India – US GSP Conflict

  • GSP stands for Generalized System of Preferences. It is an U.S. trade preference program that provides opportunities for many of the world’s developing countries to use trade to grow their economies and climb out of poverty. 
  • The U.S. plans to end preferential trade status for India, under a scheme which allows certain products to enter the U.S. market duty-free.
  • President Donald Trump said that India has failed to assure the U.S. to provide reasonable access to its markets. According to India, the U.S. move would have a “minimal economic impact”.
  • It counts to be the latest U.S. attempt to counter what it sees as unfair trade practices. President Trump has pledged to reduce US trade deficits thereby repeatedly criticizing India for high tariffs.
  • As a result, he has instructed the U.S. Trade Representative’s (USTR) Office to remove India from the list of getting grants under preferential trade treatment.
  • Currently, India has been allowed $5.6bn worth of exporting to the United States duty-free under Preferential Trade Treatment.
  • U.S. law requires the administration to wait 60 days after it notifies Congress of the move before it formally ends India’s participation in the programme. In a letter to Congress, the U.S. President Trump has said that India had “not assured the United States that it will provide equitable and reasonable access to the markets of India”.
  • Under the Generalized System of Preferences (GSP) programme, “certain products can enter the U.S. duty-free if the beneficiary developing country meets a certain set of criteria as established by the Congress”.
  • The concept of GSP is very different from the concept of MFN. MFN status provides equal treatment in the case of tariff being imposed by a nation but in case of GSP differential tariff could be imposed by a nation on various country whether it is a developed country or a developing country. Both the rules comes under the purview of WTO. GSP provides tariff reduction for least developed countries on the other hand, MFN is only for not discriminating among WTO members.

Larger Perspective:

What is the programme?

  • The Generalized System of Preferences is the largest and oldest United States trade preference programme.
  • It is an initiative by the U.S. to promote economic development by eliminating duties on some products which are being imported, from amongst the 120 countries designated as beneficiaries.

When was it introduced?

  • The Generalized System of Preferences was established by the Trade Act of 1974. According to the website of the U.S. Trade Representative, the GSP helps spur sustainable development in beneficiary countries by helping them increase and diversify their trade with the U.S.
  • The U.S. also believes that moving GSP imports from the docks to U.S. consumers, farmers, and manufacturers supports tens of thousands of jobs in the U.S.
  • The other benefit is that ‘GSP boosts American competitiveness by reducing the costs of imported inputs used by U.S. companies to manufacture goods in the United States.’
  • According to the Trade Representative, GSP is important to U.S. small businesses, many of which rely on the programmes’ duty savings to stay competitive.
  • In addition to promoting economic opportunity in developing countries, the GSP program also supports progress by beneficiary countries in affording worker rights to their people, in enforcing intellectual property rights, and in supporting the rule of law.

Why is it important for India?

  • India is the world’s largest beneficiary of GSP, which dates from the 1970s, and ending its participation would not only be the strongest punitive action against the country since Trump took office, but would also open a new front in the global trade war.
  • Although the Indian export industry might not feel the pinch of the GSP removal for India by the U.S. yet the loss for the industry amounts to about $190 million on exports of $5.6 billion falling under the GSP category.
  • Specific sectors, such as gems and jewellery, leather and processed foods will be affected as they will lose the benefits of the programme.
  • A producer may be able to bear 2-3% of the loss from the change, but not more.
  • The loss, in terms of export, of some kinds of rice for example, may even exceed 10%.
  • The landed price of goods from India has to be the same as it was before the GSP was removed. If not, consumers of those products in the U.S. would gravitate to producers that enjoy the GSP benefits and hence are able to offer lower prices.
  • The removal would also act as a privilege to the other member beneficiary countries to enhance their trading capacities with the U.S. which could perhaps lessen the India’s trading progress as a whole as obviously, it is difficult to get back a customer that a competitor takes away.

Why is India in the cross-hairs?

  • The U.S. conducts periodic reviews of the programme.
  • The review for India as conducted for the year 2018 has focused upon the fact ‘whether it is meeting the eligibility criteria that requires a GSP beneficiary country to assure the U.S. that it would provide equitable and reasonable access to its market.’
  • The Trade Representative accepted two petitions asserting that India did not meet the criterion: one from the National Milk Producers Federation and the U.S. Dairy Export Council, and the other from the Advanced Medical Technology Association.

What can the Indian government do?

  • Experts have opined that required fiscal help must be offered to the affected sectors by the Government of India.
  • However, the obvious question is that what can India do if it has to be compliant with World Trade Organization rules that protect all its members equally from undue sops given to exporters? A wry answer is that if the U.S. is not playing by WTO rules, other countries too should get the opportunity to be able to protect their industries and organizations as a whole.
  • But it is possible to offer some breather to producers suffering losses from the GSP removal, even while being WTO-compliant.
  • The Centre could consider refund of taxes for goods not under GST.
  • Use of electricity or petrol in the manufacture of such goods but for which an input credit is not available could qualify here.
  • Helping such sectors would also protect jobs; especially when job creation is at a low.