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Indian Economy

US Revokes Generalized System of Preferences (GSP) for India

  • 02 Nov 2018
  • 6 min read

The US government has withdrawn GSP (Generalized System of Preferences) benefits to India worth $70 million on as many as 50 items mostly from handloom and agriculture sector.

  • Of the total US imports under GSP in 2017 was $21.2 billion, of which India was the biggest beneficiary with USD 5.6 billion.

Impact of GSP Withdrawal

  • Impact on India
    • The products on which India exports under GSP belong to sectors which employ several thousands of men and women, especially in rural areas through micro, small and medium enterprises. Thus losing a major market can impact their profits.
  • Impact on the US
    • FICCI has said that the termination of the GSP would be contrary to the legislative objective and the history of the Trade Reform Act of 1974 of furthering the economic development of developing countries.
    • It would cause significant distress to the export-oriented sector leading to increased cost for US industries that use products under the GSP.

Background

  • Trade relationships between India and the US have gone downhill in the last few years.
  • The US had imposed tariffs on steel and aluminum imports from India and had challenged its export subsidy regime at the World Trade Organization (WTO).
  • India had also dragged the US to the WTO on higher steel and aluminum tariffs and has threatened to impose retaliatory tariffs worth $240 million on US imports.

GSP (Generalized System of Preferences)

  • The idea of granting developing countries preferential tariff rates in the markets of industrialized countries was originally presented at the first UNCTAD conference in 1964.
  • The GSP was adopted at UNCTAD in New Delhi in 1968 and was instituted in 1971.
  • There are currently 13 national GSP schemes notified to the UNCTAD secretariat.
  • The following countries grant GSP preferences: Australia, Belarus, Canada, the European Union, Iceland, Japan, Kazakhstan, New Zealand, Norway, the Russian Federation, Switzerland, Turkey and the United States of America.
  • GSP is the largest and oldest U.S. trade preference program. Established by the Trade Act of 1974, GSP promotes economic development by eliminating duties on thousands of products when imported from one of 120 designated beneficiary countries and territories.

Benefits of GSP

  • For India
    • Indian exporters benefit indirectly - through the benefit that accrues to the importer by way of reduced tariff or duty-free entry of eligible Indian products.
    • It also allows India to integrate with global value chains (GVC) and hence, with global markets and furthers the development of the country’s export base.
    • Reduction or removal of import duty on an Indian product makes it more competitive to the importer - other things (e.g. quality) being equal.
    • This tariff preference helps new exporters to penetrate a market and established exporters to increase their market share and to improve upon the profit margins, in the donor country.
  • For the US
    • Indian exports to the USA under GSP are less-expensive, high-quality alternatives that reduce the costs of final products, this enables the U.S. economy to be more globally competitive.
    • GSP is especially important to U.S. small businesses, many of which rely on the programs’ duty savings to stay competitive.
    • GSP supports U.S. jobs, moving GSP imports from the docks to U.S. consumers, farmers, and manufacturers support tens of thousands of jobs in the United States.
  • Globally
    • GSP has promoted economic growth in a large number of developing countries by allowing increased exports of eligible products. This is of tremendous benefit to the global economy.
    • At the same time it is a small aspect of the U.S. trade balance as of the total $2.4 trillion U.S. imports in 2017, only $21.2 billion arrived via GSP, amounting to less than 1% of total U.S. imports

Way Forward

  • The GSP remains a central aspect of the overall trade engagement and must remain for Indian exporters keen to address the U.S. markets.
  • The U.S. should have considered continuing India’s GSP eligibility as a gesture of goodwill that reaffirms its commitment to the mutually beneficial relationship between our two countries. The India-U.S. relationship has continued to grow stronger as India liberalizes along a positive and steady trajectory.
  • Today, both the US and India engage in countless areas of mutual cooperation and have a convergence of views in a large number of global issues. The relationship must not be seen through transactional prism only. By doing this the broader strategic dimensions of the partnership could get impacted.
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