In April 2018, the US government decided to undertake an eligibility review for India receiving benefits under the Generalised System of Preferences (GSP). Then in November 2018, the US government decided to remove 94 products from the GSP scheme. India exported 50 of those products. Now, in March, the current administration under Trump has decided that the preferential trade treatment India received under GSP has to be withdrawn.
Generalised System of Preferences is a preferential trade agreement which was enacted in 1976 under the US Trade Act, 1974. It was introduced to help the poor developing nations, by keeping very low/zero tariffs on the exports of these countries. This makes their goods more competitive as compared to the goods of other countries. This also helps these developing nations to increase their exports, which has the added benefits of GDP growth, increase in employment and an increase in foreign exchange reserves.
The US has cited reasons such as India not providing the US “equitable and reasonable” access to its markets for it to remove India from the GSP list. There are two petitions regarding this filed by the National Milk Producers Federation and the U.S. Dairy Export Council. The other industry that has a problem with this is the Medical industry in the US.
The dairy industry has faced a lot of hindrances in their daily operations because the Indian government wants to ensure that none of the sources of the dairy has been fed food derived from animal feed. The Indian government requires a certificate for that, which is a lot of paperwork and interrupts the free flow nature of the work. On the other hand, the Indian government has fixed the maximum price for stents to be sold. This has upset the US Medical industry which does not appreciate this kind of government intervention in the market.
Impact On Indian Industries
This decision by the US will obviously have an impact on the Indian exports market. The magnitude of the Indian exports under the GSP scheme is not a big figure. Indian exports are worth only $5.6 Billion under this scheme, whereas the total exports to the US stand somewhere at $48 Billion. So, the impact is not expected to be that significant. But past trends suggest that these exports have been increasing over time, so in the long run, this will have a significant impact on the exports market.
According to the data provided by FIEO, India was getting tariff preference on 5,111 tariff lines, but only 2,165 tariff lines got a tariff advantage of more than 4%. If one analyses the data from 2001 till present, it shows that the numbers of the goods that are exported are very volatile, so to break down every single good will not present a very stable image, but if one looks at the whole GSP as one single stat, it shows that exports under GSP increase every year. But there will be some major impact on some industries and some will not be affected
Industries which will be affected are organic chemicals, processed food, leather, plastic, and engineering goods. The other sectors that were enjoying the duty benefits include building material and tiles; hand tools (spanners, wrenches, drilling equipment); engineering goods such as spark ignition, turbines and pipes, parts of generators, cycles; made-ups (pillow and cushion covers); and women’s woven dresses.
FIEO believes that the export price of most of the chemical products would increase by 5%, and chemicals constitute most of the exports under the GSP scheme.
Steel and engineering goods under GSP include iron and steel products, non-ferrous metal products, industrial machinery, automobiles and components, and other products. The exports of these products were calculated at $76.2 Billion in the year 2017-18. The industry has set the export target at $100 Billion by 2021. There was a growth of 16.81% in the last year despite global headwinds, so the industry is also optimistic of the GSP issue and they are positive that they will reach the set target of three-digit exports level.
Boost For China
In this ensuing trade war between the two nations, China watches as a bystander and is smiling, thinking about its prospects if these two powers fight each other in an internecine trade war. China suffered enough from its own trade war with the US, and it is time that it got back what it lost. China’s trade war with the US led to retaliatory tariffs from both sides and at the end, it was evident who took more bruises. It was China, this is because China, with its vast amount of foreign exchange reserves and an economy which is dependent on exports to grow, had much more to lose than the US in the War of Tariffs.
Now, looking at the stats, it is clear that the Chinese economy is facing a slowdown, with unemployment also soaring. This might just be the push China needed to make a comeback. With Indian companies losing that competitive edge in the US market, consumers and producers must be compelled to shift their preferences to Chinese goods. This will give a boost to Chinese exports as their goods will be cheaper now. But all of this won’t have much effect if both, the US and China, do not reach an agreement regarding the ensuing Trade War, which they do not seem to be doing anytime soon.
Umesh Anandani, secretary general of the Indian Flexible Intermediate Bulk Containers Association, said that both the Indian and Chinese command an almost equal share in exporting this FIBC bags to the US. Now that India won’t be receiving the benefits under the GSP, this will make Chinese goods more competitive, which means China will now take the lion share of these bags.
