India US Trade Dispute: US to Suspend India’s Preferential Tariff Status

March 7, 2019 Posted by India Briefing Written by Vasundhara Rastogi Reading Time: 3 minutes

In a major setback to India-US trade relations, US President Donald Trump announced his decision to withdraw India’s name from the Generalized System of Preferences (GSP) program on March 5, 2019. The GSP gives businesses from designated beneficiary countries, a preferential or duty-free access to US markets.

Washington has accused India of raising a wide array of trade barriers that prevent American businesses from getting equivalent, if not reasonable, access to Indian markets.

Trump has also repeatedly slammed India for its “very high tariff”.

Rejecting these claims, India says that its import duties are not high and are within the norms of the World Trade Organization (WTO).

How did the GSP benefit India?

India was the biggest beneficiary of America’s GSP scheme in 2017, which gave preferential access to 1,900 out of 3,700 Indian products. In the fiscal year 2018, goods worth US$5.6 billion out of a total of US$49 billion were exported under this scheme.

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The GSP allowed market access at nil or low duties for several Indian products. These include machinery and parts, such as spark ignition, turbines and pipes, parts of generators, and cycles; chemical pesticides; made-ups (pillow and cushion cover); and women’s woven dresses.

How does the GSP suspension impact India-US trade ties?

Impact on India

Downplaying the business impact, India claims that the withdrawal of the GSP scheme will not have a significant impact on its exports to the US, as the benefits to exporters add up to just about US$190 million annually.

But, trade experts disagree. In their view, the adverse implications on Indian businesses are likely to be high, as US$5.6 billion worth of Indian exports will suddenly lose competitiveness in the US market for engineering goods, chemicals and pesticides – particularly when compared to countries like Mexico which enjoy a free trade deal with the US.

This could impact employment in the country, as India predominantly exports intermediate and semi-manufactured goods from small and medium enterprises (SMEs) that are mostly labor intensive.

Impact on the US

GSP boosts the cost effectiveness and price competitiveness of American companies.

Cutting off duty-free access to India can thus impact US importers more adversely – especially manufacturing units that use cheaper inputs from India, which were covered under the GSP. Identifying new suppliers with the same quality and price point could be time-consuming for such industries.

The withdrawal of GSP benefits will also hit the import diversification strategy of the US, which is keen to replace China as the main supplier to other developing countries of merchandise goods.

According to USTR estimates, India is the 11th largest trade surplus country for the US and enjoyed an annual trade surplus of US$21 billion in 2017-18.

Retaliatory measures from India expected

According to media reports, India is weighing its options on proceeding with retaliation against last year’s US tariff hikes on Indian steel and aluminum products.

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Since first announced in June 2018, India has deferred the implementation of these retaliatory tariffs multiple times due to ongoing trade talks. The latest extension is set to expire on April 1, 2019.

Upon implementation, the tariff hikes could impact US$10.6 billion worth of US exports to India, including almonds, apples, and phosphoric acid.

India might consider approaching the WTO to find a solution to the trade tiff – within 60 days before the GSP annulment kicks in. This could involve negotiating an agreement with the US on a bilateral package that resolves issues on providing greater market access in the agriculture and information technology sector and government price controls on drugs, among other concerns.

Laws on data localization, price control regulations on drugs and medical devices, such as coronary stents and knee implants, as well as market-withdrawal restrictions, and the limited access to India’s dairy market have been long-standing concerns for American businesses.

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