How will the U.S. move to strip India of benefits reserved for a developing country impact trade?

The story so far: On February 10, the U.S. removed more than a dozen countries, including India, from its list of countries that are classified as “developing” for trade purposes. These countries will now be classified instead as “developed” economies, thus stripping them of various trade benefits. The move, which comes just ahead of U.S. President Donald Trump’s visit to India later this month, has led to doubts over the chances of a trade deal being signed between India and the United States.

What is the “developing country” status?

The office of the United States Trade Representative (USTR) maintains a list of countries that it classifies as “developing”, “developed”, and “least-developed”. Countries that are classified as “developing” are allowed to export certain goods to the U.S. without being hit by punitive tariffs that are usually imposed on goods from “developed” countries. The “developing country” status owes its origin to the U.S. Trade Act of 1974, which authorised the Generalized System of Preferences (GSP) to help poor countries develop faster. These benefits were extended further under the World Trade Organization wherein rich countries agreed to grant trade benefits to countries that classified themselves as poor. It is worth noting that about two-thirds of countries that are members of the WTO classify themselves as “developing” countries and avail benefits.

Is such a classification justified?

Any classification of whether a country is “developing” or not is bound to be arbitrary. While the economic progress that India and China have achieved over the last few decades is seen by some as reason enough to get rid of their special status, others point to the various development indicators in which India and China still lag behind the rich world. Further, opinion on whether such a classification is required in the first place is divided.

Why is India being stripped of this status?

The U.S. administration under President Trump has repeatedly accused fast-growing countries such as India and China of wrongly claiming trade benefits that are reserved only for the truly developing countries. Therefore, Mr. Trump has sought to renegotiate trade deals with countries like China, essentially trying to make these deals more “fair” to the interests of the U.S. India has traditionally been one of the largest beneficiaries under the GSP, with over 2,000 goods having been exempted from import tariffs, until the Trump administration stripped it of the special benefit last year.

With the current change in India’s status under the USTR’s classification, the task of reclaiming the lost GSP benefits now becomes even harder. In support of its actions, the Trump administration has argued that countries like India and China have witnessed significant growth in the last few decades. This, it believes, is enough reason to scale back the various trade benefits. It has further cited the share of global trade enjoyed by India and China and their membership in the G20 club to argue that they enjoy significant economic power. Moreover, many developed countries also classify themselves as “developing” in order to escape tariffs.

How will the U.S. decision affect global trade?

Any move to end duty-free access for foreign goods into the U.S., which becomes more likely after the change in trade status, will increase the overall tax burden on goods crossing international borders. This will add further pressure on the global economy, which has already witnessed a slowing of growth this year. The growth effects of a tariff war could rise further if countries that are stripped of their “developing” economy status decide to retaliate by imposing tariffs on goods that they import from the U.S.

Recently, India offered to scale back tariffs on American dairy and other products that are imported into India. This came after the U.S. complained about the restricted access that American companies have to developing countries like India. If such trade tactics manage to bring down trade barriers on both sides, it can benefit the global economy. But, with both the U.S. and its various warring trading partners looking to protect their domestic producers rather than consumers who benefit from lower tariffs, a general fall in tariffs across the board seems unlikely.