Will Trump's move to deny India duty free exports work? Here's a shiny clue

In expelling India, the largest GSP beneficiary, Trump is making a declaration: While its trade relationship with New Delhi may not be as frayed as it is with Beijing, it's certainly fraught

President Donald Trump has decided that India’s failure to provide “equitable and reasonable” access to its market means it’s no longer eligible to export certain goods duty-free to the US. 

The 43-year-old US Generalized System of Preferences, the privilege India now loses, is part of a shared commitment by developed countries to promote export-oriented growth in emerging economies. Washington also has a long history of using it to make trading partners fall in line.

The most high-profile case is Chile in the 1980s. Once the US cut the nation’s duty-free access under GSP, support for General Augusto Pinochet’s repressive regime dried up among the wealthy. As labor-law researchers Lance A. Compa and Jeffrey S. Vogt wrote: 

Chile’s economic elites could live with a government that was an international pariah politically, as long as its free-market, export-oriented policies stayed intact and their profits kept rolling in. But when exports to the United States became threatened by General Pinochet’s labor policies, business interests began softening their support for the dictatorship. In 1991, with a new democratically elected government in place, the most abusive features of the labor code removed, and an end to physical violence against trade union activists, Chile’s GSP benefits were restored.

The latest action, however, isn’t about improving workers’ conditions or enforcing property rights. In expelling India, the largest GSP beneficiary, the Trump administration is making a declaration: While its trade relationship with New Delhi may not be as frayed as it is with Beijing, it’s certainly fraught. The last straw, as my colleague Mihir Sharma wrote, may well have been India’s aggressive moves against US tech giants, which restricted online sellers such as Amazon.com Inc. and gave Indian tycoon Mukesh Ambani’s e-commerce ambitions a leg up. 

Will this disqualification sway Indian policy? My guess is it won’t.

In a 2011 paper, trade-policy researchers Anwarul Hoda and Shravani Prakash analysed the impact of “the proclivity of the US administration to leverage the GSP program to achieve its economic and political objectives.” They found that with major developing-country trading partners “the reciprocity requirement has proved to be ineffectual.” In 1992, the US stopped India’s preferential access for chemicals and pharmaceuticals in an effort to improve intellectual-property protection. New Delhi shrugged off the pain, and waited for a World Trade Organization agreement before amending its patent law, the researchers noted.

In many instances, a certain imported item has exceeded the US limit for preferential access — set at $75 million in 1996, and rising by $5 million annually. The exporting country then seeks a waiver from duties, which it either doesn’t get or loses again. I extended the analysis by Hoda and Prakash of two such Indian exports — gold necklaces and neck chains; and jewelry made with a precious metal other than silver.

Sales do drop when a trinket enjoying zero-duty access is slapped with a US tariff of 5.5 per cent. Over time, though, exporters adjust, provided consumer tastes and incomes are supportive. Take Indian-made precious-metal jewelry. It’s hard to say what part of the 613 percent jump in US imports between 1998 and 2006 came from a reinstatement of GSP privileges in 2001, and what role the wealth effect of red-hot property markets played. Shoppers’ preferences must have been important, because gold chains — facing a similar tariff environment — showed zero growth. Similarly, Indian jewelry shipments into the US since the 2008 subprime crisis rose 27 percent, even after tariffs were reimposed in 2007. Gold necklaces are still 60 percent down, though.

Since general American tariffs are fairly low now, India can afford to ignore the threat to its $5.6 billion of US exports. Most countries become ineligible for US largess, anyway, as their income levels cross the developed-economy threshold of $12,055 per capita. (Turkey, which is also getting kicked off the list, is almost there.) The average Indian is still 85 percent below that benchmark.

So the US move is clearly retaliatory. However, labor-intensive industries like footwear and textiles don’t enjoy US preferential benefits. To that extent, the risk of widespread job losses ahead of crucial Indian general elections will be mitigated.