Why markets should pay attention to the latest India-US trade spat

  • A blanket removal of the GSP scheme for India means that about 1,900 products exported by the country to the US will be hit
  • The predominant share of exports under the GSP scheme is from SMEs, which are typically labour-intensive

There is a trade conflict brewing between India and the US. But it did not seem to matter for India’s financial markets; both the rupee and the stock markets rallied on Tuesday. Of course, the financial markets aren’t always the best barometer to assess the impact of policy decisions, especially those with long-term implications.

The Indian government, too, has played down the impact of the US move to withdraw duty benefits on Indian products under the Generalized System of Preferences (GSP) scheme. But experts disagreed.

“According to some media reports, the government is saying there will be a minimal impact of about $190 million. It looks like they are downplaying the issue. We don’t know the basis of this calculation. Since the US is a key export market for India, any impact is sure to have adverse implications, especially on small firms," said Biswajit Dhar, professor of economics at Jawaharlal Nehru University, Delhi (JNU).

To be sure, the macro impact of this development cannot be ignored. At a time when India’s export growth remains sluggish, and trade deficit remains a concern, any impact on exports can only worsen the scenario.

It could also translate into loss of employment, since the predominant share of exports under the GSP scheme is from small and medium enterprises, which are typically labour-intensive. An Indian government official had said at a US government hearing that “the predominant share of GSP beneficiary items exported from India are intermediaries and semi-manufactured goods".

As far as the impact on overall exports go, it may be fair to conclude that the loss may not be very high. After all, total exports of around $5.6 billion under the GSP scheme amounted to around 12% of total exports to the US in 2017, and a far smaller proportion compared to India’s total exports.

But even if there is a $1-2 billion impact as a result of the withdrawal of GSP scheme, the eventual impact on the country’s balance of payments will be greater, said the head of research at a multinational brokerage firm, requesting anonymity. The gap would need to be made up through higher capital flows, increasing other exports or by reducing imports, none of which can be taken as a given.

As the chart above shows, India’s trade relations with the US have only grown in size over the years. But recent developments could mean a reversal in trend. The withdrawal of the GSP scheme for Indian companies comes on the back of far greater restrictions on visa issuances for Indian firms under the Donald Trump administration. While Indian IT companies have adapted by increasing local hiring, this comes at the cost of lower margins. “Visa issuances are at about a fifth of what they used to be a few years ago," said an analyst at a multinational brokerage firm.

Coming back to the trade spat, it must be noted that India had challenged a similar move by the European Union (EU). “In 2002, EU rewrote their GSP preferences that discriminated against India. One of the sectors that got severely hit was textiles and clothing. India had then approached the Dispute Settlement Body of the WTO (World Trade Organization) contesting the case of discrimination against us, which was a violation of GSP rules. And considering the slowdown in the global economy, it will be challenging for Indian exporters to compensate for the potential losses in the US," added Dhar.

India has had a part to play in the strained trade relations as well, point out analysts, with its new restrictions in the e-commerce space, which have curtailed activities of US companies such as Walmart Inc. and Amazon.com Inc.

Indeed, the US review of GSP preferences for India was conducted after complaints by a body of US dairy product makers and a medical devices manufacturer, both of whom said that the country hasn’t reciprocated, and has instead created barriers for entry in these segments.

But the blanket removal of the GSP scheme for India means that about 1,900 products exported by the country to the US will be hit. “Popular items that India exports to the US under the GSP programme includes many intermediary products such as mechanical spare parts, ferro alloys, food products, gems and jewellery, textile products, electronic products like motors, wires etc.," said Rahul Khurana, associate partner at Economic Laws Practice, a law firm.

Interestingly, one of the reasons the financial markets are doing well lately is the prospect of an end to the US-China trade war. While that would be an event to celebrate, the trade tension between the US and India clearly does not bode well.

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