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India-USA Trade War: Tracing Reasons & Likely Effects On Exporters

One of the biggest announcements of the US last week was the withdrawal of the GSP (Generalised System for Preferences) for exports from India. In this post, we examine what the GSP system is, reasons for its enforcement and the effect it may have on Indian exporters.

What is the Generalised System of Preferences of the United States?

The GSP system came into force by 1974. It is a preferential trade program of the US under which the US waives off import duties on many products from around 120 countries. Devised in its own interest, the lack of imposition of import duties on these products meant that US industries often got inputs at a cheaper rate. According to the website of the U.S. Trade Representative, the GSP spurs sustainable development in beneficiary countries by helping them increase and diversify their trade with the U.S. The program also supports tens of thousands of jobs in the U.S. The Trade Representative says the GSP is important to U.S. small businesses, many of which rely on the programmes’ duty savings to stay competitive.

Why is it being withdrawn for India?

One of the conditions of GSP on beneficiary countries is that it requires assessment on whether it is it will provide equitable and reasonable access to its market to the United States. The idea is grounded in a strong belief in reciprocity trade agreements executed by the US, as seen by Trump’s economic policies with other nations. The US Government pointed out specific instances of Indian policies that tantamount to a violation of the access to market condition. To eliminate extortion by hospitals and medical practitioners for foreign-manufactured heart stents, India announced an upper cap to the pricing of these stents. The Advanced Medical Technology Association complained to the US Trade Representative to withdraw India’s GSP as they believed that this caused foreclosure to their entry into the Indian markets and many were made to do ‘forced sales’ at low prices.

What is the likely impact on exporters?

Currently, India is the largest beneficiary of the GSP program. However, President Trump in a recent tweet proclaimed that the US was being used by other countries and announced his intention of putting the American worker first. In fact, this is one of the reasons for the ongoing trade war between USA and China.

Under GSP, as many as 1,900 Indian products from various sectors such as chemicals and engineering equipment, leather, textiles, gold, building materials and dairy items get duty free access to the US market. While there may be no substantial effect, as India’s Commerce Secretary announced that it will only impact around $190 million annually. However, there is no denying that it as critically affect on sales and employment of Micro, Small and Medium level enterprises that are solely export oriented units. Since the landed price (that is, cost + shipping, insurance, freight) will become higher, US consumers and businesses may be able to find cheaper alternatives by other countries that would continue to enjoy the GSP benefits. However, it is not solely Indian manufacturers that would be hit. For exclusive Indian exports, such as high-quality gemstones, Basmati rice etc, for which ready alternatives are not available, the negative effect would be felt by industries in the US relying on these imports. Moreover, this could give India, a good opportunity to levy higher taxes on imports from the USA, such as Harley Davidson, which currently enjoys a 50% duty, which was lowered from 100% after Trump had expressed a want for zero-duty on these motorcycles.

How can this situation be improved?

While negotiations between India and USA are important, with issues of commerce and economics requiring diplomacy and adequate advocacy at the World Trade Organization, the Indian government must step in to protect interests of small manufacturers that are likely to be worst-hit, in case the GSP withdrawal does take place. Mechanisms for alternate employment and exploring the new market opportunity for Indian-exports must be initiated. Moreover, since the benefits of GST are not available for fuel costs (since petrol and diesel are kept out of the purview of GST), the government could offer financial benefits to such manufacturers to compensate for the increased duties that may follow.

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