On Monday, March 4, 2019, US President
Donald Trump notified US Congress of his intent to terminate Generalised System of Preferences, or GSP, benefits to India and Turkey. Trump has effectively opened a new window in his trade wars.
This time, India is clearly the target. Trump, who has vowed to cut US trade deficits, wants to end what he sees is the preferential trade treatment for India that allows duty-free entry of exports worth $5.6 billion to the US.
Of course, this is not the first time that India has become the subject of his ire. He has repeatedly complained about India for its high tariffs. The US Trade Representative’s Office, which is responsible for developing and coordinating American international trade, has in the past accused India of bringing in a “wide array of trade barriers that create serious, negative effects on United States commerce”.
“I am taking this step because, after intensive engagement between the US and the government of India, I have determined that India has not assured the US that it will provide equitable and reasonable access to the markets of India as set forth in section 502(c)(4) of the Trade Act (19 USC 2462(c)(4)),” Trump said on Monday.
The changes announced by Trump will take effect from May 3, 2019 — 60 days after the notification and will be enacted by a Presidential Proclamation.
What Does This Mean For India?
On Monday morning, commerce secretary
Anup Wadhawan has said that the withdrawal of GSP benefits to India will have a minimal and moderate impact. The total GSP benefits amounts to about $190 million on overall trade of $5.6 billion between India and the US.
While reiterating India’s deep-rooted ties with the US and continuing trade talks on all issues, he said the dairy issue raised by the US is not negotiable but India was willing to ease norms, and the country could not have compromised on the affordability of medical devices.
“The government has to be conscious of its developmental and public welfare interests. Our effort was to balance affordable prices of medical devices without compromising on public welfare,” said Wadhawan.
Earlier, with effect from November 1, 2018, the US government had revoked duty-free concessions on import of 94 products under the GSP programme. At least 50 Indian products worth $70 million, mostly from handloom and agriculture sectors, were impacted.
What is GSP?
Under Section 501/502 of the Trade Act of 1974 (as amended) relating to the United States GSP programme, certain products (there is a list of products eligible for duty-free treatment when imported from GSP beneficiaries) can enter the US duty-free if beneficiary developing countries meet the eligibility criteria established by Congress.
GSP criteria include, among others, respecting arbitral awards in favour of US citizens or corporations, combating child labour, respecting internationally recognised worker rights, providing adequate and effective intellectual property protection, and providing the US with equitable and reasonable market access.
What triggered the GSP withdrawal?
It is unclear what heralded the end to the intensive talks between India and the US. As part of the GSP Annual Review, USTR conducts in-depth reviews of beneficiary countries’ practices in response to petitions from interested parties and in this case it was the complaints from the medical devices and dairy industries.
The US launched an eligibility review of India’s compliance with the GSP market access criterion in April 2018. India has persistently engaged with the US for continuation of the GSP and also submitted pre-hearing as well as post-hearing comments.
The USTR has stated that India has implemented a wide array of trade barriers, the most contentious, however, was that related to the expansion of price capping/trade margin rationalisation of a wide array of medical devices.
India, after a series of price control measures for drugs, had over the last three years moved its attention to price controls on medical devices. In February 2016, Cardiac Stents were put under price controls. In August 2017, Knee Implants met with the same fate. More recently, the Indian government was taking steps to fix caps on trade margins for many medical devices.
However, in doing so, an apparent differential treatment was being proposed by domestic and global players. For domestic companies, the base was proposed as the Price to Distributors (PTD) while for global manufacturers that mostly import, the base was proposed as the Landed Cost.
A second ask from the global medical device industry was to withdraw price controls on cardiac stents and knee implants and treat them at parity with respect to other medical devices by subjecting the products under a trade margin rationalisation regime.
With the imminence of general elections, such a move would have been politically challenging for the Indian government and therefore the resultant stalemate.
America First Policy
This decision on GSP withdrawal must be seen against the backdrop of President Trump’s aggressive stand on ‘America first’ policy. A key theme of Trump’s election campaign in 2016 was the loss of American jobs from the alleged unfair global trade rules.
In January 2017, the US withdrew from the Trans-Pacific Partnership (TPP) and NAFTA. The newly minted
US-Mexico-Canada Agreement effectively repositioned the trade policy in favour of the US and will likely be the blueprint for new bilateral agreements with trade partners (Japan, EU, UK et el).
In trade wars, like in all wars, no one comes out unscathed. In January 2018, Trump accused
China of Intellectual Property Rights (IPR) theft and other issues and slapped tariffs on at least $50 billion of Chinese goods. China had imposed retaliatory tariffs.
Deploying punishing tariffs to win concessions gave the US remarkable leverage, but it also significantly impacted American farmers and businesses with exposure to China. Negotiations with the Chinese are continuing, and it is possible that the US may still extricate concessions from China. While China is showing flexibility, the divide on key issues remains wide.
It will be interesting to see what retaliatory actions India takes in response to the withdrawal of GSP. The timing could not have been worse for the Indian government.
Interestingly, the action took place even as the Indian
government further deferred retaliatory tariffs against 29 American products till April 2, 2019, in response to the March 2018 US imposition of heavy tariffs on specified imported aluminum and steel articles. Krishna Sarma is managing partner at Corporate Law Group.