A Broader Picture to End of Special Trade Treatment between India and US

Introduction

We live in a global marketplace. We are all linked by international trade, and the volume of that trade has grown dramatically in the last few decades. Trade is about mutually beneficial exchange but sometimes the developing countries are given some concessions so that they get equal opportunity to participate in global trade. One such benefit given to India by the  USA was called preferential trade status. Preferential trade treatment for India is given under the Generalized System of Preferences (GSP). India had been the largest beneficiary of this scheme which allows India to export nearly 2,000 products including auto components and textile materials to the U.S. duty-free. The proclamation issued by the White House also subjects solar cells and washing machines from India and Turkey to duties imposed by Trump in 2018. Both nations had been exempted because of their status as developing countries.[1]But the US ended preferential trade status for India and terminated India’s designation as a beneficiary developing country effective from 5th June 2019, because India had failed to provide adequate access to its markets, according to the USA and in trade, as already said both countries should benefit even if preferential trade status is given to one country. The move is the latest push by the Trump administration to redress what it considers to be unfair trading relationships with other countries. India had said the move would have a “minimal economic impact”, but it comes at a time of lower growth and record unemployment in the country(India).[2]

What is the Generalized System of preference?

The Generalized System of Preference (GSP) is the biggest and oldest US trade preference program and is intended to advance monetary development by permitting duty-free passage for thousands of products from designated beneficiary nations.

GSP Criteria

Under the GSP program, almost 2,000 items including auto parts and textile materials can enter the US obligation free if the beneficiary developing nations meet the qualification criteria built up by Congress.

India was the largest beneficiary of the program in 2017 with USD 5.7 billion in imports to the US given duty-free status and Turkey the fifth largest with USD 1.7 billion in covered imports, according to a Congressional Research Service report issued in January.

The GSP criteria incorporate, among others, respecting arbitral awards in favor of the US natives or incorporations, combating child labor, respecting globally recognized worker rights, giving satisfactory and effective intellectual property protection, and providing the US with fair and reasonable market access. Nations can likewise be moved on from the GSP program contingent upon elements identified with financial advancement.[3]

Now the question is why have the tariffs been imposed?

The tougher policy was affirmed by President Trump after the US International Trade Commission (ITC) discovered local producers were being hurt by cheaper imports. Manufacturing companies – Whirlpool, a US-based producer of the clothes washer, and the solar firms Suniva and Solar World Americas – had complained to the ITC and it found to support them. The ITC said that China had been selling “artificially low-priced” solar components in the US. This is also one of the reasons for the tariffs imposed by the USA on imports.

Impact on India?

Indian legislators cautioned of a potential monetary emergency. Among the ventures, most in danger would be agriculture, vehicle parts, and pharmaceuticals. Indian exporters may have forgone advantages worth $260 million after the U.S. elimination, as per the Federation of Indian Export Organizations.[4]

Tata’s auto business could also feel the heat. Tata owns Jaguar Land Rover which manufactures in the United Kingdom and exports to the United States so is expected to take a big hit from auto tariffs. [5]

So, we see by removing the preferential trade status from India, Indian exporters would be affected as now for exporting goods to the USA, they have to pay the tariff on their products which they would be exporting to the USA. This would incur additional cost to Indian exporters which they did not have to pay when India had the preferential trade status. This would affect the trade relations between India and the USA.

Further, the inflow of foreign exchange is also affected since the export prices would be increased, so exporters might reduce the exports to the USA.

India has just struck back against the tariff hikes – it has raised import obligations on a scope of merchandise, including walnuts, almonds, and shrimp, a significant number of which are purchased from the US. This would lead to trade-related tensions between India and the USA as it is between the USA and China.

Let’s take a brief look at the USA and China trade tension to understand the above point.

In  2018, Donald Trump set a 30% tariff on foreign solar panels, which were to be diminished to 15% after four years.[6] China, the world leader in solar panel manufacture, decried the tariffs.[7]That same day, tariffs were put on washing machines for the first 1.2 million units imported during the year. In 2016, China exported $425 million worth of washers to the United States.[8] March 22, 2018, Trump asked the United States TradeRepresentative (USTR) to explore applying tariffs on US$50–60 billion worth of Chinese goods. More than 1,300 classification of Chinese imports were listed for tariffs, including aircraft parts, batteries, flat-panel televisions, medical devices, satellites, and various weapons.[9]  The trade war constrained  China to import soybeans from Brazil and other producers instead of from the U.S. [10]Forbes suggested that U.S. farmers should reduce soybean production instead of depending on China. President Trump responded that he would spend the tens of billions of dollars in tariffs from China to buy products from “Great Patriot Farmers” and distribute the food to starving people in nations around the world.[11]In 2018 Total US tariffs applied exclusively to Chinese goods: US$250 billion &Total Chinese tariffs applied exclusively to US goods: US$110 billion.[12]

We see from the above developments that how badly trade relations between the USA and China are affected which resulted in both increasing their tariffs when trading with each other.

