The move will put extra burden of $290 million per year on US items exported to India.
With US President Donald Trump on Wednesday announcing plans to end preferential trade treatment for India under the Generalised System of Preferences (GSP) post a 60-day notice period, speculation is rife about how hard India will be impacted and its response to the move. Here's a look at exactly what is at stake:
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.
India was the largest beneficiary of the programme in 2017 with $5.6 billion worth of exports to the US being given duty-free status, according to a Congressional Research Service report issued in January. According to The Washington Post, while the US remains India's top export partner, receiving more than $48 billion in goods from the country in 2017, just over 10% of imports from India benefit from the programme, which was to expire in December 2020. Turkey, the other new target in Trump's trade wars, was the fifth largest beneficiary with $1.7 billion in covered imports.
In his letter to Speaker of the US House of Representatives Nancy Pelosi signalling his "intent to terminate" trade benefits, Trump said he was determined that New Delhi had "not assured" the US that it would "provide equitable and reasonable access" to the markets of India.
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. In addition, Trump has repeatedly called out India for high tariffs. In April 2018, the US launched an eligibility review of India's compliance with the GSP market access criterion.
What will be the impact on India?
The bilateral trade between India and the US stood at $74.5 billion in 2017-18, up 15.5 per cent from $64.5 billion in the previous fiscal. However, the numbers are skewed in India's favour. For instance, India reportedly imported items worth $26.3 billion from the US in FY19 (April-December) but posted total export of $38.8 billion.
According to Commerce Secretary Anup Wadhawan, "GSP withdrawal will not have a significant impact on India's exports to the US" since the duty benefit, or savings on import tariffs, amounts to only $190 million annually.
Moreover, Monideepa M Mukherjee, a spokeswoman for India's commerce ministry, told Associated Press that 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.
"India was getting tariff preference on 5,111 tariff lines [or products] out of 18,770 tariff lines in the US. However, on only 2,165 tariff lines, the tariff advantage was 4 per cent or more," said Ganesh Kumar Gupta, the president of the exporters' body. "While we hope that the exporters would be able to absorb the duty loss where it is 2-3 per cent, we need to provide fiscal support to those products where GSP tariff advantage was significant [higher] particularly in the labour-intensive sector."
According to him, 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.
What will be India's next move?
The buzz is that India may take a firm stance by imposing retaliatory tariffs on the US from the next month. If this comes to pass, a total of 29 items imported from the US, including walnuts, lentils, boric acid and diagnostic reagents, will face higher duties, cutting benefits to the US exporters. The move will put extra burden of $290 million per year on US items exported to India.
According to Wadhawan, the Trump administration decided to go ahead with tariff cut despite the fact that India was working on an "extensive and reasonable" trade package that covered all concerns related to bilateral trade with the US on sectors such as medical devices, dairy products and agricultural goods. Incidentally, the review of GSP benefits in the US was initiated on account of representations by dairy and medical industries.
He also refuted US' claims of "high tariffs" in India, adding, "Our tariffs are very consistent with the bound rates that we are entitled too in the World Trade Organisation".
