India's GSP status: US' attempt to leverage

On May 31, President Trump proclaimed the Trade Act of 1974 re-designating India as a “beneficiary developing country” from the Generalised System of Preferences (GSP), reversing an executive order of November 1975 issued under President Gerald Ford’s Administration. The law requires the president to notify the Congress at least 60 days in advance of such action of its intent (which was done on March 4) together with considerations for such action. Among other factors, the actions of the US administration are guided by twin assurances of “reasonable access to markets” and “unreasonable export practices”. India is a significant beneficiary with over 27 per cent (5,111 out of 18,770) tariff goods entitled to duty-free access into the US. In 2017, over 12 per cent of India’s exports to the US, valued at $5.58 billion, benefitted from the scheme. 

Though anticipated, it prevented the Indian administration from taking pre-emptive steps given the model code of conduct on the announcement of the national election in March and hence, this could not have come at a more inappropriate time. Despite challenges in overall export growth, exports to the US grew double digits in the financial year ending 2018, and figures available up to December 2018 point towards a healthy growth; the trade balance is, however, skewed in India’s favour. Though far from an aspirational vision both nations share to quadruple trade from $125 billion to $500 billion by 2025, this development shall certainly disturb the trend, at least in the short to medium term. The official communiques from India’s commerce ministry and trade body FIEO downplayed its impact in terms of impact assessment on the quantum of import tariffs and the ability of Indian exporters to absorb the shock is like taking a narrow view. 

The US actions go far beyond its stated objective to correct the trade imbalance; a situation dissimilar to China. There are several unresolved trade issues, besides regulatory and market access, which if remain unresolved for long, shall impact both nations from unleashing their true potential. Right or wrong, the US views India’s growing restrictions on cross-border data flows as non-tariff barriers to trade. The US will attempt to leverage its negotiating position on market access barriers, particularly on cross-border supply of digital services. 

India, on the other hand, would like to maintain its competitive position on information technology and business-process services and seek access to a liberal visa regime. This is of equal importance to US multinationals which have benefitted from offshoring into India, fuelling India’s growth in services basket, besides employment generation. According to a UNCTAD study, $83 billion of India’s services exports were digitally delivered in the financial year ending 2017. Having positioned itself as a global platform for the export of digital services, India's resilience will be tested in the negotiations. Washington’s action circumscribing its autonomy will be weighed with India’s comparative advantage in international digital trade. With India’s rise to achieve data autonomy, the US will raise concerns on the security of data stored in India. I see limited flexibility in India offering to pursue its data localisation goal, neither will it discriminate nations by according any preferential status to the US, on the other hand, could drive a tough bargain on Iran sanctions, pushing crude oil prices which is central to India’s fiscal math. 

Indian lawmakers’ approach for legislating data localisation law, its FDI regulators’ move to liberalise e-commerce norms (which the US views as protectionist) and posture in multilateral fora on tariff levies on digital services (which will be tested in the June 28-29 G20 meeting in Japan) will be closely watched in the coming months. It seems everything is open for (re)negotiation with the move having stirred the muddy waters. Hence, it’s not just the short- to medium-term impact on India’s export competitiveness or for that matter US exports to India, should India choose to retaliate. Undoubtedly, coming weeks shall witness heightened activity in the capital’s South block, which houses the PMO and the foreign ministry and Udyog Bhavan, which houses the ministry of commerce & industry. 

Equally crucial for negotiators from both sides would be to not miss the bigger picture by assessing each side’s strengths: For India, an emerging digital service provider with high talent pool, export potential, domestic growth market, national security, etc, its priorities would be driven by economic considerations. For the US, as a world leader in technology, FDI and growth potential for its multinationals, defence, intelligence needs and data security needs, it would be a combination of economic and geopolitical considerations. 

History suggests that no one wins a trade war and lessons from history explain a clamour for creating a more inclusive world, an opportunity certainly available for both leaders. We shall wait and see! 
 

The writer is partner with BMR Legal & his twitter handle is @mukeshbutani. Views are entirely personal