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Few hours after Narendra Modi took oath as the Prime Minister of India for his second term, US President Donald Trump confirmed that his administration will withdraw the designation of Generalised System of Preference (GSP) from India. GSP is the largest and oldest US trade preference programme allowing duty-free imports to the US for thousands of products. Internationally, the legal basis for the GSP programme is instituted in the Enabling Clause (EC). It is a platform established under the international trade regime of the World Trade Organisation (WTO) for developed countries to offer preferential trade treatment on a non-reciprocal basis for import of products from developing countries. This preferential trade system started for India in 1975.

Trump had previously announced that the US government was intending to terminate India’s designation as a beneficiary developing country under the GSP programme on March 4, 2019. He gave a 60-day notice period for India that ended on May 3, 2019. Prior to this, the Trump administration had launched an eligibility review of India’s agreement with the US regarding the GSP status in April, 2018. Previously, due to a decision taken by the US President “to counter China’s unfair trade practices” the Office of the United States Trade Representative (USTR) increased tariffs on ‘Section 301’ of ‘List 3’ from 10% to 25% and even announced tariffs on ‘List 4’ that covered remaining imports from China. As a result, China also announced retaliatory tariffs on the US products. After hurting the trade practices with China, Italy, and Spain, the decision of scraping GSP from India is not unexpected from the US President.

GSP and its benefits

India was the largest beneficiary of the programme in 2017. Under the GSP, 1,784 products ranging from few engineering goods and organic chemicals to textiles were exported from India to the US without duty.

Ajay Sahai, Director General and CEO, Federation of Indian Export Organisations (FIEO) previously had earlier said in a television programme, “GSP is fundamentally a non-reciprocal practice and the US is unnecessarily linking it with the concession on the medical and diagnostic equipment, IT and IT products. Our total export to the US was around $35 billion, out of that around $5.6 billion was under the GSP. But net gain in terms of tariff to India was just $190 million. Though I agree that it may hurt some traditional sectors of exports at which we need to look into closely.”

Will India suffer much?

The most serious implication of withdrawing GSP will be for sectors like agriculture, jewellery, leather, mechanical parts, and pharmaceutical items, which are set to face higher costs and competition.

Tanmoyee Bannerjee, Professor, Department of Economics, Jadavpur University, informed BE, “US President Trump is definitely showing a dictatorial approach to other countries. Cancelling GSP for India may benefit China or other countries. An acknowledgeable number of companies may start to source more from China if GSP benefits wane. Now India may retaliate and impose some counter tariffs on US products. India’s small scale manufacturing companies will get hurt by this. In case of a tariff competition, none of the countries would gain.”

Impact on the US

The trade war with China pushed American companies to source more from GSP countries like India, Thailand, Cambodia, Indonesia, and Turkey. The Coalition for GSP, in a report said that the latest official trade figures shows that GSP saved $ 105 million for American companies in March, 2019 which was 36% higher than March, 2018. If America starts to produce the items they used to import from India under GSP, they will have to face much higher production cost. In a statement Dan Anthony, Executive Director, Coalition for GSP said “Trump’s decision will cost American businesses over $ 300 million in additional tariffs every year. American importers will pay more, while some American exporters will continue to face current market access barriers in India and others.”