How Donald Trump’s GSP gambit boomeranged, but worked instead for India
A review of India’s eligibility for the GSP scheme was ordered in 2018, and India was removed from the programme, which currently has 120 beneficiary countries, in June 2019.
Indian exports to the United States of goods that were previously allowed in duty-free under a special trade scheme called the Generalized System of Preferences (GSP) increased in the six months after the Trump administration withdrew these benefits last June and sought to leverage their resumption to extract concessions, according to people familiar with the negotiations and parliamentary communications by the Modi government’s commerce ministry.
The restoration of these GSP benefits in exchange for concessions — essentially more access for US firms to certain Indian markets — were to have been key components of a limited trade deal that was intended to be announced during President Donald Trump’s just-concluded India visit, his first as president. It didn’t, to all around disappointment. India and the United States declared Tuesday, after talks between President Trump and Prime Minister Modi they will “promptly conclude” Phase One of a comprehensive bilateral trade agreement at a future, but undetermined date. Possibly after the November elections in the US, as Trump signaled.
The unexpected growth in exports of these goods, which may or may not last in the long term, Indian negotiators had felt emboldened by the windfall, and less compelled, as a consequence, to concede ground in negotiations with American officials, who may have made it worse, Indians have argued, by constantly “changing the goalpost”.
The termination of GSP benefits was nowhere as crippling as Indians feared. Though the government had sought to underplay its impact, it had tried hard to prevent it, from the time a review was ordered into India’s eligibility for the scheme in 2018. India was kicked off the programme, which currently has 120 beneficiary countries, in June 2019.
“So far the cumulative exports under the GSP tariff lines have not declined in the post GSP withdrawal period (June – Oct 2019) as compared to the corresponding period of the previous year,” Union commerce minister Piyush Goyal told the Lok Sabha in response to a written question on December 11, 2019.
But the US plan was unravelling in the most unexpected way. The growth in the export of GSP goods, ranging between 3,500 to 3,800 different items, is understood to have gone up by 5.5% over the corresponding period, which is way more the 1.9% growth in overall Indian exports to the United States, according to people closely associated with India-US trade discussions.
It was not a uniform increase across the spectrum of good, those people said. Kitchen gadgets and equipment and gadgets, for instance, declined. But some others shot up noticeably. India exported processed foods, leather and gems and jewelry worth $783 million to the United States in 2018. The export of these goods jumped by almost 3.8% in 2019 between June, after the withdrawal of GSP benefits, and September, according to data cited by the commerce minister in a Lok Sabha reply.
GSP has been a key part of India-US trade. It accounted for $6.3 billion worth of Indian exports to the United States in 2018, which is a 12.1% of total Indian goods exports to the United States — a sixth. The total duty saved because of the scheme was $240 million. Indians were worried, more significantly, of losing American importers of their goods, which would be costlier now because of the newly imposed tariffs. Their buyers could dump them for other suppliers, it was feared.
But their importers stood by them by and large, leaving even Indians impressed by the “resiliency” of the demand for their goods. That the tariffs that went into effect after the termination of the GSP were not substantial and ranged between 0.25% and 8% also helped, according to the people familiar with these negotiations.
They conceded that the importers could be staying with their suppliers for now in the hopes of India being restored the terminated benefits, which is a distinct possibility, as the key Indian demand for any future trade deal. In the unlikely scenario of that not happening they might switch to other suppliers to keep their costs down.
Biswajit Dhar, a professor of economics at JNU and former trade negotiator for India said, said there could be two factors contributing to the continued uptick and even growth of the erstwhile GSP goods. One, transactions between exporters and importers are sometimes bound by medium-term contracts and they will continue to do business till they run out or a reviewed.
Two, there is a question of “substitutability”, if the importer can source these goods from somewhere else.
The 25% and 10% tariff on Indian steel and aluminum exports to the United States levied by President Trump in March 2018 on countries with significant trade surplus over the United States had also not been debilitating enough.
Indians were among the last to appeal to the Trump administration for exemptions, as other countries. and were prepared for the long haul.
“The impact of the increase in these tariffs has been limited,” the commerce minister told Lok Sabha in response to a question on February 5. The share of United States in India’s exports of steel came down from 3.3% to 2.5% in 2018-19. India also took the US to the WTO’s disputes settlement mechanism.
But the Modi government did address the underlying reason for the levy, and has been chipping away at the deficit with bigger and bigger purchases of American natural gas and oil, defense equipment and passenger planes.
The deficit is down from $30 billion in 2017 to $24 billion. The president noted it at a news conference in New Delhi earlier in the week, but kept up the pressure. “It’s now down to $24 billion because of what we’ve been doing,” he said. “But still, that’s too high. We shouldn’t have a 24-billion-dollar deficit.”