Story Of The Week

Trade ties at risk: Withdrawal of GSP

“India exported goods worth $5.6 billion under GSP last year, but our total GSP benefits were to the tune of only $190 million. The benefits in absolute sense and a percentage of trade involved are very minimal and moderate”

Commerce Secretary Anup Wadhwa recently reacted to the United States’ harsh move to revoke GSP from India (and Turkey). He laid emphasis on the fact that India requires a certificate stating the source of the dairy product to check whether it has been fed animal derived feed, in order to address its religious and cultural concerns.

However, before delving further into this issue, let us first understand the background of the situation.

What does GSP really mean?

Institutionalized on January 1, 1976 under the Trade Act of 1974 (US), Generalized System of Preferences is one of the largest and the oldest ‘preference program’. It was initiated to promote economic development in the developing world by providing preferential duty free entry to up to 4800 products from approximately 129 different countries.

 

Are GSP and the usual trade arrangement under WTO same?

Under the normal trade laws, the WTO members must provide equal preferences to its trade partners. There is no scope for any discrimination between countries. This trade rule under the WTO is called the Most Favored Nation (MFN) clause.

GSP on the other hand calls for a preferential treatment, to be given to some special economies (developing nations) to ensure continued growth in such economies.

But is U.S. also benefitting from this scheme?

Yes, U.S. is definitely one of the biggest beneficiaries of this preferential program.

  1. By mobilizing GSP imports from the docks to U.S. consumers, farmers, and manufacturers supports tens of thousands of jobs in the U.S.
  2.  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.”
  3. Most of the 3,500 Indian products that are being imported by the U.S. under the GSP are raw materials or important intermediaries of value chains. In multiple cases, Indian exports are less-expensive, high-quality alternatives that reduce the costs of final products, thereby creating value that is subsequently exported the world over by U.S. companies or directly conveyed to the U.S. consumer. Indeed, this enables the U.S. economy to be more globally competitive.

Why is GSP important for India?

According to the United States Trade Representative Report that was released in January, India has received the most amount of benefit from the GSP program. In fact, in the financial year 2017, India’s $ 5.7 billion export was duty free while Turkey exported duty free goods worth US $ 1.7 billion to USA. India is the world’s largest recipient of benefits from the GSP program.

GSP also allows the Indian exporters to gain a competitive edge in the market and furthers the development of the country’s export base. It also allows India to integrate with the global value chains (GVC) and to reach the global markets.

A producer of agricultural products may bear a loss of 2-3% however, the loss, in export of some kinds of rice for example, might even exceed 10%. The final price of goods from India must be the same as it was before the removal of GSP else consumers of such products in the U.S. would shift to the producers that would still be enjoying the GSP benefits and hence would be able to offer lower prices. Obviously, it is difficult to get back a customer that a competitor takes away.

Why is India in the cross-hairs?

The decision to revoke India’s GSP benefits was an effect of a decision by the Office of the United States Trade Representative to conduct a review of India’s eligibility for the program in April 2018 whereby the GSP beneficiary country is required to assure the U.S. that it will provide equitable and reasonable access to its market as well.

 After the final review, the Trade Representative accepted two petitions asserting that India did not meet the criterion, from the following segments:

  1.  National Milk Producers Federation and the U.S. Dairy Export Council

 U.S. dairy imports into India aren’t currently being allowed because of “Religious Reasons” by the Government in lieu of raising focus on protecting the sacred cow. New Delhi on the other hand, is worried for example, that American cows may have been given bovine somatotropin, a growth hormone that’s extracted from the pituitary gland of other cattle.

  • Advanced Medical Technology Association

India has also, very recently placed a cap on the prices of medical devices, like stents etc., ultimately impacting the U.S. exports of such devices.

  • The e-commerce restrictions

The trigger for the latest downturn in trade ties was India’s new rules on e-commerce that restricts the way Amazon.com Inc. and Walmart-acquired Flipkart do business in a rapidly growing online market set to touch $200 billion by 2027. Constantly changing rules and regulations make it difficult for the online foreign retailers such as Amazon.com Inc. to operate.

  • Data storage

Global card payments companies such as Mastercard and Visa are being forced to move their data to Indian web servers.

Was there actually an impact on the India-U.S. bilateral trade last year?

The U.S. policy makers clearly overlooked one extremely important observation. U.S.-India trade actually boomed over the past year. Total goods trade grew by approximately 16.7 percent between December 2017 and November 2018, with U.S. being the bigger beneficiary as their exports to India grew by around 27 percent during the same timeframe.

What is the cure now?

Affected sectors must be offered fiscal help, either in the forms of subsidized production or rebates. However, the bigger concern is to safeguard our own interests by ensuring that World Trade Organization protects all its members equally from undue sops given to exporters? A wry answer is that if the U.S. is not complying by the WTO rules, other countries too need to be able to protect their industries.

References

https://help.cbp.gov/app/answers/detail/a_id/266/~/generalized-system-of-preferences-%28gsp%29

https://www.bloomberg.com/opinion/articles/2019-03-06/u-s-removal-of-gsp-trade-benefits-should-wake-up-india

https://www.thehindu.com/business/Economy/why-is-gsp-vital-to-india-us-trade-ties/article26482585.ece

https://thediplomat.com/2019/03/the-us-gsp-decision-risks-to-us-india-relations-and-upsides-for-china/

https://www.abplive.in/business/india-believes-gsp-benefit-withdrawal-by-us-will-not-have-much-impact-on-exports-heres-why-934306

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