US president Donald Trump opened another potential front in his trade war on Friday, May 31.
After foreshadowing it for months, the US administration on June 1 terminated India’s designation as a developing nation, withdrawing the exception that allowed New Delhi to export nearly 3,000 products to the US duty-free, earning India a revenue to the tune of $5.7 billion in 2017.
However, benefits could possibly be reinstated subject to India and the US reaching an agreement, according to a senior US State Department official.
What led to this
On March 4, Trump first announced that the US intends to revoke India’s designation as a beneficiary developing country under the Generalised System of Preferences (GSP) programme. The 60-day notice period ended on May 3.
India’s non-compliance with the GSP market access criteria built on concerns raised by its medical devices, ICT and dairy industry.
Washington has been particularly irritated by India’s tightening of regulations that have undermined major US companies, but favoured domestic entities in the past year, Reuters reported.
According to a Qrius report, the difference related also to the recent change in e-commerce and data localisation policies that has irked Amazon and Google.
Earlier this year, the government introduced an e-commerce law stating that an online platform cannot sell goods from companies it has a stake in. It added that platforms like Amazon must only act as a facilitators between vendors and consumers.
Sources also claimed that US Trade Representative Robert Lighthizer has a longstanding frustration with India’s self-designation as a developing nation at the World Trade Organisation.
“I have determined that India has not assured the United States that India will provide equitable and reasonable access to its markets,” the US president announced on Saturday, on the basis of an eligibility review that was launched in April 2018.
“Accordingly, it is appropriate to terminate India’s designation as a beneficiary developing country effective June 5, 2019,” Trump said in his proclamation.
Also read: Trump’s ‘tax’ attack on India, explained
New Delhi’s attempts to arrive at a “balanced” package that would address these concerns and protect the Indian public’s welfare were not successful. In response, the Indian government said it had offered resolutions to the US during bilateral trade discussions, and it’s “unfortunate” that those weren’t accepted.
What is the GSP?
A decades-old programme instituted in 1974 and designed to promote economic development around the world, the GSP allows certain products from developing countries to enter the US market with import tax barriers.
The GSP also helps keep US companies competitive because it allows cheaper imports into the market and gives the American consumer a greater degree of choice.
Only those countries that meet the eight mandatory and seven discretionary eligibility criteria can avail of this provision.
Currently, there are 118 beneficiary countries in the American GSP, including Pakistan, Sri Lanka, and Afghanistan. The US ended Turkey’s preferential trade treatment in May.
Turkey was the fifth-largest beneficiary of the program — which allowed some Turkish exporters to sell products in the US duty-free — in 2017 with $1.7 billion in covered imports to the US.
Mandatory criteria include a beneficiary not being a communist country and committing to end the worst forms of child labour. Discretionary criteria include the level of economic development (i.e., the Turkey case), and assurances on market access (i.e., the India case).
Other parameters include respect for “arbitral awards in favor of United States citizens or corporations…respecting internationally recognized worker rights, providing adequate and effective intellectual property protection, and providing the United States with equitable and reasonable market access.”
The White House announcement came just a day after Indian Prime Minister Narendra Modi was sworn into office for a second term after a landslide victory in last week’s national elections.
As Piyush Goyal takes charge of the Ministry of Commerce and Industry, a new challenge stares him in the face. This is exacerbated by the fact that India was the biggest beneficiary of the GSP; Indian exporters may have forgo benefits worth $260 million after the U.S. elimination, according to the Federation of Indian Export Organisations (FIEO).
The trade promotion body claims that sectors such as imitation jewellery, leather articles (other than footwear), chemicals & plastics, agriculture, pharmaceuticals and surgical instruments could be the worst affected.
In March, Commerce secretary Anup Wadhawan had said that India does not plan to impose retaliatory tariffs on the US goods. “The withdrawal will not have a significant impact on India’s exports to the US,” he said.
But Opposition leaders claim that agriculture, auto parts and pharmaceuticals are among the industries most at risk, while also subjecting India-made solar cells and washing machines to the new duties.
The government is reportedly considering ways to increase support to sectors impacted by the US government’s decision. Indian officials have also hinted at higher import duties on more than 20 US goods, following the move to drop India from the programme.
How will this affect US businesses?
This indicates that the damages will be two-pronged and stand to affect the US just as much it would hurt India’s trade and commerce.
Trump went ahead with the move, despite pleas from several US lawmakers and businessmen. The Coalition for GSP, an industry body, was one of the opposers; following the announcement, a spokesperson told the press it would cost American companies $300 million in additional annual tariffs.
“There are no winners from today’s decision,” Dan Anthony, executive director of the group, said in a statement, as reported by Bloomberg. “American importers will pay more, while some American exporters will continue to face current market access barriers in India and others, including farmers, are very likely to be subject to new retaliatory tariffs.”
A group of 24 members of the US Congress also drafted a letter to the White House on May 3, urging Trump to scale back his hardline policy with regards to India’s access to the GSP programme.
While India promises to continue to work on strengthening economic ties with the US, its trade decisions would be guided by its own “development imperatives and concerns,” the Commerce Ministry said in a statement.
“We view this issue as a part of this regular process and will continue to build on our strong ties with the US, both economic and people to people. We are confident that the two nations will continue to work together intensively for further growing these ties in a mutually beneficial manner,” it read.
The statement echoed Wadhawan’s stress on national interests above all else, invoking US’s protectionist policies as an argument against it.
“Government of India has to be conscious of our developmental and public welfare interests. Our effort was to balance the affordable prices of the medical devices without compromising on public welfare,” the Commerce Secretary had said in March.
India is also a beneficiary of the European Union (EU)’s separate GSP programme, along with 18 nations. As the only South Asian country in that grouping, India enjoys a 66% reduction in product tariffs, which will be a source of relief in these troubled times and hopefully offset some of the losses.
The withdrawal of preferential trade status also comes just weeks after the US tightened sanctions on importers of Iranian oil including India, China, and Turkey.
Prarthana Mitra is a Staff Writer at Qrius.
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