Will India's exports be hit if US withdraws its preferential trade status?

India's GSP eligibility had been under threat ever since it was clubbed with Indonesia and Kazakhstan to be scrutinised by a sub-committee under the United States Trade Representatives

What is the Generalised System of Preferences (GSP)?

The GSP is the United States’ largest and oldest trade preference programme. Established by the Trade Act of 1974, the GSP promotes economic development by eliminating duties on thousands of products when imported from one of the 120 designated beneficiary countries and territories. Rolled out at a time when the US economy was booming, the programme sought to expand and cement the country’s trade relations with numerous nations across the global south, including the vast majority of African nations struggling with economic issues after independence. 

At the height of the cold war, the scheme projected American power across the globe and aimed to bring nations at risk of courting the USSR and allied nations into its economic fold. On Monday night, India was made non-eligible to receive GSP benefits.
 

Why should India bother?

India has consistently remained the largest beneficiary nation under the scheme. In the last financial year, it received a total of $190 million as duty benefits. Upwards of 3,700 Indian products are entitled to receive GSP benefits. In essence, spread across tariff lines and categories, this enables India to access the US market at zero duty costs for thousands of goods. 

The country exported goods worth $5.6 billion to the US in 2017-18 through the scheme, representing 11 per cent of the total exports to the US, pegged at $47.87 billion. It is a significant catalyst for boosting exports state bound in multiple sectors such as inorganic and organic chemicals, agricultural and marine products, among others.

What does the US want?

In November 2018, the US president had signed an executive order to end the duty-free status of 50 Indian exports to the US. The country has attracted the wrath of the current Donald Trump administration which has repeatedly pointed to the large trade deficit run up by the US with India. America’s current trade deficit stands at $ 21.2 billion, up from $ 16.63 billion five years back.

Since China does not figure in the list of GSP eligible list, the United States Trade Representatives (USTR) Office has sharpened its attacks against India, which it feels should not seek benefits intended for less developed economies.

India’s GSP eligibility had been under threat ever since it was clubbed with Indonesia and Kazakhstan to be scrutinised by a sub-committee under the USTR. The sub-committee came down heavily on New Delhi for continuing to take advantage of liberal trade policies while restricting market access for US goods.
 

Has India benefited from GSP?

The government data suggests India managed to export only 1,900 items through the GSP, showing the nation’s inability to build up trade competitiveness. Most export items are raw materials and intermediary goods. India’s exports have helped in cost effectiveness and price competitiveness of US downstream industry. On the flipside, the GSP withdrawal is also expected to impact the competitiveness of many manufacturing sectors in the US and will hit US consumers at the same time, according to trade experts.

Will India’s exports be adversely affected now?

Since GSP exports account for only 0.4 per cent of all exports, its withdrawal is expected to have marginal impact, according to the largest export body, Federation of Indian Export Organisations. This is echoed by the government as well. Some others believe that since export orders to developed markets such as the US have cutthroat competition and margins have remained depressed across sectors, major export share is at stake. Since other developing nations are operating on similar margins and costs, entire chunks of the export market may be lost.

Where does this leave India-US trade relations?

The first casualty of the latest developments is widely expected to be the mutually acceptable trade package between the nations, under negotiation for months. The package has been in the works for the past one year and trade officials have met as many as five times to hammer out a deal that provides an amicable solution to grouses from both sides. 
 

On the other hand, India may also announce retaliatory tariffs. Officials also feel that India can't yet again delay the imposition of the already announced higher duties on 29 key imports from the US. These have been deferred a record six times. Expected since June last year, the tariffs are set to go live from April 1.