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US to end preferential trade treatment for India from June 5; what it means and will it affect country?

India says it had offered a resolution after significant US requests to find a mutually acceptable way but failed to reach consensus with the Trump administration

twitter-logoBusinessToday.In | June 13, 2019 | Updated 11:00 IST
US to end preferential trade treatment for India from June 5; what it means and will it affect country?
The decision would put additional tariffs burden of over $300 million on the American businesses every year.

In a major blow to India's newly elected government, US President Donald Trump has terminated India's designation as a beneficiary developing nation under the key GSP (Generalised System of Preference) trade programme, with effect from June 5. The White House in a statement said India had not assured the United States that it would provide "equitable and reasonable access" to its markets, which was why the Trump administration had taken the action.

The US government had notified India on March 4, 2019, of its intent to terminate the country's designation. The 60-day notice period ended on May 3. "I have determined that India has not assured the US that it will provide equitable and reasonable access to its markets. Accordingly, it is appropriate to terminate India's designation as a beneficiary developing country effective June 5, 2019," Trump said. Notably, the decision would put additional tariffs burden of over $300 million on the American businesses every year.

The government has responded to the US action, saying India, as part of bilateral trade discussions, had offered resolution on significant US requests to find a mutually acceptable solution but to no avail. "India, like the US and other nations will always uphold its national interest in these matters," a statement by the Ministry of Commerce said.

India was the largest beneficiary of the programme in 2017 with $5.6 billion worth of exports to the US being given duty-free status, according to a Congressional Research Service report issued in January. According to The Washington Post, while the US remains India's top export partner, receiving more than $48 billion in goods from the country in 2017, just over 10% of imports from India benefit from the programme, which was to expire in December 2020. Turkey, the other new target in Trump's trade wars, was the fifth largest beneficiary with $1.7 billion in covered imports.

The move is the latest push by the Trump administration to reduce US trade deficits and redress what it considers to be unfair trading relationships with other countries, starting with China. In addition, Trump has repeatedly called out India for high tariffs.

What is the Preferential Trade Agreement (PTA)?

These agreements give signing nations special or preferential access to each other's markets, giving a boost to overall trade. In the US, the GSP programme - designed to promote economic growth in the beneficiary developing countries - provides duty-free entry for up to 4,800 products from 129 designated beneficiary countries and territories.

The criteria for inclusion in the GSP programme include factors such as providing the US with equitable and reasonable market access, respecting arbitral awards in favour of US citizens or corporations, combating child labour, providing adequate and effective intellectual property protection, and respecting internationally recognised worker rights, among others.

The overall impact on India

The bilateral trade between India and the US stood at $74.5 billion in 2017-18, up 15.5 per cent from $64.5 billion in the previous fiscal. However, the numbers are skewed in India's favour. For instance, India reportedly imported items worth $26.3 billion from the US in FY19 (April-December) but posted a total export of $38.8 billion. Commerce Secretary Anup Wadhawan had earlier said that the GSP withdrawal would not have a significant impact on India's exports to the US since the duty benefit, or savings on import tariffs amounted to only $190 million annually.

Moreover, Monideepa M Mukherjee, a spokeswoman for India's commerce ministry, had also told Associated Press that GSP was in any case "meant for least-developed countries, and India has graduated out of that". The Federation of Indian Export Organisations (FIEO) also believes that India's exports to the US will remain unaffected by Trump's latest move since it will only have a marginal impact on a few domestic sectors such as processed food, leather, plastic, building material and tiles, engineering goods, and hand tools, among others.

Options before India

The buzz is that India may take a firm stance by imposing retaliatory tariffs on the US. If this comes to pass, a total of 29 items imported from the US, including walnuts, lentils, boric acid and diagnostic reagents, will face higher duties, cutting benefits to the US exporters. The move will put an extra burden of $290 million per year on US items exported to India.

Edited by Manoj Sharma

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