Sample Lecturette 9: India-USA: Generalised System of Preference | Preparation Tips for SSB Interview - CDS PDF Download

Indian exporters suffered a major setback when, starting from 5th June 2019, the Trump administration decided to withdraw the export incentives offered to India through the Generalized System of Preferences (GSP).
The GSP is a special treatment given by the US government to its exporters from developing countries, including India.

Generalised System of Preference

Under the GSP, Indian exporters enjoyed the benefits of duty-free access to the United States for nearly 1937 products, including chemicals, gems, and textiles.
In 2017, India received the highest subsidies amounting to $5.6 billion under the GSP. The scheme undergoes an annual review to determine the eligible beneficiaries and covered products.

What is GSP?

As mentioned earlier, GSP is an arrangement that provides favourable terms for developing nations, such as India, to import goods from developed countries like the US, EU, UK, Japan, etc., at highly concessional or even zero tariffs for many products.
Introduced by the United States in 1976, GSP covers imports from around 120 designated beneficiary countries and territories.
The primary aim of GSP is to support growth and provide developing countries with an opportunity to enhance their economies and alleviate poverty through trade.
In return, developed countries like the US benefit by improving their competitiveness in the global market by reducing the costs of imported inputs used by their businesses to manufacture goods in America.

Reasons for GSP:

• The Trump administration decided to end the Generalized System of Preferences (GSP) for all developing countries receiving GSP benefits. This cancellation affected 94 products, mainly agricultural and handicraft items. The withdrawal became effective on 1st November 2018.
• The primary reason behind the US withdrawal of GSP from India is the substantial annual trade surplus of US $22.9 billion, which President Trump believes is negatively impacting the US economy.
• This trade surplus occurs when the total value of goods exported from India to the United States exceeds the value of goods imported by India from the United States.
• A trade surplus also leads to an inflow of national currency from foreign markets. Consequently, it strengthens the monetary value of the Indian Rupee compared to the US Dollar.

Reasons for the trade deficit:

Firstly, President Trump labels India as a "country with very high tariffs" and often highlights the example of Harley-Davidson motorcycles being exported to India.
Secondly, the Trump administration believes that India has implemented various trade barriers that severely affect US trade. They also feel that India has not taken sufficient measures to meet the criteria of the GSP program.
As a result, the Trump administration seeks the following:

• Increased market access concessions from India, particularly for dairy and pharmaceutical products.
• The US pharmaceutical industry regards India as its largest market, and it opposes India's efforts to promote the domestic production of affordable generic medicines for various new diseases.
• Elimination of restrictions on storing data in international servers, cloud computing, mandatory access to source code, and other policies. These measures are seen as hindering the growth of domestic digital platforms and industries in India.

Implications for India

• India will be significantly affected by the removal of GSP. In the 2017-18 period, the country benefited from preferential tariff treatment on imports, which accounted for around 12 percent of its total exports valued at $48 billion.
• The withdrawal of GSP will impact exports worth $6.35 billion from India, resulting in annual net losses of approximately $260 million for exporters.
• Industries such as imitation jewellery, leather, agriculture, auto parts, chemicals and plastics, and pharmaceuticals, which are already facing a severe crisis, will experience a further deterioration due to the absence of GSP.
• In the future, we can expect many more sectors, including the services sector, which has over $28 billion worth of exports to the US, to be significantly influenced.
• However, according to the Washington Post, 90 percent of Indian exports to the United States already face regular tariffs, so the US will not be affected by the exit from the GSP program.

Steps that India can take

India should immediately initiate a meaningful dialogue with the US to explain that this decision goes against the principles of non-discrimination between developing countries outlined in the WTO Charter.
Furthermore, considering India's strategic partnership with the US, it is important to highlight that the country has seen a 550% increase in arms exports from the US in 2017, making it the second-largest supplier of defence hardware and equipment to India.
Therefore, it is necessary to emphasize that India is taking steps to reduce its trade surplus with the US.

Additionally, India can implement the following measures to safeguard its interests:

• Provide support to products that have experienced significant GSP losses by extending rebates on state and central taxes, ensuring that the market for these products is not lost.
• Explore other trading partners such as China and Russia. However, India will need to address other challenges, such as the mounting trade deficit with China ($53 billion) and the ongoing border dispute.
• Regulate the maximum prices of pharmaceutical items manufactured in India, such as heart stents and knee implants.

Conclusion:

This significant setback to Indian exports has arrived at a critical moment when oil expenses are increasing, the rupee is declining against the dollar, unemployment rates are at their highest, there is a crisis in the farming sector, foreign investments have decreased, and the Indian economy is struggling due to the global economic slowdown.
The Modi government must tackle this issue with great creativity and prevent it from becoming another obstacle on the path to achieving the "ache din" that the people of the country are eagerly anticipating.