The genie is out of the bottle. After constantly objecting to India’s trade restrictions on import of goods, the US has finally responded by announcing the withdrawal of the preferential tariff benefits to India under the Generalized System of Preferences (GSP) programme.

However, given the chequered use of preferential tariffs by the US, the recent measure deserves a closer look.

One of the key principles of WTO (World Trade Organization) law is the provision of non-discrimination between WTO members, i.e., the principle of Most-Favoured Nation (MFN). Applying lower tariffs to imports coming from certain countries would be against the MFN principle. However, the enabling clause permits members to derogate from this MFN principle and provide preferential tariffs to imports from “developing countries".

There is no criteria for qualifying as a developing country in WTO—a member may self-elect itself as a developing country.

An analysis of average MFN tariffs applied by the US (as reported in the WTO tariff analysis online database) is of interest. The average MFN tariff by the US on import of goods is around 3.5%. Thus, for many products of export interest, the MFN tariff, in the absence of GSP benefits, may not be very high and may not have significant impact.

However, it appears that the withdrawal will impact different products of export interest at varying degrees depending upon the applicable MFN tariff.

Irrespective of the eventual trade impact, the US action is at loggerheads with its WTO obligations. Requiring the developing countries to provide “reasonable and equitable market access" is not strictly in compliance with the enabling clause, which expressly requires grant of preferential treatment by developed countries to developing countries to be on a non-reciprocal basis.

Withdrawal of GSP benefits on such pretext also undermines the objective recognized in the preamble to the WTO Agreement that there is a need for “positive efforts" to ensure that developing countries secure a share in their growth in international trade commensurate with the needs of their economic development.

GSP benefit to India is not being withdrawn because it has crossed certain financial, developmental or trade threshold, but because it has not reciprocated with “reasonable and equitable market access". Such criterion for discriminating between developing countries is not consistent with WTO.

There is also an obligation to not discriminate between “similarly situated" developing countries. The WTO Appellate Body, in response to the complaint by India, in the case of European Communities—Conditions for the Granting of Tariff Preferences to Developing Countries (EC-Tariff preferences)—decided that discrimination between similarly situated developing countries is not consistent with the WTO obligations of the member country.

The US action does not even attempt to distinguish or identify developmental, financial or trade needs of India vis-à-vis other developing countries.

India’s response to the US action is yet to be formally announced. The record shows that India has been reluctant to resort to retaliatory tariff but has not been shy of initiating WTO dispute against the US. Another alternative in this case is to bend over backwards and allow what the US considers “reasonable and equitable" market access.

Dhruv Gupta is partner at Lakshmikumaran & Sridharan.

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