n February 4, US President Donald Trump announced that he intended to end India’s preferential trade treatment under Generalised System of Preference (GSP) that allows products worth $5.6 billion enter the American market duty free. He explained that he was forced to take the decision because even after intensive engagement between the Governments of the USA and India the latter did not assure that it would provide equitable and reasonable access of US goods to its markets. Besides India, the US would also terminate the GSP facility to Turkey on the ground that it has improved its economy a lot during the last four-and-a-half decades.
Now let us see what GSP is. It is a trade programme designed by the US to promote economic growth in the developing world by providing preferential duty free entry for up to 4,800 products to 129 of designated beneficiary nations. Its objective is to promote development of the beneficiary countries so that they increase and diversify their trade with the US. The GSP was instituted January 1, 1976 by the Trade Act of 1974 of the US. Among the 129 countries, India is one. As of today, India is the largest beneficiary of the GSP programme. India exported goods worth $5.6 billion during 2017 under the GSP as against the total export of $48 billion to the US.
Ending its participation would be the strongest punitive action against India since Trump assumed office in 2017. Trump’s decision could be seen as major setback in the India -US bilateral relationship in field of trade and economy. As many as 3,700 products get GSP benefit but India exports around 1,900 items. Reacting to Trump’s move, India’s Commerce Secretary said that the country exports goods worth $5.6 billion under GSP and duty benefit is only $190 million annually. He further said India mainly exports raw materials, intermediate goods like chemicals, engineering parts, jewellery etc. Hence, GSP withdrawal will have minimum effect on India’s export. The benefit in absolute sense and percentage of trade involved is very minimal and moderate. But even if it may not affect the export earnings of the country, individuals in the Micro, Small and Medium Enterprises (MSME) sector would suffer.
The US demands for relaxation in norms for export of medical devices and dairy products American diary and medical device industries allege that India is creating trade barriers that create serious negative effects on US commerce. On the other hand, India argues that its position is based on religious, cultural and moral grounds. India is committed to respect the religious and cultural beliefs of its people. Several countries export dairy products to India meeting India’s requirements. India requires that dairy products be delivered from animals which have never consumed any feeds containing internal organs, blood meal or tissue of ruminant origin. India also argued that import barrier on diary product is due to certification and not market access as it allows import from Australia and Switzerland. India advice to US is to follow the process. As far as medical devices are concerned, India says that it is committed to provide its citizens with equitable and affordable access to medicines and medical devices.
Since India is predominantly exporting intermediate and semi-manufactured goods to the US under GSP, it has helped American companies to be cost-effective and competitive in downstream industries, which helps the US to export more. Some of are the opinion that there is scope for negotiation between India and the US to find out amicable solutions in the interest of both the countries. Of course, before scraping the GSP, the US will serve a 60-day notice to India. If the US serves a notice to India to scrap the GSP during the electioneering period, this may give an opportunity to the opposition parties to criticise the Modi government for not being able to keep bilateral trade relations with the Trump administration. Moreover, since trade ties between India and China are on the rise, the US is indirectly putting pressure on India to act on the contrary.
There is every possibility for talks between India and the US for an amicable solution. Even if it fails, the scraping of GSP will not have much effect on bilateral trade between India and the US. Of course some entrepreneurs in the MSME sector may suffer, but the government may make some alternative arrangements for their rehabilitation. There will hardly be any perceptible negative effect on the Modi government and BJP in their 2019 election campaign.