The GSP contains a list of countries and products which are allowed entry into the USA duty-free or on payment of lesser duties.

Donald Trump, the famously protectionist American President, informed Congress on 5 March, 2019 that he intends to end India’s and Turkey’s preferential trade treatment under Generalized System of Preferences (GSP). The United States Trade Representative Office (USTR) further confirmed that this was on account of India’s “failure to provide United Stated with assurances that it will provide equitable and reasonable access to its market in numerous sectors”.

Generalized System of Preferences

The GSP is essentially an exception to the more general rule of Most Favoured Nations (MFN) under the World Trade Organisation's (WTO) General Agreement of Trade and Tariff (GATT). MFN means that the member countries of the WTO will have to give same treatment to all other WTO members as it is giving to their most favoured trading partner. Through GSP, they are allowed to give an exemption of or lower tariff rate to the developing or least developed countries when imports are made from such countries. GATT imposes a condition for maintaining GSP, i.e., it has to be generalized, non-discriminatory and non-reciprocal.

The GSP contains a list of countries and products which are allowed entry into the USA duty-free or on payment of lesser duty. The list includes various countries like India, Indonesia, Thailand, Egypt, Brazil, etc. The products in the list include meat, fisheries, agricultural products, chemicals, ores, textiles, etc. The USTR makes annual reviews about the types of commodities to be selected under GSP and the countries to be benefited. The USA’s GSP program also mentions some mandatory criteria which a country has to fulfil in order to become a beneficiary country.

Why India is being pushed out of GSP

The USTR conducted a review for India’s eligibility under GSP Program in August, 2018. The reason for this review was the excessive trade barriers imposed by India on the goods exported from USA. India took a strong stand in the beginning by stating that removal of India from the GSP program will be arbitrary as well as discriminatory and that India can drag US to the WTO under this ground.

By the end of hearing, India mentioned the importance it serves not only to India but also to US. It stated that numerous of intermediate products used in industries in US come from India and they are not bound to cause any injury to the domestic production there. It also defended its price control of medicines and medical devices through the argument that the country was dedicated to provide its citizens with affordable and equitable access to such facilities.

Impact of removal of India from GSP program

Commerce Secretary, Anup Wadhwan, has given a statement on 5 March, 2019 that GSP withdrawal will not have any significant impact on Indian exports to US. The terms of US on medical devices and market access are non-negotiable as of now. Over the last few months of 2018, India and USA entered into several trade talks to find a solution to the increased tariffs in India.

The new e-commerce rules and demands of data localisation from India are definitely going to hurt the USA giants like Amazon, Walmart, Facebook, Netflix, Apple etc. There is no doubt that India serves as important market for these USA entities considering the slowdown in China’s economy.

The Indian export to US accounted for approximately $48 billion in 2017-2018 on which preferential tariff worth $5.6 billion was enjoyed by India. However, in 2017, US good trade deficit with India was $22.9 billion in 2017, a 5.9 percent over 2016. India, along with being the largest beneficiary of GSP, is one of the few countries with which US trade deficit has decreased over last two years.

The GSP coverage in United States is limited to 3 percent of imports that could face a tariff which accounts to imports approximately worth $19 billion. On account of such a small GSP programme, the immediate effect of terminating India’s status will not be felt on the overall economy, but it could affect some of USA’s interests.

Under GSP, the subsidiaries of USA’s multinational companies pay lower tariff rates towards export of their goods. Some of the major parts and components of the final goods arriving in USA are being sold by USA to other countries. The effect of increased tariff by termination of India’s status under GSP will reach back to the USA through supply chain effects. While this will definitely impact India, it will also impact US equally.

The intermediate products if sold at a higher cost, will lead to higher selling price of final products in US. The low cost of raw materials is sed to benefit American competitiveness by reducing the cost of production for American manufacturers in both domestic as well as export markets.

The sectors in which India was receiving benefits can still be provided fiscal support in order to maintain their export and landed prices, as suggested by Ganesh Kumar Gupta, President, Federation of Indian Export Organizations. However, the strict trade remedial law of USA can be used to impose countervailing duty measures on these imports making it tougher for Indian manufacturers who are not much affected by GSP termination otherwise.

Possible arguments in WTO

The preferential treatment given to the developing countries by developed countries should be ‘non-discriminatory, non-reciprocal and generalized’. The enabling clause under GATT elaborates that any such system of trade preference should be modified, if necessary, to positively suit the development, financial and trade needs of such developing countries. India can argue in WTO that the eligibility criteria and the decisions under those criteria made by USA are not designed to enhance the development and trade needs of developing countries. They are rather self-centred and focussed on the reciprocity of removal of trade barriers in such countries including India for USA.

The USTR has stated that the termination will take at least 60 days to come into force and will be done through president’s proclamation. Now, it is to be seen if India decides on approaching WTO against US.