India has to end the cat-and-mouse play and focus on nurturing its long-term strategic relationship with the US.
We were hoping against all hope. The message was loud and clear but we were turning a deaf ear to it. After months of simmering tensions between India and the US on the trade front, the US has just announced its decision to withdraw trade concessions under the Generalised System of Preferences (GSP). India was slammed for being a “a very high-tariff nation” denying the US “equitable and reasonable access to the markets of India”. At the heart of the dispute lies the soaring trade deficit in the US and key sectors like medical devices, agriculture and dairy products which were identified as trade barriers.What added fuel to the fire was India’s recently announced changes to its e-commerce rules that are perceived to be detrimental to American giants such as Walmart and Amazon.
This tit-for-tat action has clearly spelt out two things. Firstly, the world will not take India’s rising protectionism lying down. If India closes its markets, it will also find doors closed to its exports. Second, the US is using GSP to leverage tariff reforms across sectors. The larger questions are: who will blink first and who has got the stomach to suffer the setback?
It is a no-brainer that withdrawal of India’s GSP status is a cause for concern on the economic and trade front. India has been the largest beneficiary of the program and the US remains India’s top export destination. Given the forthcoming elections, the government has cleverly tried to downplay the impact and stated that the decision would not have a “significant impact” on exports as the “economic value of GSP benefits are very moderate”. They say the impact of removing GSP concessions on Indian products is miniscule, amounting to only $190 million in tariffs on a total export amount under GSP of $5.6 billion to the US. The withdrawal of trade concessions, though, is a cause for concern. The government may respond mildly to the move, but it knows the impact is much larger.
India is one of the few countries that has a trade surplus with the US. Although the products impacted by the withdrawal of tariff concessions may be limited in number, the risk of losing competitive advantage and integration with global markets are wider. Further, smaller, labour-intensive industries that benefit from duty-free entry into the US market will be hit most as the same will significantly hit employment.
In an attempt to reduce trade barriers set by India, the US has overlooked the GSP benefits that were accruing to them such as global competitiveness, import diversification and lower manufacturing costs. Since most of the 3,500 Indian products imported by the US under the GSP are raw materials, intermediaries or semi-manufactured goods, US industries could maintain their domestic and export competitiveness. Thus, arguably, benefits to US companies and consumers offset the relatively small concessions to India under the GSP regime.
India was touted to gain from the US-China trade war. The financial markets were doing well, partly because of India becoming a prospect for trade vis-à-vis China. However, the non-GSP status for India does not promise sustained growth. So who could be the real winner? China, which maintains a trade surplus with both India and the US, could benefit from new opportunities. Exports to the US could potentially be replaced by Chinese ones as several products such as bulk industry bags, plastics, etc, will become less competitive against Chinese products without GSP benefits.
The GSP annulment kicks in within 60 days and, meanwhile, India has several options that it can explore. It can drag the US to the WTO like it has done in the past with the EU in 2002, the case in which it came out victorious. It can also go down the tit-for-tat route by imposing retaliatory tariffs to US tariffs on steel and aluminium imports which it has deferred multiple times. The retaliatory approach, although tempting, can have a cascading effect on other aspects of the India-US relationship and tarnish India’s global image as a leading investment destination.
If we look at GSP withdrawal from a bird’s eye view, the economic impact may be inconsequential. However, strategic relationships are larger than nitpicking isolated transactions. It is about valuing relationships and creating long-term stability, trust and credibility. India’s firm stance is that GSP withdrawal is unjustified as, historically, GSP has been a non-reciprocal preferential treatment and linking it with market access and tariff is against the basic tenets of GSP. Although the argument is irrefutable, why are we missing the larger picture? Diplomacy as a ‘package deal’ must be seen in a broader scheme of things, fostering mutual agendas and benefits. Although the margin of profit through GSP may be small, and could possibly be ironed out in the future, the move comes at a sensitive time when India relied upon the US to put international pressure on Pakistan and the Modi government is trying to assert its foreign policy prowess and military strength. India has made a quantum leap in the ‘trading across border’ parameter of the Ease of Doing Business rankings released by World Bank, however, its protectionist measures on e-commerce rules and data localisation norms played a big role in the US’s ‘provocation for inaction’. This provocation for inaction is not a novel concept. Courts, such as the National Green Tribunal, have been imposing serious consequences on the government for inaction through bans, penalties, etc, for eons.
India needs to stand true to its policy of a liberalised economy and participate in global trade. It needs to be cognisant of the fact that the current scenario affects not only trade in specific sectors but also diplomatic relations. Trade wars with major economies like the US does not augur well with India’s attempts to project itself as a leading investment destination. It is time to end the cat-and-mouse play and focus on nurturing our long-term strategic relationship with the US.