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Fresh headache for PM Modi, Piyush Goyal as Trump ends preferential trade treatment for India

India US - getty
Many items may escape any large-scale impact, but it is clear that items primarily produced by small industries will get impacted.
US President Donald Trump’s trade wars have intensified and the latest salvo fired against India terminates the designation of a developing nation under the Generalized System of Preferences (GSP) and posing a fresh challenge for the new Commerce Minister Piyush Goyal.

Instituted on January 1, 1976 under the Trade Act of 1974 (US), GSP is the largest and oldest trade preference programme offered by the US. The initiative is aimed at promoting the economic growth in the developing world by providing preferential duty-free entry for up to 4,800 products from 129 designated beneficiary countries -including India. India exports nearly 2,000 products to the US duty-free, enjoying the status of a developing economy amounting up to $5.6 billion.

“I have determined that India has not assured the United States that India will provide equitable and reasonable access to its markets,” Trump said Friday evening. “Accordingly, it is appropriate to terminate India’s designation as a beneficiary developing country effective June 5, 2019.”

The announcement, which has been postponed from March this year, will provide a fresh set of challenges for Minister Goyal, who has to tackle slow export growth and headwinds from uncertain global economic conditions.

While India, officially downplayed the move by one of its largest trading partners, maintaining that since most of its US-bound shipments are already out of the GSP purview. “GSP withdrawal will not have a significant impact on India's exports to the US. The benefits in the absolute sense and a percentage of trade involved are very minimal and moderate. India mainly exports raw materials and intermediate goods such as organic chemicals to the US”, said Commerce Secretary Anup Wadhawan has said in March.

Impact or no impact?
It is difficult to ascertain what the long-term ramifications of the order will be, but it is certain that the impact will be different across different sectors and export items. Some items will be impacted, while other items will not be. India has about $22-billion in trade surplus with the US, which pales in comparison with the $566-billion surplus that China has with the US, but the Trump administration had been particularly irked by India’s stance on particular items.

Source: USTR

Trump has often complained about Harleys imported into India were subject to a 50 percent tariff followed by high tariffs on solar panels. Trump’s grouse extended to prices of medical stents and even ecommerce. It can be argued that at a time when India could have been a strong substitute and partner for the US in its much larger trade war with China, withdrawal of GSP is a mistake.

“The US needed to take a call on this carefully. If the US wants to increase duty on number of products for China, they should make other countries more competitive. If I see the data of the last three months, there is a major gain for India under GSP in products where the duty on China has increased. This essentially implies that if GSP continues, India can try to take the place vacated by China,” says Ajay Sahai, DG & CEO, Federation of Indian Export Organisations (FIEO).

The Impact:
India's export of goods to the US is about $50-billion. Not all products are under GSP and most of the products that top India’s exports to US are not under GSP, for example- precious stones (diamonds), jewellery, Motor vehicles, fuel (refined crude), Pharmaceuticals, many apparel products etc. Of the major export products, some chemical products, machinery and parts, automobile parts are covered under GSP and their exports will be impacted.

“US Government had initially announced to withdraw GSP status for India from May 3, 2019 onwards. However, it was informally deferred, probably till the general election results were announced in India. Now that the new ministers are sworn in, and the US has decided to go ahead with the removal of GSP status, the Indian Government may have to evaluate alternative options to provide concessions to the exporters impacted by the removal so that they can partially or fully absorb the impact. Of course, these have to meet the norms prescribed by the WTO and agreed by India,” says Waman Parkhi, Partner – Indirect Tax, KPMG India.

Parkhi adds that exporters impacted have also to analyse the impact of the removal of GSP and re-negotiate prices with Customers. They should also evaluate other markets to de-risk their business.

Expressing concerns that the sector’s US-directed exports could now be adversely impacted by the scrapping of the GSP, Puran Dawar, Agra Footwear Manufacturers and Exporters Chamber (AFMEC), says that the decision would certainly have a bearing on the leather goods exports to the US and this comes at a time when the made-in-India items, on the US turf, are already grappling with stiff competition, with items especially from China and Vietnam. It could be highlighted that the US represents the highest share of Indian leather exports and the Council for Leather Exports (CLE) has set an ambitious target to accomplish exports of $10 billion by 2024-25 from the current level of $5.73 billion, and experts opine that Trump’s decision might derail the pace here, to some extent.

Many items may escape any large-scale impact, but it is clear that items primarily produced by small industries will get impacted. Having a zero-duty or very low tariff on these items was a big deal for small businesses, which would now have to face import tariffs. The irony, according to Bipul Chatterjee, ED, Consumer Unity and Trust Society (CUTS) International is that most of the items exported under the GSP scheme were intermediate products that are being used to manufacture value-added items in the US. “As a result, the cost of production will go up both for the American producers and for the end user/ consumers – which is not a desirable scenario for the cause of bilateral Indo-US trade.”

According to Bloomberg, Dan Anthony, the executive director of the Coalition for GSP, says the decision will cost American businesses over $300 million in additional tariffs every year. “There are no winners from today’s decision,” Anthony said in a statement. “American importers will pay more, while some American exporters will continue to face current market access barriers in India and others, including farmers, are very likely to be subject to new retaliatory tariffs.”

(With inputs from Neha Dewan and Shariq Khan)
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