Impact on the US economy                                                                                                              

In an announcement, Coalition for GSP official chief Dan Anthony said Trump’s choice will cost American organizations over USD 300 million in extra levies each year. “Without GSP benefits American ventures face another duty/tariff that will mean employment misfortunes, canceled investment, and cost increments for buyers. American importers will pay more, while some American exporters will continue to face current market access barriers in India and others.[13]

Now let’s see how much India trades with the USA and how trade would be affected by the USA decision

According to the 2017-18 financial year, India’s largest trading partners include in the first place China, the USA, and the UAE.[14] In the USA, India had maximum exports according to the 2017-18 financial year that is 48.6[15] India exports approximately 7500 commodities to about 192 countries.[16] The USA is the largest export partner of India with a share of 15.3% in the overall exports. [17] India also imports from the USA with a share of 5.2% in the overall imports.[18]

So, we see according to the above data, in the 2017-18 financial year we had maximum exports in the USA which means the USA was one of the top countries contributing to foreign exchange in India. Now, since the preferential treatment given to India by the USA under the Generalised System of preference program, is taken from India, the exports to the USA would be affected as under the preferential treatment Indian goods could enter the US market duty-free but now the exporters would have to pay the duty/tariff on their products exported to the USA, so this would increase the export cost for Indian exporters and thus Indian exporters would be forced to increase the prices of their goods in the USA or accept a reduction in their profit. It might be possible that after the taking of the preferential trade status from India, exports to the USA would be affected and the Indian traders would export their goods to such countries where they have a better chance of a profit margin.

Role of Shanghai Cooperation Organization [SCO]

The Indian government is resentful over the Trump administration’s announcement on May 31 that it was ending a special trade privilege granted to India in 1976 for exporting goods to the US duty-free. At the Shanghai Cooperation Organisation (SCO) meeting on June 13-14, India, China and Russia are meeting to discuss US trade protectionism and to form a new multilateral trading system. One of the significant focus of the SCO meeting is to discuss the continuing trade war between the US and China and its impact on the global economy. The fundamental aim of this meeting is to unite against the protectionist trade policies of the USA  and effectively coordinate with one another to form a multilateral trading system that is non-discriminatory, transparent, and based on rules.[19] Further, the Shanghai Cooperation Organisation summit agenda include global order and security and economic partnerships. The multilateral economic cooperation is the most important agenda of this meeting.[20]

We see that the SCO meeting between India, China, and Russia basically focuses on creating a multilateral trade system for themselves and SCO countries after the strict trade protection measures were taken by the USA against China and after removing the special trade privilege given to India by the USA. If the multilateral trade system is successfully established it could backfire against the USA as if SCO countries unite they could force the other countries if the countries want to trade with SCO countries to follow the rules of the multilateral system. Further, the SCO countries can give trade benefits to each other and thus can reduce their dependency on other countries for trade. Further, if some particular commodity is produced only in the SCO countries, then they can by mutual agreement decide among themselves how they would trade such commodities to outside countries. If India and China unite relating to the trade aspect then they can mutually impose heavy tariffs on USA products. They can mutually decide to import less USA products. This would definitely affect the US trade and economy.

Conclusion

To conclude we can say that there are trade implications for both India and the USA of removal of India from the designation of developing countries and removing the preference given under the generalized system of preference [GSP] to India by the USA. The further USA is the largest export partner of India, so if such preference not given as was given in the GSP system, then this would affect the exports to the USA from India and thus affect the trade relations, the way it is tensed between China and USA. Further Shanghai Cooperation Organization [SOC] is planning to form a multilateral trade system between SOC countries e.g. China, India, Russia, and other Central Asian Countries which could backfire against the USA as these countries feel the USA is doing abuse of trade remedy measures and wants to unite against USA protectionist trade measures.

About the Author:  Purnashri, Intern at IP and Legal Filings, and can be reached at support@ipandlegalfilings.com.

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