The US government has decided to take India out of the Generalized System of Preference (GSP). Many Indian products can no longer enter the US market duty free after May 2019. Indian firms may also lose an edge over China and other countries that did not benefit from the GSP. Will the US action hit India hard and affect India-US relationship? Should India file a case at the WTO against the US action?

To understand the issue, let’s focus on a crucial point. The US-GSP is just a pint-sized scheme. And hence the withdrawal will have a barely noticeable impact at the macro level. Look at the figures. The GSP covers less than one per cent of the total annual US imports of $2.3 trillion. The US government foregoes only about a billion dollars worth of customs revenue annually through the zero duty GSP imports.

The US-GSP scheme, implemented since 1974 to help exports from the poor countries, is a good example of a low-cost PR exercise. Each year during annual GSP review, eligible countries scramble to provide detailed justification to the USTR to not exclude them or their products from the scheme.

Almost all trade associations/exporters from these countries file petitions to the USTR. And if a country or product is taken out, it has a chance to appeal to the US President. It is more like a great power game with little gains to most countries.

Skewed profile

On paper, the GSP facility is available to 121 low-income countries. Yet just seven countries account for 90 per cent of imports under the US-GSP scheme. India is the largest user with export of $5.7 billion.

Other big users are Thailand, Brazil, Indonesia, Turkey, the Philippines and South Africa. Naturally, there is a debate on whether emerging market countries should be excluded from the scheme to make way for the more deserving Least Developed Countries.

India should have no objection if the US does this. But the US is taking out India alone and this violates the WTO rules. The GATT enabling clause of 1979, the legal base for the current GSP schemes mandates that a GSP scheme should be non-discriminatory and non-reciprocal. The US decision violates both criteria.

Thailand, Brazil, Indonesia, the Philippines and South Africa are at a similar level of development as India. Excluding only India means that the US is not treating countries with a similar level of development with the same yardstick and hence violates the non-discrimination criteria.

Next, the US reason for discontinuing the GSP for India is that India does not provide adequate market access to US products. The US expects something in return. And this violates the non-reciprocity condition. So India has a strong case for approaching the WTO. India won a similar case in 2006 against the European Commission when it granted more favourable tariff treatment to similarly placed countries. But are India’s stakes high enough to justify the exercise of this option?

About 16 per cent of India’s global exports go to the US. But less than 2 per cent of these benefit from the US-GSP scheme. And for every $100 value of goods exported to the US, only 12 per cent enter with GSP benefit. Few product groups on which the US import duty is high will face initial hiccups. These include leather and footwear, bulk drugs. Engineering products and chemicals and plastics will face a moderate impact. While on steel, auto components, ceramic, glass, telecom, and electrical products the impact will be negligible.

Till now, such products competed with those from the other GSP beneficiary countries and the US FTA partners like Canada, Mexico, South Korea, Chile, etc. Post GSP, competition would be with all countries including China. These sectors will have to work on reducing the price through product differentiation and better bargaining with the suppliers. The government can help by ensuring quick GST refunds, customs clearances and disbursal of credit under the Interest Equalization Scheme.

The spillover

Should the GSP withdrawal affect the strategic relationship? India and the US work closely in economic, trade, investment, security, geostrategic and many other areas. India buys military equipment and Boeing aircraft worth billions of dollars from the US.

India’s civilian nuclear commerce has the potential to benefit US suppliers. US firms like Google, Facebook gather Terabytes of data every day and earn billions of advertising dollars every year from India.

Amazon which had to withdraw from China, is the biggest online retailer in India.

The US earns dollars from India from various engagements and not just trade.

India has almost become a digital colony of the US firms, but any effort to put minimal regulation like mandating data localisation and changes in FDI rules regarding e-commerce is met with stiff opposition from the US. The US has imposed 25 per cent tariffs on steel and 10 per cent on aluminum in June 2018. India chose to wait on imposing counter tariffs. On the positive side, India is one of the few countries that received a US waiver on Iran sanctions.

Since the launch of the trade war, the US trade deficit has increased by $85 billion.

Half the deficit increase is with China. India’s GSP loss may benefit China as the export product profile of India and China broadly match.

India may not respond to Trump’s action giving primacy to trade and tariffs over other issues. GSP alone may be too small an issue to justify retaliatory tariffs or dragging the US to WTO. But this view would hold only till the time India feels that gains and losses across all areas of engagement are balanced.

The writer is from the Indian Trade Service. The views are personal.