Trade talk: GSP benefits not the issue in Indo-US trade

GSP benefits look odd since India is no longer a poor country, but these offset the advantages China has as well as those that Mexico/Korea get from FTAs with US.

Trade talk: GSP benefits not the issue in Indo-US trade
Trade talk: GSP benefits not the issue in Indo-US trade

Heads of government do not, as a rule, make raucous statements on trade or tariff policy. President Donald Trump is an exception. Trade policy warnings, threats and declarations flow freely from him—typically through tweets. These have been directed mainly against the major trading partner nations of the United States – China, the European Union, Canada, and Mexico. Occasionally, India has also been the object of his ire. A few months ago, in the context of Harley Davidson motorcycles manufactured in the US, he railed against high import tariffs in India. More recently, the US president declared his intention to stop subsidising India and China.

Subsidising India and China? By what he said at a rally in Fargo, North Carolina, it appears that he was referring to the preferential tariff treatment to goods under the Generalised System of Preferences (GSP). The US GSP scheme was introduced in 1976, with India included in the list of beneficiary countries. The mention of China is puzzling as it has never been a beneficiary country.

Non-reciprocity is one of the explicit requirements of the 1979 decision in GATT 1947, which provides the legal basis for preferential treatment of developing countries in GSP schemes, notwithstanding the general obligation to extend non-discriminatory treatment to WTO members. However, from the outset, the US has made the grant of benefit under the scheme subject to policy conditionality and one of the tests applied is whether the beneficiary concerned is providing equitable and reasonable access to its markets. From this perspective, the US government takes up review of the beneficiary government’s practices every year. This year, the US trade representative (USTR) has commenced a review of the GSP eligibility of three beneficiary countries—India, Indonesia and Kazakhstan. The notice published by the USTR mentions that the review has been launched against India based on complaints against trade barriers made separately by US dairy interests and the medical device industry. It is evident that continuation of this benefit is going to involve a process of give and take and president Trump’s recent remarks have raised the stakes. There are several trade issues between India and the US but the GSP review sets up a mini-agenda of three issues for intensive dialogue. India has to be prepared for hard bargaining ahead.

In this context, we need to first evaluate the benefit that India derives from preferential tariffs in the US. All products included in the US GSP get the benefit of duty-free treatment when imported from beneficiary countries. Even though the MFN tariffs of the United States on industrial products have come down considerably after successive rounds of negotiations, duty free access under the GSP remains meaningful, as even low duties make a difference in an intensely competitive world. It gives beneficiaries a significant advantage over China and eliminates the disadvantage vis-à-vis countries like Korea and Mexico, which are the United States’ partners in FTAs. The rules of origin are relatively simple: if the product is not wholly produced in the beneficiary country, there should be at least 35% value addition in
that country.

But the scheme also has a number of features that limit its benefits. First, several categories of products are excluded altogether from the GSP benefits. These include textiles and apparel, footwear, leather wearing apparel, glassware and a number of electronic and steel items considered to be import-sensitive. Thus, most of the main labour-intensive manufactures, in which India has an export interest, are excluded from the purview of the US GSP scheme. Second, even for products included in the scheme, the benefit is limited by the competitive need limitations (CNLs). An individual beneficiary country gets excluded from the benefit once its exports of a product exceed a certain value limit in a calendar year ($185 million in 2018) or its share equals or exceeds 50% of the GSP imports of that product from all beneficiaries. In subsequent years, if the share in imports of an excluded beneficiary falls below the CNLs, the benefit can be restored for that beneficiary, but the process is not automatic and many times the USTR decides to continue the exclusion. Further, the law bars waivers for products that have a large or dominant share of GSP imports, and even provides for the revocation of waivers in such cases. The CNLs can be waived if the total imports of a product in a year are less than a certain value considered de minimis ($24 million in 2018).

As regards the benefit of the US GSP for India’s trade in recent decades, there is reason to be more than mildly positive about the assessment. US total imports of merchandise from India have increased roughly three-fold from $16.4 billion in 2000 to $48.7 billion in 2017, while the GSP imports were more buoyant, rising from $1.1 to $5.7 billion, or five times, during the same period. India’s share of US imports under the GSP from all beneficiaries has also increased impressively. From 6.9% in 2000, India’s share has grown to as much as 26.7% in 2017. India has been the largest beneficiary developing country every year continuously from 2011. Some of the products that have benefited from the preference and continue to do so are auto components, machinery and mechanical appliances and electrical machinery, while some others, like jewellery, have benefited in the past, with imports touching a high of $2.4 billion, before their GSP treatment was curtailed under the CNLs. Clearly, the GSP has helped to push forward India’s exports to the United States. In the trade dialogue, India should not be content only with the continuation of its GSP beneficiary status, but should up the ante by asking for the restoration of the benefit for the excluded jewellery tariff lines in which imports into the US have been below the statutory red lines of the CNLs in recent years.

In the GSP hearings before the USTR, the US industry interests have focused on the certification requirement related to livestock feeding practices, which impede market access for dairy products. The concern in India regarding the use of animal products in the livestock feed springs from religious sentiment, but the US industry argues that the Indian government’s demand does not have a scientific basis in addressing a risk for either food safety or animal health. The use of labelling has been suggested to resolve the issue.

On medical devices, the US industry contends that the price control that the government has imposed on coronary stents and knee implants have severely impacted their sales and caused them to withdraw their products from the Indian market. Here, too, a suggestion has been made that instead of capping the price at the retail level, the trade margin should be capped at each point of sale, from manufacturer to distributor to hospital to patient. The success rate in the India-US bilateral trade dialogue has not been very high in the past. Issues on the bilateral agenda have remained trapped in discord for long periods. Is there a basis for hoping that things will be different this time?

The author is a Professor, ICRIER and former deputy director general, WTO

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