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All India Radio (AIR) IAS UPSC - Effects of US Intention to Terminate Preferential Trade Terms to India
Published on April 1, 2019, 6:58 p.m.

Effects of US Intention to terminate preferential trade terms to India

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TOPIC: General Studies 2:

  • Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests
  • Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.
  • Important International institutions, agencies and fora- their structure, mandate.

In News: Arguing that New Delhi had failed to assure America that it would provide equitable and reasonable access to its markets in numerous sectors, US President Donald Trump had informed the US Congress about his intent to terminate the designation of India and Turkey as a beneficiary developing country under the Generalised System of Preferences (GSP) programme.

What are Preferential Trade Agreements (PTAs)?

These agreements give signing nations special or preferential access to each other's markets, giving a boost to overall trade. In the US, the GSP programme - designed to promote economic growth in the beneficiary developing countries - provides duty-free entry for up to 4,800 products from 129 designated beneficiary countries and territories.

The criteria for inclusion in the GSP programme include factors such as providing the US with equitable and reasonable market access, respecting arbitral awards in favour of US citizens or corporations, combating child labour, providing adequate and effective intellectual property protection, and respecting internationally recognised worker rights, among others.

One of the discretionary criteria the President must (as per the GSP statute) take into account while determining the GSP eligibility is the “extent to which such country has assured the United States that it will provide equitable and reasonable access to its markets and basic commodity resources and the extent to which it has assured the United States it will refrain from engaging in unreasonable export practices.”

The program accounts for some $5.6 billion of India’s exports to the U.S, making India the largest GSP beneficiary. The Trump administration, which periodically reviews the GSP eligibility launched a review last April of India’s compliance with GSP market eligibility criteria.

The move is the latest push by the Trump administration to reduce US trade deficits and redress what it considers to be unfair trading relationships with other countries, starting with China.

The Trade barriers in question

India has implemented a wide array of trade barriers that create serious negative effects on United States commerce.

  • India’s new e-commerce rules which have impacted American companies like Amazon and Walmart (majority owner of Flipkart)
  • Price controls on medical devices (cardiac stents)
  • Tariffs on ICT products like smart watches and high-end mobile phones
  • Lack of greater market access for the U.S. dairy industry

The above are some of the issues that have caused trade friction between the two countries.

Impact on India

GSP was in any case "meant for least-developed countries, and India has graduated out of that". In January, the International Monetary Fund had reconfirmed India's 'fastest-growing major economy' tag and predicted GDP growth at 7.5 per cent in FY20.

The Federation of Indian Export Organisations (FIEO) also believes that India's exports to the US will remain unaffected by Trump's latest move since it will only have a marginal impact on a few domestic sectors such as processed food, leather, plastic, building material and tiles, engineering goods, and hand tools, among others.

The removal of these duty concessions would make the above products relatively uncompetitive in terms of prices in the US market compared to exports from other developing countries. For example, the import price of most of the chemical products, which constituted a large chunk of India's exports, is expected to increase by about 5 per cent. Industry body FICCI concurs that GSP withdrawal will make the Indian industry less competitive.

Indian government arguments –

  • The impact would amount to only $190 million on the value of $5.6 billion in exports to the U.S. that fall under the GSP category.
  • Federation of Indian Export Organisations (FIEO) has said that overall impact will amount to less than 0.4% of India’s exports to the U.S.
  • India’s exports to the U.S. stood at $50.57 billion in 2017 with a GSP tariff advantage of only $190 million, which was less than 0.4% of total exports.
  • According to FIEO, the sectors that will likely be significantly impacted will include processed foods, leather products other than footwear and engineering goods such as spark ignition, turbines and pipes.
  • The export body also pointed out that the withdrawal of GSP benefits to Indian exporters will also impact the downstream industries in the U.S. that were using the cheaper inputs from India.

However, the government would continue to talk to the U.S. during the 60-day period after which the GSP withdrawal would come into effect, in an effort to work out a deal.

In this globally protectionist environment, it is hoped that the countries refrain from a tit-for-tat trade war like the one between the US and China.