Experts also say that before GSP, China controlled 85% of the exports of the travel goods industry. Travel goods include luggage, handbags, backpacks, briefcase, etc. The American Apparel & Footwear Association (AAFA) and the Travel Goods Association (TGA) have pleaded with the US government to not remove India from the GSP scheme. Only one year ago did the Trump administration allow travel goods to come under GSP, since then the industry has been able to move away from Chinese exporters and this has been very profitable for the industry as the goods have become duty-free. Earlier there used to be a duty of 17.6-20% on these goods.
India is the largest exporters of travel goods to the US. After the GSP, China’s share dropped to 81%, now as any company in the US won’t have a choice, they will start importing from China only, which is another sphere where China benefits.
How This Affects Indo-US Relations
Donald Trump, to keep his core voter base happy, resorts to protectionism and rhetoric about how the US always gets the bad part of a trade deal. This led to him scrapping the NAFTA and introducing the new deal which was called the USMCA. So, this should not come as a surprise when the US does not want India to be a beneficiary of the GSP scheme. India does enjoy a trade surplus of a little over $20 Billion with the US. Donald Trump has been focusing on reducing the US’s trade deficit with other countries.
This will have a significant impact on Indo-US relations. Indo-US relations are on the upswing, with the US defence industry looking to expand its operations in the vast and untapped Indian markets. Indo-US relations are also stronger than ever because they both need each other to counter the rising Dragon (read: China). Both the countries now also have a nuclear relationship, which started after the signing of the Indo-US Nuclear Deal in 2008. The commitment level of the US has increased now after the US agreed to build 6 more nuclear power stations in India.
India also has a very powerful and important diaspora in the US. The diaspora is not only important for the US economy as they occupy most of the STEM jobs, but it is very powerful politically also. The US Senate also has one caucus dedicated just to ensure that the Indo-US relationship never strains.
So, when one looks at all these things, the GSP issue looks very trivial. But it is not about the size of the issue, rather the precedent it sets. The leaders of both nations have shown themselves as no-nonsense and strongmen in their country and especially amongst their core voter base. Anyone who blinks first will lose respect in the eyes of the voters, and both the leaders are facing an uphill battle in the upcoming general elections. So, no one can afford to step down. This has led to India saying that if the US keeps its word of withdrawing GSP benefits for the Indian exports, it will have to retaliate by imposing tariffs on 29 US goods. This will not go down well with the US and it might lead to a serious trade war.
Both the governments should pay heed to what some US lawmakers are saying – which is that the US should hold this decision until the general elections in India are held so that the new Indian government can negotiate in good faith. And the Indian government should know that retaliating is not the way to move forward, but with diplomacy, this problem can be solved and a middle ground can be found.
How Will This Impact The US Economy
The US runs a trade deficit of $22.9 Billion with India and a trade deficit of $419 Billion with China. Removal of GSP benefits for Indian exports will reduce the US trade deficit with India, but it will increase the US trade deficit with China as the US importers will now have to shift to Chinese exporters. So, this just proves that what Donald Trump hopes to achieve (a lower trade deficit) will not come to fruition, because even if they reduce the deficit with India on one hand, they are increasing it with China on the other hand.
AAFA and TGA lay out the scenario of what might happen if India’s GSP status is removed. Before GSP, the travel good industry used to import everything from China, and those good came with tariffs. So, it meant that the cost of the industry was very high. So, when the Donald Trump administration put these travel goods under GSP, Indian exports became more attractive and the industry shifted from China to India. This reduced the cost of the operations significantly, which led to more profit for US companies. More profit led to expanding operations and in turn more employment.
The other scenario is with the increasing costs, the companies reduce the operations, which would lead to increasing prices, affecting the consumers.
The USTR also states that providing GSP to other developing countries provide employment to tens of thousands of people in the US. People are needed to work on the docks and to transport imported goods to different parts of the city.
What Should India Do?
If the US government decides to revoke India’s GSP status, it would make India’s exports less competitive, if compared to exports of other countries.
It is believed that even after the tariffs, the cost of most of the goods will increase by only 2-3%, so they can absorb the losses themselves. But there are some industries, whose cost will increase by more than 4%. So, for these exporters, the government should provide fiscal support. Fiscal support includes giving subsidies or tax breaks, to reduce their cost and provide some relief.
In the end, India should resort to economic diplomacy and find a way through negotiation.