Winners and losers

What does the withdrawal of USGSP benefits mean for India's exports?

On March 5, 2019, the United States Trade Representative (USTR) announced the US government’s intention to terminate the benefit of duty-free treatment under the generalised system of preferences (GSP) for products imported from India. How much of a setback does this constitute for India’s exports?

Within 60 days of the notification, imports from India of products now included in the USGSP scheme will be required to pay MFN duties. The preliminary assessment in India of the damage to the country’s trade interest has been dismissive.  

There are a number of reasons for the apparent lack of concern in India at the USTR decision. From the outset, the USGSP scheme was designed to result in diminished benefits for countries like India, which export labour-intensive products. The US law mandatorily excludes most textile and apparel articles, footwear, handbags, luggage, flat goods, work gloves, and leather apparel from the purview of the scheme. Further, a central feature of the USGSP scheme is the competitive need limitations, which imply that individual beneficiary countries are excluded once imports from any one of them cross the stipulated value limit, or if they exceed a 50 per cent share of imports from all beneficiaries in a particular year. There is provision for the restoration of benefits if in a subsequent year imports from that country fall below the prescribed limits. However, the re-designation of a country as a beneficiary is not automatic. The switch on or switch off of benefits by virtue of the competitive need limitations reduces the value of preferential benefit in promoting industrialisation of developing countries, which was the main aim of the programme. 

Another reason for the reduced value of the USGSP is that the US has granted more comprehensive benefits to nations that have entered into FTA agreements with it. NAFTA and KORUS FTA agreement, for instance, give duty free treatment to Mexico and South Korea respectively far greater in scope than is available to GSP beneficiaries. An even more important reason is the erosion of tariff benefits under the GSP due to the reduction of US MFN tariff in successive rounds of multilateral trade negotiations. The USGSP scheme was introduced on January 1, 1976, and since then, the US has reduced the MFN tariffs twice, in the Tokyo Round concluded in 1979 and in the Uruguay Round, which ended in 1994. In 2017, the MFN tariff applied level in the USA was 3.4 per cent and the trade-weighted average 2.4 per cent. 

But averages conceal great divergences and to make a proper assessment of the impact, we need to look at the tariff situation on each product. US MFN tariffs are significant on many products and the effect of GSP withdrawal will depend on the level of MFN duty that will apply once the GSP treatment is withdrawn. 

Our assessment is that about US$3.3 billion worth of Indian exports to the US, on which the MFN duty is more than 2.5 per cent, will be adversely affected. Of this, the export of products amounting to about $1.4 billion on which the MFN duty is higher than 4 per cent is likely to be particularly affected. The most important group of products that will stand to lose is chemical and allied products, valued at about US$ 519 million, on which tariffs will apply in the range of 4-6.5 per cent. Iron and steel products, including some categories of hand tools, valued at $177 million will be hit by duties in the 5-15 per cent range. 

Another segment of industry that will suffer from tariff increases in the range of 4-20 per cent is travel goods (mostly non-leather), including suitcases, handbags and sports bags, in which imports from India are at $253 million. An equally important section of industry that will be hit with tariffs of 4-20 per cent is handicrafts (lamps, parts, chandeliers etc), in which the current level of US imports is about $109 million.  

On the whole, the negative fallout of the US decision to withdraw GSP benefits from India is assessed at modest but not trivial. But the effect on certain sensitive sections of small and micro industries should be a cause for concern.

Should the government have done something to stave off action by the US government? Even though the GSP benefits are required to be non-reciprocal according to the UNCTAD resolution in which it was agreed and the GATT 1947 decision that incorporated preferential treatment of developing countries in the rules, US laws have provided for seeking reciprocity from beneficiary countries from the beginning and these laws have not been challenged. According to reports, negotiations did take place between the two sides in the two areas of US concern on which it sought concessions, namely, market access in dairy products and regulations governing medical devices, but success proved elusive.

Hoda is professor & Gupta is fellow, ICRIER