Since the Trump administration’s decision to revoke India’s status as a beneficiary country under the Generalized System of Preferences (GSP) program in March, discussion around the merits and weaknesses of one-way preferential trade treatment granted by developed countries to developing nations has been rekindled. The move which aimed to redress India’s unfair trade practices is expected to affect India’s annual gains of $190 million from the exports worth $5.6 billion under the GSP category. Although the Indian side has referred to the impact as “modest,” the sudden withdrawal of this unilateral, non-reciprocal privilege is likely to hurt small and medium sized businesses in sectors like jewelry, agriculture, auto parts, pharmaceuticals, chemicals, plastics, and others. These businesses will find it difficult to survive price-based competition owing to the supply of similar products from other developing countries to American markets at cheaper prices.
The U.S. GSP program with its origins in Trade Act of 1974 is considered to be one of the key exceptions providing non-reciprocal trade preferences to certain products from designated beneficiary developing countries (BDCs).The preferences are mostly in the form of duty-free tariffs or concessional tariffs extended to more than 3,500 products from about 121 developing countries, which enables entry to U.S. markets. India, being one of the largest beneficiaries of the GSP scheme, has enjoyed zero-tariff status on around 2,000 products, with the highest profits accrued in 2017. As per the 2018 reports by the U.S. Trade and Tariff DataWeb, automobile vehicles and other engineering items from India became the largest item in the GSP category followed by gems, jewelry, organic chemicals and plastics.
While the GSP was proposed to be non-reciprocal and non-conditional in nature except the four eligibility requirements for the beneficiary status, the U.S. Trade and Tariff Act of 1984 introduced certain revisions, altering the spirit of the GSP scheme. The changes added tougher reciprocal conditions which required the BDCs to reform certain domestic economic policies. In particular, the conditions relating to the protection of intellectual property rights and reduction of trade distorting investment practices became the controversial leading to the withdrawal of GSP status of several BDCs by the U.S. government. India and Turkey are the latest facing the brunt of these conditionality provisions.
In the Indian case, the rise in tariffs and custom duties on imports, especially in sectors of pharmaceuticals has caused great resentment among U.S. companies which lobbed calls of “unfair trade practices” against India. While market access related allegations form the core basis for Washington reviewing and eventually revoking India’s GSP status, there are several new issues at play as well.
In recent years, India has strongly opposed the U.S.-led free trade argument to support the free flow of data, much to the discomfiture of American e-retail giants like Amazon and Walmart-owned Flipkart. The Indian bid for data sovereignty has strongly irked American and other e-commerce giants. They have begun to face the impact of India’s data localization and the evolving e-commerce policy, which allegedly limits their expansionist ambitions in the Indian market. The Indian stance on data sovereignty is believed to be the key stimuli leading to the suspension of New Delhi’s trade privileges under the U.S. GSP program. The use of GSP scheme as a bargaining tool by Washington to strike deals with the beneficiary economies is hardly new. The U.S. has frequently leveraged the program to advance its politico-commercial interests and often arm-twisting partners from the developing world.
Apart from the geostrategic underpinnings, the Indian experience reveals several structural weaknesses of the GSP program. First, the acts of renewal and review of products or country eligibility under GSP has always been an ad-hoc process involving a great deal of policy inconsistency and uncertainty. The unilateral decision of the U.S. administration to exclude products from the preferential category has often limited the expansion and diversification of exports from developing countries. Most of these products are labor-intensive, and low-end manufacturing goods in which the developing nations enjoy comparative advantages.
Second, the competitive need limitation (CNL) aspect of the program has created a lot of uncertainty and confusion related to the re-designation of the GSP status of a particular product after the export volumes have gone below the threshold. For example, India’s requests for re-designation of products were repeatedly ignored by Washington in 2008 and 2009 on account of pressures from its various business groups and individual corporate entities. In fact, the U.S. domestic lobby has closely monitored export volumes of select products from India so that they could revoke the earlier waivers enjoyed by these products instead of granting them new ones.
Third, the “development” agenda of the U.S. GSP program is beset with contradictions. While the zero tariff schemes on products from BDCs provided them with access to markets in developed nations, the narrow focus on particular items on the other hand, hindered the expansion of exports as well as their global competitiveness. Additionally, the one-way preferential scheme has rendered the process of tariff liberalization in developing countries incomplete, intensifying the gap between the developed and developing countries further.
In view of such structural shortcomings and ambiguous benefits under the GSP program, the loss of India’s preferential status can be more of a diplomatic setback than an economic one. The inability to forestall the end of the preferential trade status calls into question New Delhi’s strong bilateral ties with Washington and calls for re-assessing India’s diplomatic options vis-a-vis the United States, before the current trade-related discontent grows into a bilateral trade dispute in the coming years.
The end of GSP status in the short run requires Indian commerce department to manage custom duties on the foreign imports and easing regulatory standards for foreign companies, enabling them to do business in India. Owing to New Delhi’s raising of import duties since 2017, various WTO members have lodged complaints, out of which seven are slapped by the US and are pending for decisions at the WTO Dispute Settlement Body. On the export side, the conflict lies vis-a-vis India’s trade distorting export subsidies, which requires putting in place a recalibrated approach that would enhance the competitiveness of Indian exports and push them higher in global value chain.
In the long run, however, the U.S. withdrawal of duty free benefits to Indian goods provides useful opportunity to improving India’s foreign trade and investment policies. More importantly, it serves as timely reminder to the Indian policymakers that dependence on the trade preferential schemes is a double-edged sword, where the short-term benefits are incompatible with the long term industrialization and developmental goals of the beneficiary countries.
Priyanka Pandit is a Research Fellow at the Indian Council of World Affairs, New Delhi.