Post the announcement of Lok Sabha election results of 2019; Trump made no hesitation in delaying to announce the revised GSP agreement for India. The recent development on the Generalized System of Preferences states that Trump is set to altogether remove the benefits of such tariffs for products imported from India. In 2018, the US announced that it would reduce GSP benefits from 94 products, out of which 50 of them were Indian imports worth $5.6 billion. This was a part of a plan to completely remove the preferential trade benefits to India and Turkey. The plan progressed in March 2019 when Trump announced his intention to reduce the benefits completely for India and finally declared that it was set to be a “done deal” in May 2019. India contributes nearly 2.1% of US imports worth $54.4 billion, as of 2018 and these numbers may be affected post the imposition of tariffs on these goods. The US majorly imports spices, agricultural products, precious metal, handicraft, textiles, mineral fuels, engineering goods, machinery and pharmaceutical products. Thus, they intend to reduce the access of these Indian products in US markets for the reasons examined below.
The “What”
Generalized System of Preferences has been in effect since January 1971 introduced by the United Nations Conference on Trade and Development (UNCTAD) and established in the Trade Act of 1974. This was done in order to extend preferential trade to developing countries and promote economic development, initiated by developed countries to help developing countries by granting access to markets and increasing exports from these nations by reducing or even eliminating tariffs on certain goods. This benefits these nations because it helps them to access international markets by exporting goods in which it is abundant. It also increases the competitive advantage[i] of developing nations. This scheme increases bilateral trade between two nations and productivity of a developing nation which would otherwise merely compete in the domestic market. In India, the GSP has been revised and reduced for various products.
The “Why”:
The United States claims that India is practising unfair trade as it bars from entering the medical and dairy industry by the imposition of high tariffs on these sectors. The United States Trade Representative (USTR) conducted a review (in April 2018) on the agreement with India concerning GSP benefits. It concluded that India failed to meet the eligibility as they imposed barriers that hurt United States commerce as they accepted two petitions filed by National Milk Producers Federation and the US Dairy Export Council from the dairy industry and the United States Trade Representative about AdvaMed’s concerns about market accessibility, in the Health sector. The reason why India decided to restrict these goods was- (1) With regard to the dairy industry, the Vajpayee government imposed sanctions in 2003 on dairy products to protect the religious interests of the population as it was claimed that animals which consumed “internal organs, blood meal, or tissues of ruminant origin” hurt religious sentiments of the people. (2) About the medical industry, their restrictions in the form of price caps on coronary stents and knee replacement implants.
This resulted in Trump taking retaliatory measures to remove GSP benefits, which is inconsistent with the goals of India to reach bilateral trade higher than $142 billion. This move would hurt American small-to-medium enterprises rather than Indian companies. The Ministry of Commerce commented that this would not make much of a difference to the Indian economy given that the GSP waived off $190 million in tariffs. Trump claimed that Indian tariffs are too high for imported goods from the US; however, the Ministry claimed that it was consistent with the WTO rates.
India has imposed restrictions on not only US imports to protect the interests of domestic producers, but also on other countries imports into India. This is about medical devices, dairy products and electronic devices. There was also an imposition of a restriction on e-commerce businesses like Amazon and Walmart. This resulted in Trump initiating a new trade war (other than the one on China) on India as well as Turkey (where GSP was removed as Trump claimed that the country was developed). Since Trump took office, India has needed to increase its imports as Trump was insisting on keeping a watchlist on countries that are involved in currency manipulation. To avoid being on that watchlist, it was imperative for the country to keep a trade surplus of less than $20 billion, current account surplus of less than 2% of GDP and purchases of foreign currency of less than 2% of GDP per annum. Thus, India needed to increase its imports to keep off the list and has been removed.
The United States thus pushes for fair trade practices with nations as it claims that Indian companies enjoy zero tariffs and can access US markets easily however American companies are at a disadvantage as they have to pay higher tariffs for entering Indian markets.
The Verdict
The US economy has changed its stance about bilateral trade since Trump came into power with stricter regulations. With the removal of GSP benefits, it does not impose much of a problem for the economy, as claimed by the authorities (Ministry of Commerce). Due to this, it is unlikely that India would use retaliatory trade barriers for American products as the loss may range up to 3% for producers in India. The issue concerning trade barriers on the dairy industry is claimed to have been to protect consumer interest as it is said that how cows were fed in the US was questionable. Concerning the medical industry, India has placed tariffs as they believe that access to public hospitals might become more expensive as medical devices such as stents from the US may make costs higher.
The most affected sector is likely to be SMEs which constitute 45% of total exports from India and sectors such as textile, farm products and engineering products would be adversely bear imposition of a $190 million and this would affect the competitiveness as the production may be reduced as a result of increased tariffs on their products. The market access to these products would be reduced in the US economy.
Previously, the government used policies like Market Access Initiative to promote exports from the country by providing financial assistance to the exporters. However, these schemes do not align well with the aim of exporters or the country’s economy. These schemes merely provide subsidies and government help. This is not enough to counter the effect of fiscal deficit and promote long term growth by achieving economies of scale. Piyush Goyal, the newly appointed Minister of Commerce & Industry (as of 2019) rightly stated, “I do not think that any programme or ambitious scheme can run only on subsidies and government help. We have to move out of this continuous effort and demand, make our industry truly competitive and self-reliant. My own experience in the last five years is that wherever we have done away with subsidies, industry and business have progressed, grown and prosper”. It is imperative that the government uses policy programs that work towards improving efficiency, productivity, logistics, tax relief and improvement of export infrastructure. Export promotion is necessary at this stage as stock markets rally with the announcement of the election results. However, only time will tell if the government with the new Finance Minister, Nirmala Sitharaman, would cater to the needs of those affected by these changes imposed by the US government.
References:
Kumar, K. B. (2019, March 09). The Hindu. Retrieved from https://www.thehindu.com/business/Economy/why-is-gsp-vital-to-india-us-trade-ties/article26482585.ece
Lakshman, S. (2019, May 31). The Hindu. Retrieved from https://www.thehindu.com/news/international/india-to-lose-preferential-trade-terms-with-us-under-generalized-system-of-preferences-program/article27360972.ece
Office of the United States Trade Representative. (2019). Retrieved from 2019 GSP Annual Product Review: https://ustr.gov/sites/default/files/IssueAreas/gsp/2018_Import_Statistics_Relating_to_CNLs_De_Minimis_Waivers_and_Product_Redesignations.pdf
[i] Competitive advantage of a country is its ability to use its resources efficiently to produce a product at a lower price as compared to another country done through cost advantage or product differentiation