On Monday, the United States announced that it will end India’s participation in the Generalized System of Preferences (GSP), a preferential trade deal with developing countries.
In a statement, the Office of the United States Trade Representative (USTR) announced that President Donald Trump is terminating India and Turkey as GSP beneficiaries because “they no longer comply with the statutory eligibility criteria”.
According to the US, India has failed to give “assurances that will provide equitable and reasonable access to its markets in numerous sectors”.
This simply means that the while India is trading duty-free in the US, American products are paying import taxes.
The USTR office said India has 60 days before it implements this change.
What is the GSP?
Under the GSP programme, certain products from developing countries can enter the American market duty-free.
Only those countries that are beneficiaries and meet the eligibility criteria can avail of this provision.
“GSP criteria include respecting arbitral awards in favor of United States citizens or corporations, combating child labor, respecting internationally recognized worker rights, providing adequate and effective intellectual property protection, and providing the United States with equitable and reasonable market access.”
Established in 1974, the GSP intends to provide economic access to developing countries by removing import tax barriers and increasing their trade with the US.
The GSP also helps keep American companies competitive because it allows cheaper imports into the market and gives the American consumer a greater degree of choice.
Currently, there are 120 beneficiary countries in the American GSP, including Pakistan, Sri Lanka, and Afghanistan.
The European Union (EU) also has its own GSP with 18 beneficiaries, including India as the only South Asian country.
In the EU, India enjoys a 66% reduction in product tariffs.
India’s tussle with the GSP
In 2018, the US launched a review of India’s compliance with the GSP, particularly looking at whether American goods have “equitable and reasonable market access”.
The USTR said it was reviewing two petitions from entities alleging that India is not complying with the criteria of the GSP––one from the National Milk Producers Federation and US Dairy Export Council and the other from the Advanced Medical Technology Association.
In late April, a GSP subcommittee reviewing India’s compliance also found that India “implemented a wide array of trade barriers that create serious negative effects on U.S. commerce”.
As the two petitions leveled similar accusations, this non-compliance was factored into India’s overall review.
What does this mean for India?
For Trump, the narrative around India’s elimination is a favourable one. As a politician, he is able to harp on American protectionism, one of the pillars of his election campaign: “Buy American, Hire American”.
In a discussion on trade deals with Vietnam, the White House said Trump wants to “deepen relationships” with trade partners “while never sacrificing wins for American workers and industries”.
Such declarations work in Trump’s favour as an optical champion of the American middle class and the country’s struggling labourers.
However, for Modi, India’s termination from the GSP tells a complicated story.
In 2017, India exported goods worth $5.6 billion to the US under the GSP, which accounts for 11% of total trade between India and US.
Advantageous or not?
However, proponents of Indian protectionism—the practice of protecting domestic industry by levying duties on imports—may not see this termination as a problem, because it shows that the government is protecting the interests of Indian businesses.
Department of Commerce Secretary Anup Wadhawan also downplayed the issue by stating that US’s decision will not have a “significant impact” on the export market.
“India exports goods worth $5.6 billion under the GSP, and the duty benefit is only $190 million annually,” said Wadhawan to PTI.
However, regardless of Indian protectionism, the Hindustan Times says American and Indian officials simply failed to crack a mutually beneficial deal for the GSP.
The Hindustan Times quoted an “official close to the negotiations” who said, “We had conceded most of their demands and had indicated our readiness to discuss the few remaining ones as well… but they seemed to be in the mood to go for all.”
Referring to these negotiations, Trump wrote a letter to Congress stating he is not certain of India providing equitable and reasonable market access to the US.
In a letter to Congress, Trump wrote, “I am taking this step because, after intensive engagement between the United States and the Government of India, I had determined that India has not assured the United States that it will provide equitable and reasonable access.”
Why did Trump do this?
Experts have called this a short-sighted failure on Trump’s part because the US also benefits from Indian exports.
However, policy expert Dhruva Jaishankar hinted at other motivations.
On Twitter, Jaishankar said the US terminating India’s beneficiary status was related to the recent change in e-commerce and data localisation policies that 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.
On data localisation, the Economic Times reports that data on Indian consumers must be stored and collected in India and transferred to international companies only if they comply with data protection laws.
Tech firms were unhappy with the restriction on data flow because it makes tracking consumer behaviour more difficult.
However, Indian start-ups lauded the effort because they have public access to all consumer data in the country.
Jaishankar says US-India trade differences predate Trump and will continue after him, as well.
India has 60 days before Trump signs a presidential order officially eliminating India from the GSP. If it fails to do so, it’s likely to impact several industries, such as jewellery and automobile.
Director General of the Federation of Indian Export Organisations told NDTV that agriculture and handicrafts could also be hit.
Indian authorities can use this time to renegotiate the country’s position.
Rhea Arora is a staff writer at Qrius.