What is GSP?The Generalized System of Preferences or GSP status is one of the policy measures which is in place in the USA to allow developing countries more equitable access to the American market. Under this system, specific imports from certain countries are given tariff-free access (or at least access at reduced tariffs) to the US markets. Until recently, India was one of the beneficiaries of the GSP status. Starting from June 5 onward (today onward), Indian exporters will no longer be able to enjoy reduced tariffs in the US.
Before beginning our discussion on this, let us remember that this in itself is not that big of an issue. Last year, $6.35 billion worth of Indian goods with GSP status were exported to the US. But the tariff benefits received by India accrued to only $260 million. This is a small amount considering our overall trade with the US. This is one reason why there was only a mild reaction from New Delhi which termed the move as 'unfortunate'.
However, even in spite of all that, India will face losses due to this. Specific sectors such as jewelry, leather goods, pharmaceuticals, chemicals, and agricultural products will have to face more competition. The Federation of Indian Export Organisation (FIEO) has already warned that exporters might find it difficult to absorb these losses.
Reasons – Actual and FabricatedWhy has the US suddenly gone on to impose such a move? The answer to this question should not be too difficult to answer if we look at India's trade balance with the US. The Balance of Trade is in favor of India. In other words, India exports more to the US than what it imports from the US (this is obviously bad for the US). To reverse this and discourage Indian imports into the US, this step has been taken. The ostensible reason given by Trump was that India was not providing equitable and free access' to Indian markets to American firms. Specific mention was made regarding the American medical devices firms and the dairy firms which had to face 'tariff barriers' in India.
Are the claims made by Trump true? The medical devices imports from the US to India were Rs 61.5 billion in 2014-15. This rose to Rs 74.2 billion in 2017-18. This rise would not have been seen if India had 'tariff barriers' on imported medical devices. In contrast, it is the US which prevents Indian medical device firms from bidding for any tender in the US (according to a 2018 Business Standard article). And what about the dairy products? India itself is one of the world's largest milk producers. Why would one of the largest milk producers need to import milk from US firms?
The Trade War and IndiaIn the Trump years, the US has once again embarked on the protectionist route. His 'Trade War' with China is already well known, even to novices in foreign policy. This trade war or tariff war, whatever you call it, has led to panic across the world. The 'free trade' which the Western capitalist world had been long advertising as the solution to all problems was in serious threat. In serious threat was also the world GDP which would probably take a dip in case two powerful countries go on to impose tariff restrictions on each other.
India does not have any reason to be happy with these policies of the US. Restricting Chinese access to the US markets means that China would look towards other markets, notably India. It is possible that Chinese goods would be dumped into Indian markets, leading to havoc among domestic producers. If China trades less with the US, then the Yuan would depreciate, meaning that the Chinese goods would now become even cheaper, probably displacing Indian goods. The GSP issue, however, directly targets India.
It is not the first time that Trump's protectionism has been directed against India. In May 2018, Trump increased the tax on Indian steel imports into the US by 25% and on aluminum imports by 10%. Since June 2018, India has been mooting retaliatory tariffs on certain American products. However, considering the fact that India does not want bilateral relations to turn sour (rather it cannot afford bilateral relations turning sour), it has not gone on to implement its threats. Since June 2018, the retaliatory tariff hikes have been postponed eight times.
Concluding remarksThe latest move by the US is surprising in some aspects and less surprising in other aspects. We have to remember that the West (this includes countries like Japan and Australia) despite their high praises of the free market, do not actually practice what they preach. They are the ones who practically forced free-market reforms on the Less Developed Countries (LDCs) in Asia, Africa, and Latin America. On the other hand, they have long blocked access to their domestic markets through huge subsidy supports to their own domestic producers. The richer countries have flouted WTO regulations by paying huge sums as subsidies, especially to cotton producers, thus impoverishing LDCs in Western Africa. It is the richer countries who have imposed more protectionist policies than anyone else. It is the duty of the developing world, especially India to lead a dedicated coalition against this blatant neo-colonialism, even though this won't be easy at all. Maybe the NAM can be remodeled to take up this issue.