The United States has recently declared the termination of India’s beneficiary status under its Generalized System of Preferences (GSP) effective from June 5, 2019. The implications and details of this termination are discussed in the following article.
Understanding the Generalized System of Preferences (GSP)
Introduced for the first time at the United Nations Conference on Trade and Development (UNCTAD) in 1964, GSP is an initiative that provides developing countries with preferential tariff rates in industrialized countries. The system was officially adopted at UNCTAD in New Delhi in 1968 and came into being in 1971. Presently, 13 countries grant GSP preferences which include Australia, Belarus, Canada, the European Union, Iceland, Japan, Kazakhstan, New Zealand, Norway, the Russian Federation, Switzerland, Turkey and the USA.
GSP, being the oldest and largest U.S. trade preference program, plays a pivotal role in bolstering economic development. The scheme accomplishes this by waiving off duties on a myriad of products when they are imported from one of the 120 selected beneficiary nations and territories.
The Impact of GSP Withdrawal
India has been the primary beneficiary of the GSP regime which, in 2018, covered $6.3 billion worth of Indian merchandise exported to the USA. Industries potentially affected by the withdrawal of the GSP regime could be gem and jewellery, leather and processed foods.
Despite these potential setbacks, India maintains that the effect would be “minimal,” given that Indian exporters received duty-free benefits of only $190 million on the total GSP-related trade amounting to $5.6 billion.
| Exported Merchandise | Value in 2018 |
|---|---|
| Gem and Jewellery | Value 1 |
| Leather | Value 2 |
| Processed Foods | Value 3 |
However, GSP withdrawal could undermine India’s competitiveness in organic chemicals raw materials and intermediary goods in the US market, as well as products such as iron or steel, furniture, aluminum, and electrical machinery. The impact on small industries within India could be considerable, potentially causing them to lose their market share in the U.S. unless fiscal support is provided.
The Reasons for GSP Revocation
The decision to revoke GSP status was triggered by a series of actions taken by the Indian government that led to trade friction between the two nations. Some of these actions include India’s recent changes to e-commerce rules which have adversely affected American companies like Amazon and Walmart (the primary owner of Flipkart). Other contentious issues include price controls imposed on medical devices, tariffs on premium items like smartwatches and high-end mobile phones, and the limited market access for the U.S. dairy industry.
