US-India trade war? Look before you leap

• India is firmly planning to counter the US move to withdraw GSP on Indian goods by imposing retaliatory tariffs from the coming month.
• India’s total exports to USA in 2018 remained at US$ 51.6 billion, while agricultural exports remained at US$ 4.71 billion.
• India was the largest beneficiary of the GSP program in 2017 with US$ 5.7 billion in imports to the US given duty-free status. Turkey was the fifth largest with US$ 1.7 billion in covered imports.
• Even the US stands to benefit from the GSP regime, since the intermediary inputs provided by India help keep its industry competitive.

India is planning to counter the US decision to withdraw GSP on its exports by imposing retaliatory tariffs from the coming month. If the Indian government goes ahead with retaliatory tariffs, twenty-nine items imported from the US, including walnuts, lentils, boric acid and diagnostic reagents, among others will face higher duties, cutting benefits to US exporters. The move will impose an additional burden of US$ 290 million per year on US items exported to India.

Are we moving towards a new trade war as it happened with US-China last year? It’s crucial to analyze and assess the realistic scenario for both countries before taking action. India’s total exports to US grew at a CAGR of 9.6% from 2009 to 2018, while corresponding world exports to USA grew at 5.7%.

Now it’s well-known that US is ending the preferential trade status granted to India and Turkey, asserting that India has failed to assure America of ‘equitable and reasonable’ access to its markets. The justification given is that India has implemented a wide array of trade barriers that create a seriously negative impact on US commerce as per USTR.

India’s top exports to the US under GSP in 2017 included motor vehicle parts, ferro alloys, precious metal jewellery, building stone, insulated cables and wires. Out of US$ 36 billion of exports to the US by India, US$ 5.7 billion worth of exports will be affected, marginally impacting US trade deficit with India.

India’s trade surplus for merchandise goods with the USA is around US$ 18-19 billion. Also, most of the exports are of intermediate goods not produced in the US.

From 2015 to 2017, imports of capital goods (machinery, equipment, aircraft, semiconductors, engines, tractors, etc) and industrial equipment (lumber, chemicals, aluminium and copper, iron and steel, cotton and wool, plastics, fuels, etc) together accounted for 55% of the total imports of USA. Notably, over half of what enters the US as imports constitutes orders from US companies (e.g. manufacturers) for equipment, supplies, raw materials, commodities, and other imports that serve as direct inputs into the production process that takes places in American factories and businesses that employ millions of American workers.

And the lower the price of inputs for US businesses (whether sourced internationally or domestically), the more competitive those companies are, the more of their products they can sell (both international and domestically), the greater market share they can achieve, and the more US workers they can hire. So higher prices of inputs actually work to the detriment of US companies. The loss to the US can easily cross the US$ 190 million burden on India due to the removal of GSP.

How GSP has benefitted India

Under the US GSP programme, nearly 2,000 products including auto components and textile materials can enter the US duty-free if the beneficiary developing countries meet the eligibility criteria The US GSP scheme was introduced in 1976, with India included in the list of beneficiary countries. However, it is subject to conditions and one of the criteria applied is whether the beneficiary concerned is providing equitable and reasonable access to its markets. The US government takes up a review of the beneficiary government’s practices every year.

This year, the US trade representative (USTR) has commenced a review of the GSP eligibility of three beneficiary countries — India, Indonesia and Kazakhstan. According to the notice by USTR, the review has been launched against India based on complaints against trade barriers made separately by US dairy interests and the medical devices industry. It is evident that continuation of this benefit is going to involve a process of give and take. There are several trade issues between India and the US but the GSP review sets up a mini-agenda of three issues for intensive dialogue.

Even though the MFN tariffs of the United States on industrial products have come down considerably after successive rounds of negotiations, duty free access under the GSP remains meaningful, as even low duties make a difference in an intensely competitive world. It gives beneficiaries a significant advantage over China and eliminates the disadvantage vis-à-vis countries like Korea and Mexico, which are the USA’s partners in FTAs. The rules of origin are relatively simple: if the product is not wholly produced in the beneficiary country, there should be at least 35% value addition in that country.

As regards the benefit of the US GSP for India’s trade in recent decades, there is reason to be more than mildly positive. Total US merchandise imports from India have increased roughly three-fold from US$ 16.4 billion in 2000 to US$ 51.7 billion in 2018, while GSP imports rose by five times from US$ 1.1 billion to US$ 5.7 billion during the same period. From 6.9% in 2000, India’s share under GSP from all beneficiaries has grown to as much as 26.7% in 2017. Undoubtedly, India has been one of the largest beneficiary developing countries every year since 2011, but it always provided competitive intermediate inputs to the USA. Some of the benefited products are auto components, machinery and mechanical appliances and electrical machinery.

The jewellery sector benefited in the past, with imports touching a high of US$ 2.4 billion, before their GSP treatment was curtailed under competitive need limits (CNLs). Clearly, GSP has helped push forward India’s exports to the US. In the trade dialogue, India should not be content only with the continuation of its GSP beneficiary status, but should up the ante by asking for the restoration of the benefit for the excluded jewellery tariff lines in which imports into the US have been below the statutory red lines of the CNLs in recent years.