US trade representative Robert Lighthizer. (Reuters)
US trade representative Robert Lighthizer. (Reuters)

Opinion | A bumpy road ahead for India-US trade relations

The two countries should continue to talk and explore ways of resolving their knotty issues

The sword hanging over India’s preferential access for its exports to the US market has finally fallen. On 4 March, US trade representative Robert Lighthizer announced that the US intends to terminate India’s designation as a beneficiary developing country under the generalized system of preferences (GSP) programme. According to the United States trade representative, India’s termination from the GSP programme follows “its failure to provide the United States with assurances that it will provide equitable and reasonable access to its markets in numerous sectors". What would be the impact of this action and how should India respond? Also, is there any significance in the timing of this action?

The termination of GSP benefits is likely to adversely affect about $5 billion of India’s annual exports to the US. This amounts to 10% of India’s total exports to that country. At a macro level, the termination of benefits under the GSP would wound the country, but would not prove to be a fatal blow to India’s export ambitions.

Of course, the specific sectors that benefitted from access under America’s preference regime would face the brunt. The loss of the associated benefits would raise the price of exports of these sectors, thereby posing challenges to them in competing with other countries in the American market.

So, what are the options available to India? Let us examine them.

First, the sectors likely to be adversely affected by loss of benefits under the preference regime need to enhance their cost competitiveness. This will help offset the erosion of the GSP tariff advantage and facilitate the retention of their market share in the US. If need be, the government could provide some financial support as an emergency measure to these sectors. However, this should not be in the form of export subsidies.

Second, in July last year, India had announced its intention to impose retaliatory tariffs on the US for the latter’s steel and aluminium tariffs, allegedly for protecting America’s national security. So far, India has refrained from imposing those retaliatory tariffs. With the preferential benefits at the verge of being terminated, there should be no trade-related reason for India to hold back these tariffs.

Third, under the rules of the World Trade Organization, tariff preference schemes such as America’s GSP are required to be non-reciprocal. In other words, the US cannot demand reciprocal market access for its exports to India in return for granting benefits under the scheme. As such, the reason stated by the US for terminating these benefits to India—India’s supposed failure to provide equitable and reasonable market access to American goods—falls foul of World Trade Organization rules. New Delhi must move fast and challenge the termination of these benefits under the organization’s dispute settlement mechanism. This would signal India’s intention that it expects America and other countries to play by multilateral, not unilateral, trade rules.

Fourth, it is no secret that the US wants India to lower tariffs in many sectors, particularly dairy products and wheat. Cheap and highly subsidized imports from the US in these sectors would result in severe loss of livelihoods in India. It is, therefore, not surprising that India has stood its ground and not given in to this particular demand by Washington.

However, can the Indian government identify products where it can provide additional market access to the US, without there being a large-scale negative fallout on employment levels in the country? This engagement should be accompanied with a list of products from India on which it could request the US to lower its tariffs.

Why has the US chosen this moment to terminate India’s benefits under the generalized system of preferences? Two reasons can perhaps explain the move.

First, in the current security environment, India needs the backing of the US, which has chosen a time to strike on trade when India is vulnerable in its international relations. Perhaps the US calculus is that India will succumb on trade issues, in exchange for its continued support of India in geopolitical and strategic matters. India’s policymakers and political leaders need to have ample clarity on how to strike an overall balance in the country’s interest in different spheres. They need to keep in mind the reality that anything which makes the country economically weaker will also reduce India’s heft in the global political arena.

Second, at this juncture, the prospect of a deal between the US and China to lower the heat on trade war appears to have brightened. The message that the US is trying to convey to India is the following: If it can extract concessions at the negotiating table from China, then what chance does India have to resist the US? This is clearly a part of the mind game that Washington seems to be playing and which Indian policymakers need to be cautious about.

Overall, termination of India’s benefits under the generalized system of preferences presages a bumpy road ahead in bilateral trade relations between India and the US. It is essential that the situation does not spiral out of control. The best course for both countries would be to continue to talk and explore ways of resolving their knotty trade issues.

Abhijit Das is head, Centre for WTO Studies, Indian Institute of Foreign Trade.

Views expressed are personal

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