It was believed to be a strong economic and diplomatic partner, the USA has given a shock to the trade relations of both the nations. On Monday one of the pivotal trade advisors of President Donald Trump, Robert Lihjthizer announced that The USA would remove India and Turkey from the list of countries with Generalized System of Preferences (GSP).
This decision to end preferential trade status for India is likely to hamper some of the economic and strategic relations in the near future with the USA. This move could further increase India’s competition with other exporters in the space of organic chemicals, steel and aluminum along with the furniture.
According to the office of the United States Trade Representative (USTR), an agency responsible for developing and recommending a trade policy for the President of the US,
“India’s termination from GSP follows its failure to provide the United States with assurances that it will provide equitable and reasonable access to its markets in numerous sectors.”
However, Turkey’s withdrawal was because it has demonstrated better performance in economic development and is now said to be ‘graduated’ from the list
What is GSP?
A Generalized System of Preferences (GSP), is one of the oldest preference programmes on the trade deal of the USA. The GSP contains a list of countries and products which are allowed entry into the USA duty-free or on payment of lesser duty. India has been one of the biggest beneficiaries of GSP in which, more than 25% of the goods that were exported into the US got free access in 2017.
The criteria for inclusion in the GSP programme include factors such as providing the US with equitable and reasonable market access. The beneficiaries are expected of some rights and laws which indirectly benefits the US citizens. The GSP listed nations have an open market, Intellectual property protection, and laws which protect workers rights.
According to USTR (United States Trade Representative), The GSP was established by the Trade Act of 1974, It promotes economic development by eliminating duties on thousands of products when imported from one of 120 designated beneficiary countries and territories. Other than India and Turkey the GSP list consists of other developing nations like Brazil, Egypt, and Indonesia.
How has it benefitted India?
According to a report by Congressional Research Service, India was the largest beneficiary of the programme in 2017 with $5.6 billion worth of exports to the US being given duty-free status. Receiving more than $48 billion in 2017, the USA is India’s top export partner. India’s export of organic chemicals to the USA was $1.4 billion in 2017. More than 1500 products exported to the USA could be impacted.
What actually lead to this decision?
The announcement came two days after Donald Trump in a press brief referred to India as “very-high tariff nation” and demanded a “reciprocal tax“. Trump gave an example of Harley-Davidson motorcycles to prove his point.
The USTR had conducted a review for India’s eligibility in August 2018. It was done due to excessive trade barriers imposed by India on the goods exported from the USA. According to a statement,
“At the direction of President Donald J. Trump, U.S. Trade Representative Robert Lighthizer announced today that the United States intends to terminate India’s and Turkey’s designations as beneficiary developing countries under the GSP program because they no longer comply with the statutory eligibility criteria”.
It was not the first time that Trump had called India, ‘tariff king’. Last year during a press address at United States-Mexico-Canada Agreement (USMCA), he gave a similar example.
What will be the impact of the decision?
FIEO (Federation of Indian Export Organisations) an exporters body on Tuesday said that the US decision to withdraw duty benefits under its Generalized System of Preferences (GSP) programme will have a marginal impact on few domestic sectors such as processed food, leather, plastic, and engineering goods.
It also stated that the import price of most of the chemicals products, which constituted a large chunk of India’s exports, is expected to increase by about 5%. The withdrawal of GSP benefit will also hit the import diversification strategy of the US where it is keen to replace China as the main supplier to other developing countries.
Many experts also believe that because of the reason that India has been diversifying its market in Latin America and Africa along with other countries, it has expanded at a very competitive pace thus bearing a minimum effect of the decision.
How will India respond?
The changes may not take effect until at least 60 days after the notifications to Congress and the governments of India and Turkey and will be enacted by a Presidential Proclamation. India may take a firm stance by imposing retaliatory tariffs on the US from the next month.
A total of 29 items imported from the US, including walnuts, lentils, boric acid and diagnostic reagents, will face higher duties, cutting benefits to the US exporters. The move will put an extra burden of $290 million per year on US items exported to India. But India has stated that it was negotiating a favorable trade package for the US, especially for its agricultural goods, which will now be put on hold till US makes a final decision on GSP.