The US recently announced the termination of its Generalized System of Preferences (GSP) designation for India. Under the GSP, certain designated goods had been permitted to enter the US duty-free. While the US action has made the headlines, its origins and implications are not well understood. What is the larger significance of this spat?
As background: Indian merchandise exports to the US in 2018 were about $55 billion, of which only about $5.5 billion were exports under GSP. The “preference margin” that India enjoyed by gaining duty-free access on these goods was only about 3-4%. If this cost is completely absorbed by Indian exporters, the withdrawal would translate into a loss to India of about $200 million. However, if India has market power in any of these industries, the cost may be passed on to US customers in the form of higher prices. Market realities will determine the sharing of this burden; the ultimate cost to Indian exporters could be considerably lower. Regardless, the costs of GSP withdrawal are quite modest.
What is the legality of the US action? It is widely believed that GSP was a unilateral US concession to India and theirs to withdraw at their whim. This is incorrect. Because of the World Trade Organization’s (WTO) “non-discrimination” clause, the granting of concessions by any WTO member to another is only permitted under specific rules. The GSP is permitted under the WTO’s “enabling clause”, which permits developing countries to receive preferences but only if preferences are extended to all developing countries equally.
Thus, on the face of it, the unilateral withdrawal of the GSP concession from just India could be argued to be WTO-illegal. The US rationale is that a country receiving a GSP preference must meet its eligibility criteria and offer “equitable and reasonable” access to its markets. Its specific complaint against India has originated, inter alia, from its exporters of medical devices, who have alleged that the imposition of price caps by India on devices such as heart stents have lowered their sales and profits.
However, the enabling clause explicitly states that preference-granting countries may not expect “reciprocity” from developing countries in the form of lower trade barriers, especially if these barriers are inconsistent with the recipient countries’ “development, financial and trade needs”. An Indian challenge of the US decision at the WTO on the basis that it is discriminatory could also find strength in precedence: India won a similar case against the European Union (EU) following its denial of GSP for India 2003 on EU “eligibility” grounds.
Further, the US action against India, which has claimed that the price caps on medical devices were simply intended to prevent price-gouging by local hospitals, may seem rather ironic in light of US President Donald J. Trump’s own announced intention to seek price caps on sales of pharmaceuticals in the US.
Yet, apart from ironies and the legal niceties, India faces the reality that due to US procedural opposition to the appointment of judges the WTO’s dispute settlement mechanism is backlogged and at risk of collapse by year’s end, when only two judges will remain—since a minimum of three judges is required to constitute a bench. Even more daunting, the Trump administration appears to have offered an implicit threat: Findings by the WTO against the US may trigger a US exit from the WTO system altogether. Prominent WTO members appear to have understood that, for the time being, it may be in their own best interests to withhold challenges to the US lest the whole system come crashing down.
A larger point is that Trump has drawn a clear distinction between friendship and commercial interest. Allies will not be spared the full force of US economic power in pursuit of its perceived national interest. Whether the US was a “benevolent hegemon” in the past, underwriting the stability of the global geopolitical and economic systems, or not, can be debated. Under Trump, it will clearly not, however, take on this role in the future.
India’s long-term developmental and strategic interests clearly involve greater economic alignment with the US. Negotiating ticklish trade disputes with an unpredictable but powerful partner will require a delicate balancing act. On the one hand, an aggressive Indian response could provoke significant retaliations. On the other hand, not reacting could well be perceived as weakness and set India up as a soft target for Trump’s next trade tantrum.
For its part, India would do well to set aside legal rectitude and reflect instead on the optimality of its own trade policy choices. Our policy reversals in the last two years, with arbitrary tariff increases on a number of goods, and our continued use of high tariffs (“spikes”) on a limited yet significant range of other goods have marred an otherwise laudable record of liberalization in the last three decades. Unilaterally eliminating tariff spikes and harmonizing the tariff regime to a low and simple single rate system (of a revenue-preserving 5-7%) will serve the Indian economy well, accelerate its desired integration with global production chains and earn the admiration of our trading partners—perhaps, as an added bonus, even the irascible Trump.
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