriminatory, as well as non-reciprocity of the benefits provided to the developing countries under what was termed as the “Enabling Clause” of the Trade Act of 1974. While on the other hand, the U.S. claimed that for a country to be a part of the GSP, it needed to satisfy the criteria of providing the U.S. with “equitable and reasonable” market access, combating child labour, providing adequate and effective intellectual property protection, as well as respecting internationally recognised worker rights, along with being a developing country.

INDUSTRIES AFFECTED

A great number of industries will be affected in one way or the other if this decision is taken. The U.S. is considered to be the biggest importer for Indian carpets. Under the GSP scheme, this is one of the majorly benefitted industries. Certain authorities such as the Carpet Export Promotion Council (CEPC), have stated that there will be “zero impact” as a result the U.S.’ decision mainly because only one out of the five categories of carpets exported has the liberty of exercising its GSP advantage. Also, the proportion of total exports which this category of carpet constitutes is very low, and hence the carpet industry as a whole is not gravely affected. The leather sector on the other hand is predicted to take a hit. Members of the Agra Footwear Manufacturers and Exporters Chamber (AFMEC) stated some the goods produced in India were already facing a pretty competitive market from exports from countries like China and Vietnam.

As it stands, if the U.S. goes ahead with its decision of completely withdrawing its GSP scheme, then the impact on the garment industry, especially readymade garments (RMG), would be significant since almost 35% of the RMG exports go to the U.S. Experts in the industry have stated that if these exports continue reach the U.S., then in addition to the current situation of increased prices, the marginal impact might actually tend towards something extreme. They are also of the opinion that the government should compensate the incline in prices by offering subsidies or incentives.

The Apparel Export Promotion Council (AEPC), in one of its reports said that the US imported RMG products worth $586.58 million under 15 different categories that enjoyed GSP. India’s share in this pie was close to about $17.97 million. The MFN (most favoured nation) tariff on 15 products varied from 0.86% to somewhere around 14.6%, out of which India got duty-free access with a 100% margin of preference. It can also be noted that these 15 products in total, contributed to only about 0.46% of India’s total apparel exports. The AEPC has also identified, on the basis of its ongoing trade relations with the U.S., that the GSP withdrawal on as many as 11 out of the 15 previously noted products, might only have a minor to negligible impact on the apparel exports to the U.S.

It bears emphasis that even though the realistic amounts at stake are relatively small, the small industries in the country would still have to deal with significant impacts. Hence, these industries will require domestic assistance from the government to help them maintain their edge, through means of fiscal support. This fiscal support from the government includes financial subsidy, preferential income tax rate and income tax refund. The industries on whom the withdrawal of GSP will have the most effect on, will be mainly because the export quantity from these industries will reduce due to the tariff rates and the prices of these exported goods in the American market will rise sharply. Thus, in order to help these industries out by compensating for increased prices and reduced sales, the government brings into the picture – subsidies, tax rate and other such policies. Export bodies of the country have already concluded that if such assistance is not provided, then these industries would lose their share in the U.S. market. In the absence of these industries, the orders meant for the Indian market could be diverted to other countries, which are already evident in the case of China.

HOW WILL CHINA BE AFFECTED?

The withdrawal of GSP benefits by the U.S. could potentially involve something of a second order effect, via which some of the Indian exports would now have to face MFN duty rates. This would further result in the prices for the US importers increasing, who could then potentially substitute the products from the Indian market with products from other such alternate sources at cheaper prices. This second order effect, termed as something known as the “substitution effect”, will lead to significant impacts on India Inc. This, in turn, will lead to better trade relations between the U.S. and other countries, such as China.

China benefits from such decisions taken by the U.S., only when it produces the same good as the country whose GSP benefits have been revoked, in this case, India. An example of such a good is a Flexible Intermediate Bulk Container (FIBC), which is basically a huge bag made of flexible fabric designed to store and transport materials such as fertilizers, sand and granules of plastic. This will happen over a course of time as India’s export of FIBCs to the U.S. decreases, since Indian FIBC exports will become less competitive in the American market due to tariffs. Thus, China’s exports to the U.S. increases.

This situation will have a completely different outcome when another factor, namely the current U.S. – China trade war, is taken into account. The trade deficit faced by the U.S. is approximated at a staggering $420 billion. This war is the result of both countries imposing tariffs on each other’s exports.

INDIA’S REACTION

The trade tensions between India and the United States escalated over the past year when the U.S. decided to increase the tariffs on imports of steel and aluminium, thus placing India’s GSP eligibility for benefits, under review. Hence, India stated that it would implement certain measures such as imposing retaliatory tariffs on U.S. imports and even came up with the list of items including walnuts, chickpeas, lentils, boric acid, diagnostic reagents, among other goods, which would be affected by these tariffs. The latest deadline for the implementation of these tariffs was April 1st, 2019; after previously being deferred continuously for six months. If this decision to impose tariffs was made, it would certainly put an extra burden of $290 million per year on US items exported to India.

India is considering referring the case to the WTO, but owing to the current stalemate of trade wars, along with the blockage of appointment of members to the WTO Appellate Body by the U.S., the very move of India approaching the WTO to seek any action against the U.S. may not bear any fruit. It may be challenging all the more, for India to enter negotiations with the U.S. at the WTO unless India somehow agrees to give a certain degree of reverence to the U.S.’ concerns regarding market access. In addition to this, it has been reviewed that the WTO dispute settlement mechanism is quite biased, highly influenced by corporate interests and lobbying groups, as well as time consuming, and hence it would be better option for both nations, at the highest level of their respective governments, to bilaterally resolve their concerns amicably through negotiations.

Anuraag Shyamsunder is a 1st year student of BA Economics at OP Jindal Global University.

Image Source

https://thediplomat.com/2018/02/is-it-finally-time-for-a-us-india-free-trade-agreement/

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