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Recent announcement by US president Donald Trump that US is considering termination of India’s designation as a beneficiary to Generalized System of Preference has ignited a new debate in India that how would this termination impact India.
What is Generalized System of Preference?
- The Generalized System of Preferences (GSP) was instituted in 1971. The 13 countries that grant GSP preferences are: Australia, Belarus, Canada, the European Union, Iceland, Japan, Kazakhstan, New Zealand, Norway, the Russian Federation, Switzerland, Turkey and the United States of America.
- It is a preferential tariff system extended by developed countries (also known as preference giving countries or donor countries) to developing countries (also known as preference receiving countries or beneficiary countries). It involves reduced MFN Tariffs or duty-free entry of eligible products exported by beneficiary countries to the markets of donor countries.
Why US has decided to withdraw benefit?
- In a letter to press, U.S. Trade Representative (USTR) stated the reason for withdrawal that India failed to “provide the United States with assurances that it will provide equitable and reasonable access to its markets in numerous sectors.
- This decision was taken after a review process of India’s status after complaints from domestic U.S. constituencies in the dairy and medical device sectors of the barriers in market access in India.
- As per USTR, US have been on deficit for many years in trade with India.
- According to the USTR, in 2017, India was the United States’ ninth largest goods trading partner. In this category, however, India ran a $22.9 billion deficit that same year, meaning it exported more to the United States than it imported in American goods.
- Most recent complaint from the side of US president was high Indian tariffs on Harley Davidson motorcycles.
- However, there has been a limited truth in the facts present by USTR analysis. India’s tariff rates have been reducing steadily over the decades from as high as 150% in 1991 to 10% in 2007-08. According to WTO data, India’s average applied tariff is around 13 per cent. Although there have been move to increase duties on a number of items in last 5 years.
- Also India has said it made every effort to meet the most of the U.S. demands and reach an understanding, but key points of difference, especially regarding India’s cultural concerns to do with dairy products, could not be accommodated.
Other causes of contention between India and US
- Services: For India, a key issue is U.S. temporary visa policies, which affect Indian nationals working in the United States. India also continues to seek a “totalization agreement” to coordinate social security protection for workers who split their careers between the two countries.
- Agriculture: Sanitary and phytosanitary (SPS) barriers in India limit U.S. agricultural exports. Recent 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.
- Intellectual Property (IP): 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 concern for the United States, which designated India again on its “Special 301” Priority Watch List for 2017.
- Localization Trade Barriers: The United States continues to press India on its “forced” localization practices.
- Investment: India has made FDI reforms, such as raising foreign equity caps for insurance and defence, but barriers remain in multi-brand retail and other sectors.
- New e-commerce rules: The move disrupted product listings on Amazon & Walmart and forced it to change its business structures.
Status of India US trade relation
- For India, United States was its second largest export market (16% share) after the European Union (EU, 17%), and third largest source of imports (6%) after China (17%) and the EU (10%) in 2017.
- The bilateral trade between India and the US stood at $74.5 billion in 2017-18, up 15.5 per cent from $64.5 billion in the previous fiscal.
- India reportedly imported items worth $26.3 billion from the US in FY19 (April-December) but posted total export of $38.8 billion.
- Bilateral trade frictions exist on numerous fronts, but many observers believe bilateral commercial ties could be more extensive if trade and investment barriers were addressed.
How would it impact India?
Post announcement there has been mixed reaction from the side of India. According to some reports it will not have any impact on India, while on the same time some reports suggest that it will impact India’s trade with US badly. Let’s have look on both the aspects.
Let’s first have look on negative impacts
- India was getting tariff preference on 5,111 tariff lines [or products] out of 18,770 tariff lines in the US.
- Chemicals, gems and jewellery, engineering and textiles are among the Indian industrial sectors that will be hit worst by this step.
- the removal of duty concessions would make the above products relatively uncompetitive in terms of prices in the US market compared to exports from other developing countries.
- For example, the import price of most of the chemical products, which constituted a large chunk of India’s exports, is expected to increase by about 5 per cent.
No significant impact
- As per some reports there won’t be any significant impact on India’s trade with US. India exports goods worth $5.6 billion under the GSP, and the duty benefit is only $190 million annually and the tariffs that India imposes are “very consistent with World Trade Organization-bound rates.
- India has attempted to address the trade deficit with purchase of American oil, energy and aircraft.
- The US and India reportedly are in intensive negotiations to address key trade issues, such as on the U.S. steel and aluminum tariffs and India’s GSP status.
- As WTO members, the United States and India negotiate multilaterally to liberalize trade, but unable to reach a conclusion yet.
- Now 60 days must pass for beneficiary country to be taken off the list, after the notice has been given. During which there is possibility of negotiation. India must make efforts to stay in the list by convincing the US congress of its intention to pay back.
- India must keep in mind U.S.-China trade war, and if a trade deal with the U.S. is reached, India could be the biggest beneficiary of business deals lost by China.