The US President Donald Trump has finally come good on his threat by announcing a freeze on preferential treatment to imports from India under the generalised system of preferences (GSP). The Commerce Ministry was quick to make light the eventual impact, saying the GSP benefits added up to only $190 million while India’s total exports to US under GSP stood at $5.7 billion dollar. The development would not have come at a worse time for India. More than its impact on the trade flows; the US measure will have bad optics for India, especially when elections are round the corner.
The heightened tension on the Indo-Pakistan border has renewed the spotlight on India’s relations with foreign countries, especially US. Trump’s decision will certainly fly in the face of the Modi government which did a lot of chest-thumping on its foreign policy successes, most of which is self-acclamatory. In the wake of its attack on terrorist havens inside Pakistan February 26, the government climbed a high diplomatic table and trumpeted its leverage with foreign countries, especially Pakistan’s traditional allies like US and Saudi Arabia.
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Lately, trade ties between US and India have not been easy. Donald Trump is known for his transactional and highly fluid nature. The fact that India has a $22 billion trade surplus with US has not been music to Trump’s ears. The US government’s decision to end the preferential treatment to India is the result of the failure of year-long negotiations between the two countries. To this extent, Trump’s decision on GSP was not completely out of blue. Trade tensions between the two countries escalated last year when US took two consecutive decisions to increase import tariffs on steel and aluminium and place India’s eligibility for GSP benefits under review. India said it would impose retaliatory tariffs on imports from US and even notified the items that would attract tariffs. Frequent talks between the two countries to resolve the impasse did not bear fruits. Recent decisions of the Modi government on FDI and e-commerce have not gone down well with the Trump administration. Complaints from American medical and dairy industries may have hastened the GSP withdrawal decision.
The US decision may also be a strategic step to force India to draw down its significant oil imports from Iran as well as Venezuela. The US move could ignite anti-America sentiment within India and is likely to fuel Opposition critiques of the government. As the elections are approaching, the government may not have enough elbow room to buckle under US pressure. Otherwise, Trump’s decision could well get sucked into the campaign fervor of domestic politics.
India’s exports are not doing well in the international markets. Its share in the overall global trade has been stagnant at about 1.7 per cent. Lack of competitiveness of Indian goods and services may be a reason for the dwindling volumes of exports. Most export-oriented sectors are labour-intensive. When juxtaposed with India’s growing incidence of unemployment, withdrawal of GSP benefits to Indian exports will make a big difference to our job scene. A Centre for Monitoring Indian Economy (CMIE) report said joblessness in February 2019 was 7.23 per cent as against 6 per cent in February 2018. India must not be smug. It should negotiate with the US and try to end the trade impasse before the 60-day window closes. The US government, on its part, should also be practical in its trade deals. It has already messed up its economic relations with China — the second largest economy in the world. Spoiling its trade relations with India-the second largest demography in the world, will certainly not serve its trade interest. Both India and the US should talk to end the impasse.
