WITHDRAWAL OF INDIA FROM THE US’ GENERAL SYSTEM OF PREFERENCE (GSP) TRADE PROGRAM – AN IMPACT ANALYSIS
THE GSP – AN OVERVIEW
The United States has implemented a Generalised System of Preference (GSP) trade program from the 1970s, wherein it extends a preferential tariff system to developing country. It is a preferential arrangement as it permits zero tariff or concessional low imports from such countries. The GSP program was introduced to bring about economic development in the beneficiary developing country, where it permitted 4800 goods from 129 designated developing countries to enter the US duty free.
A country may be included in the GSP program when it meets the criteria of factors such as allowing equitable and reasonable market access to the US, following arbitral awards awarded in favour of US entities or citizens, preventing child labour, protection of intellectual property rights, following the international standard of workers’ rights, etc.
In 2017, India received $5.6 billion through exports given to the US duty free, and as a result was the largest beneficiary of the GSP program. Similarly, US received goods worth $48 billion from India in 2017, remaining India’s top export partner. However, approximately 10% of the goods imported from India receive benefits under this program. Withdrawal of India from GSP program will introduce additional tariff on the American businesses of approximately $ 300 million annually.
In March 2019, President Trump decided to terminate India’s designation as a beneficiary developing nation from the GSP trade program, with effect from June 5, 2019. This was done as an attempt to lessen the trade deficits of the US and to provide for sufficient redressal of unfair trade relations with other countries. It was claimed by the President that India had not “assured US that it will provide equitable and reasonable access to its markets”. One of the US demands was to reduce its trade surplus, as India had an annual trade surplus of USD 21 billion in 2017-18, making it the 11th largest trade surplus country for the US.
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IMPACT ON INDIA
India and the US shared bilateral trade of $74.5 billion in 2017-2018, a 15.5% increment from $64.5 billion in the 2016-2017. In the next fiscal, 2018-2019, India exported goods worth $38.8 billion whereas it imported items worth only $26.3 billion from the US. It is evident that India earns more through exporting ‘intermediate goods’ to the US, which are not usually manufactured in the US.
Withdrawal from GSP program is predicted to not have a significant impact on India’s exports to the US. It is so stated because the benefits received on import tariffs and duty free exports runs up to a value of $190 million per annum.
India is most likely to remain unaffected by the GSP withdrawal regarding exports to the US, as there will only be a partial impact on domestic sectors like farming, marine, handicraft products, hand tools, engineering goods, leather, plastic, processed food, building material and tiles, etc.
India exports approximately 1937 goods to the US under preferential trade arrangement. The benefits of GSP program do not play a vital role in larger Indian trade but it affects trade activities carried on by the small and medium enterprises.
Small firms are likely to be affected by India’s withdrawal from GSP as they produce ‘intermediate goods’ which are not manufactured in the US. With the removal of duty free or concessional exports, small and medium enterprises will not be able to export as freely and in the same quantities as earlier.
This will eventually create beneficial exports for countries like China who can supply similar products to the US without GSP benefits.
POTENTIAL ISSUES
1.Service Sector
A key issue for India is U.S. temporary visa policies, which affect Indian nationals working in the United States. India is challenging U.S. fees for worker visas in the WTO, and monitoring potential U.S. action to revise the H-1B (specialized worker) visa program.
2.Agricultural Sector
Sanitary and phytosanitary (SPS) barriers in India limit U.S. agricultural exports. The United States questions the scientific and risk-based justifications of such barriers. An ongoing issue is India’s purported compliance with a WTO decision against its ban on U.S. poultry imports and live swine due to avian influenza concerns; the WTO held that India’s measures violated WTO SPS rules.
3.Intellectual Property Regime
The two sides differ on how to balance IP protection to incentivize innovation and support other policy goals, such as access to medicines. India’s IP regime remains a top U.S. concern, and India remains on the “Special 301” Priority Watch List for 2018, based on such concerns as its treatment of patents, infringement rates, and protection of trade secrets.
4.“Forced” Localization
The United States continues to press India on its “forced” localization practices. Initiatives to grow India’s manufacturing base and support jobs include requirements for in-country data storage, domestic content (such as laws protecting India’s solar sector), and domestic testing in some sectors. Adding to U.S. concerns are India’s new data localization requirements for electronic payment service suppliers (e.g., MasterCard, Visa).
5.Investment
India aims to attract foreign investment and has made FDI reforms, such as raising foreign equity caps for insurance and defense, and other strides to improve its business environment. U.S. concerns about investment barriers remain nevertheless, heightened by new Indian restrictions on how e-commerce platforms such as Amazon and Walmart- owned Flipkart conduct business. From the U.S. view, India’s weak regulatory transparency and other issues, such as India’s IPR and localization policies add to concerns about FDI barriers.
6.Defense Trade
The two nations have signed defence contracts worth more than $15 billion since 2008, up from $500 million in all previous years combined.
India’s pursuit of a multibillion- dollar deal to purchase the Russian-made S-400 air defense system may trigger U.S. sanctions on India under the Countering America’s Adversaries Through Sanctions Act (P.L. 115-44).
CONCLUDING REMARKS
The United States and India have had “intensive” negotiations to address the U.S. steel and aluminium tariffs, India’s GSP status, and other trade issues.
While the immediate and long terms issues that shall be faced by the Indian trade due to the loss of its designation, no justification can be provided for as to how the U.S or the Trump administration plans to fill the void that shall now be created in the “intermediate goods” sector.
Given the Trump Administration’s focus on greater reciprocity in U.S. trade relations, what are ways to strengthen U.S.-Indian trade and investment ties?
Is there potential for broader trade agreement negotiations?
Stay tuned for our next issue where we will discuss on the pertinent questions raised above.
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