Generalized System of Preference
- 03 Dec 2018
- 5 min read
Why in News?
Recently the US government has withdrawn its GSP (Generalized System of Preferences) benefits to India worth $70 million on as many as 50 items mostly from handloom and agriculture sector.
- Generalized System of Preferences (GSP) is an umbrella that comprises the bulk of preferential schemes granted by industrialized nations to developing countries.
- It involves reduced Most Favored Nations (MFN) Tariffs or duty-free entry of eligible products exported by beneficiary countries to the markets of donor countries.
- 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.
- United Nation Conference on Trade and Development (UNCTAD) is a permanent intergovernmental body established by the United Nations General Assembly in 1964.
- It supports developing countries to access the benefits of a globalized economy more fairly and effectively.
- It has 194 member nations.
Most Favored Nations (MFN)
- As per the WTO’s General Agreement on Tariffs and Trade’s MFN principle, each of the WTO member countries should “treat all the other members equally as ‘most-favoured’ trading partners.”
- According to the WTO, though the term ‘MFN’ “suggests special treatment, it actually means nondiscrimination.”
- The following countries grant GSP preferences:
- European Union
- New Zealand
- Russian Federation
- United States of America.
Benefits of Generalized System of Preference
- Economic growth and development in the developing world by helping beneficiary countries to increase and diversify their trade with the developed nations.
- Employment – Moving GSP imports from the docks to consumers, farmers, and manufacturers supports tens of thousands of jobs in the developed nation.
- Company Competitiveness is boosted by GSP as it reduces costs of imported inputs used by companies to manufacture goods.
- GSP promotes Global values by supporting beneficiary countries in affording worker rights to their people, enforcing intellectual property rights, and supporting the rule of law.
GSP for India
- Indian exporters benefit indirectly by way of reduced tariff or duty free entry of eligible Indian products.
- Reduction or removal of import duty on an Indian product makes it more competitive.
- 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.
- It allows India to integrate with global value chains and hence with global markets.
GSP for US
- Cheaper imports of intermediary products from India enable availability of cost-effective and price-competitive inputs to the US downstream industries.
- It also helps the US firms remain domestically and internationally competitive.
Impact of GSP Withdrawal
- The products on which India receives GSP benefits belong to labour intensive sectors such as textile, handloom and agriculture.
- India will lose out on preferential tariff on exports worth of nearly $ 5. 6 billion under the GSP route out of the total exports of $48 bn in 2017-18.
- India could lose US market share to rivals like Vietnam and Bangladesh, which will continue have duty-free access.
- Indian exports to the US under GSP program are mostly intermediaries and are not in direct competition with US producers which ultimately benefit US economy.
- The US should consider continuing India's eligibility as a gesture of goodwill that reaffirms its commitment to the mutually beneficial relationship between our two countries.
- GSP remains a central aspect of the overall trade engagement and must remain available for Indian exporters keen to address the US markets.