Why India needs to reform its trade policy

New Delhi | June 25, 2019 2:17 AM

Modi 2.0 has its task cut out with regard to reforming trade policy.

trade, trade policyIndia has been maintaining a trade surplus with the US for quite some time, which has not gone down well with the Trump administration.

By Geethanjali Nataraj, Gunjas Singh and Shivang Gupta

The Generalized System of Preferences (GSP) is a US trade programme designed to promote economic growth in the developing world by providing preferential duty-free entry for up to 4,800 products from 129 designated beneficiary countries and territories. It is a unilateral and non-reciprocal agreement extended by the US to support a large number of developing countries.

Under this scheme, India was allowed duty concessions on over 3,000 imported products to the US valued at $5.7 billion since 1976, making India the largest beneficiary of GSP. To qualify as a beneficiary developing country (BDC) or a least-developed beneficiary developing country (LDBDC), a country has to meet the required criteria as per 19 USC 2462(b)(2) code, a US law. It includes for a country to not be communist, to support free international trade of vital commodities, to not aid or abet anyone wanted for international terrorism, to ensure worker rights, to abolish child labour and to respect workers’ rights.

In March 2019, Donald Trump announced the US’s intentions to end India’s BDC treatment, following a 60-day notice period. This was put on hold due to general elections in India. With effect from June 5, 2019, India no longer receives preferential treatment as a BDC under GSP. Trump put forward his concerns that as India has not assured the US that it will provide equitable and reasonable access to its markets, it would be appropriate to terminate India’s designation as a BDC. In fact, 11 more countries are under review for termination from GSP.

India has been maintaining a trade surplus with the US for quite some time, which has not gone down well with the Trump administration. India’s trade surplus in merchandise goods with the US stood at $23 billion at the end of 2017. As per US regulations, a beneficiary country must meet 15 discretionary and mandatory eligibility criteria established by Congress to qualify for GSP. These include providing the US with equitable and reasonable market access, combating child labour, respecting internationally-recognised worker rights, and providing adequate and effective intellectual property rights protection. The US believes that India has failed to provide reasonable access to its markets and hence failed to meet the mandatory criteria, making India ineligible for GSP.

According to a report by the US Chamber of Commerce, India remains a challenging market for intellectual-property-intensive investments, even as the bilateral trade relationship continues to improve. The US is keen on getting reasonable access to Indian markets primarily for its three industries—pharmaceuticals, telecom and the dairy industry. It has expressed concerns over the new Draft Pharmaceutical Policy proposed by the Department of Pharmaceuticals, and India’s new telecommunication security requirements. The US commerce secretary Wilbur Ross during his visit to India in May 2019 to attend the 11th Trade Winds Business Forum and Mission had listed out alleged unfair trade practices by India, including on data localisation, price control on medical devices and the higher tariffs on telecommunication equipment. So while patented medicines are excluded from price controls, the draft policy explicitly reserves the right to issue compulsory licences, which does not go very well with foreign pharma companies. On the other hand, in the telecom sector, high tariffs on imported telecom devices have been due to the new security requirements by India. This raises potential WTO-compliance concerns, which may act as a dangerous precedent for governments that may be inclined to use national security claims to undermine global trade. As far as dairy industry is concerned, India had imposed tariffs on imported dairy products from the US during the AB Vajpayee government as India required that dairy products be derived from animals that have never consumed feeds containing internal organs, blood meal, or tissues of ruminant origin. This criterion is non-negotiable to India and had also rejected the ‘labelling solution’ of a red-dot sticker on grounds of protecting cultural and religious sentiments of Indians.

In 2018, India’s total exports to the US were $51.4 billion, with $6.35 billion in exports under GSP—India gained duty concessions of only $190 million in 2017 under GSP, which is rather a small amount relative to the value of exported goods traded with the US. Products that had GSP benefits of more than 3% are most likely to be hit due to GSP. Major sectors that will be impacted include imitation jewellery, leather industry, pharma, chemical and plastics, and processed agri-goods.

According to the ministry of commerce and industry, exclusion of India from GSP and ending the preferential trade status would have a moderate impact on exports, as the trade concession on exports is a small fraction of the total exported volume.

At the same time, India has argued that GSP benefits are “unilateral and non-reciprocal in nature extended to developing countries” and that it is wrong for the US to use it for its own trade benefits. Despite Trump’s decision to stop India’s preferential treatment, India will continue building strong ties with the US, both economic and people-to-people. Before this official announcement, India was considering raising import duties on more than 20 US goods, but it wasn’t done. Commerce minister Piyush Goyal has said that India accepts the decision gracefully and won’t push the US for benefits further. “We will work to make exports more competitive,” he said.
Irrespective of GSP, it is imperative that India needs a strong export culture and needs to be more competitive to survive and get greater access to markets across the world. India needs to focus on diversification of exports and look for new countries and innovative products to ensure that its exports do not decline and its trade deficit remains manageable. However, the government did take retaliatory action and the first response from the new government has been announced—retaliatory tariffs on 29 products. This list was drawn up after the US imposed tariffs on steel and aluminium. This is only the beginning of the multiple challenges India is likely to face on the trade policy front. Large-scale trade reforms are the need of the hour and Modi 2.0 has its task cut out with regard to reforming India’s trade policy.

Nataraj is professor of Economics, Indian Institute of Public Administration, Delhi, where Singh and Gupta are interns.

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