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Indian Economy

Generalised System of Preference

  • 03 Dec 2018
  • 7 min read

Last Updated: September 2022

For Prelims: Generalised System of Preferences, United Nation Conference on Trade and Development (UNCTAD), United Nations General Assembly, Most Favored Nations (MFN)

For Mains: Generalised System of Preferences: Benefits, Importance of GSP for India, Importance of GSP for US, Impacts of GSP Withdrawal, India’s Relations with the US

Why in News?

In 2019 The US government has withdrawn its GSP (Generalised System of Preferences) benefits to India worth $70 million on as many as 50 items mostly from the handloom and agriculture sectors.

What is GSP?

  • About:
    • GSP is the largest and oldest US trade preference programme, designed to promote economic development by allowing duty-free entry for thousands of products from designated beneficiary countries.
    • It 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.
  • Background:
    • The idea of granting developing countries preferential tariff rates in the markets of industrialized countries was originally presented at the first United Nation Conference on Trade and Development (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 15 countries grant GSP preferences:
      • Armenia
      • Australia
      • Belarus
      • Canada
      • The European Union
      • Iceland
      • Japan
      • Kazakhstan
      • New Zealand
      • Norway
      • the Russian Federation
      • Switzerland
      • Turkey
      • United Kingdom
      • The United States of America
  • Importance of GSP for US:

    • Cheaper imports of intermediary products from India enable the availability of cost-effective and price-competitive inputs to the US downstream industries.

    • It also helps the US firms remain domestically and internationally competitive.

What is UNCTAD?

  • 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 globalised economy more fairly and effectively.
  • It has 195 member nations.

What are Most Favored Nations (MFN)?

  • As per the World Trade Organisation's ( WTO) 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.”

    What are the Benefits of GSP?

    • 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: It is boosted by GSP as it reduces the costs of imported inputs used by companies to manufacture goods.
    • Promotion of Global Values: By supporting beneficiary countries in affording worker rights to their people, enforcing intellectual property rights, and supporting the rule of law.

    What is India's Status in GSP?

    • Significance of GSP for India:
      • Before GSP was removed, India was the biggest beneficiary of the GSP regime and accounted for over a quarter of the goods that got duty-free access into the US in 2017.
        • Exports to the US from India under GSP at $5.58 billion was over 12% of India’s total goods exports of $45.2 billion to the US that year. The US goods trade deficit with India was $22.9 billion in 2017.
      • 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.
    • Impacts 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 tariffs 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.
    • Current Scenario:
      • More recently in 2021, at the US-India Trade Policy Forum (TPF), the US stated that it will consider India’s request for restoring the GSP as it is affecting Indian exports worth over $6.3 billion.

    What can be the Way Forward?

    • 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.

    UPSC Civil Services Examination, Previous Year’s Question (PYQs)

    Mains

    Q. ‘What introduces friction into the ties between India and the United States is that Washington is still unable to find for India a position in its global strategy, which would satisfy India’s National self-esteem and ambitions’. Explain with suitable examples. (2019)

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