Battling against US protectionism

The year 2018 has been an exceptional year for India-US economic relations. Trade tensions triggered by protectionist measures taken by the US Administration following the show of aggressive intent by President Donald Trump against the major economies, has left India in a piquant situation.

While several of those targeted have either adopted retaliatory measures or have decided to concede ground to the largest economic power, India seems to have been caught between the imperatives of maintaining a policy of non-confrontation with its strategic partner, on the one hand, and to protect the interests of domestic manufacturing industry, especially when the industry is facing some of the most serious challenges.

In March, President Trump announced his decision to block imports by imposing “reciprocal tax” against countries using tariffs on American products. The objective was to trigger the revival of the American manufacturing sector. Through a Presidential Proclamation, import tariffs of 25% and 10% were imposed on steel and aluminum, by invoking the provisions of Section 232 of the Trade Expansion Act of 1962. This provision allows the Administration to take measures to protect domestic industries for “national defense” and “national security”.

India was among the countries adversely affected by increased import tariffs on steel and aluminum. Indian exporters faced an additional burden of $241 million arising from the proposed import duties, which was nearly 20% of their export realisations in calendar year 2017.

Until 2015-16, the United States was one of the largest markets for the Indian industry, with an export share of above 8%. In the subsequent years, exports declined precipitously, and the export share dipped to less than half in the subsequent years.

With its exports to one of the world’s largest steel markets already on a down-hill, Indian steel industry, thus faced an uncertain future.

Like most affected countries, India tried to initiate negotiations with the US Government by announcing retaliatory measures. In May, India submitted a notification in the WTO, indicating that tariffs on 20 products imported from the US would be increased.

Included in this list were agricultural products like soya beans and palmolein, and the American icon, Harley Davidson motorcycles. In a later notification in June, India increased the list to 30 products, but subsequently, Harley Davidson was taken off the list.

Although the increase in import duties were to take effect from August 4, this action was deferred, presumably because of the two-by-two dialogue between India and the US, which was held in the third week of August.

While India’s position has been to find a negotiated solution to the trade frictions, the US Administration has adopted an aggressive stance towards India and other trade partners, which was underlined by President Trump.

Yet another evidence of this stance was the increase in anti-dumping actions against India in 2018. Until mid-November, the US Customs and Border Protection had taken anti-dumping actions against 27 products exported by India, the highest in recent years.

Interestingly, a majority of these products included those from the iron and steel industry. This shows that the injury to the Indian industry that began with the tariff hikes in March, was heightened by the anti-dumping action.

The most recent of US actions against India was the Presidential Proclamation of October 30 (Proclamation 9813) “To Modify the List of Products Eligible for Duty-Free Treatment Under the Generalized System of Preferences”.

This Proclamation gave a list of products from the developing countries, which would not receive duty-free access into the United States market from November 1, 2018, that they had hitherto enjoyed under the Generalized System of Preferences (GSP).

The GSP was introduced in 1971 after the second session of the United Nations Conference on Trade and Development (UNCTAD) had unanimously adopted it in 1968. Under the GSP, developing countries’ exports were granted duty-free access by the developed countries. Developed countries thus granted unilateral trade concessions to the developing countries for increasing their exports.

The US Trade Administration annually reviews the GSP preferences, examining whether exports from developing countries conform to Competitive Need Limitations (CNL).

A developing country can lose its GSP benefits on any product if the CNLs are exceeded. Two measures are adopted for assessing CNLs: import of a product from a beneficiary developing country accounts for 50% or more of the total imports of the product; or imports exceed a certain dollar value, which was set at $180 million in 2017.

Enforcement of CNLs is subject to waivers, the main being the de minimis waiver. This waiver sets a floor for the value of imported products below which CNLs cannot be enforced. In 2017, the floor was set at $23.5 million.

In its current year’s review, the US identified 94 products from 16 countries, which would lose GSP benefits from November 1, 2018. This list included 50 products imported from India, by far the largest number for any GSP beneficiary.

The list of products targeting imports from India are all relatively low-value products; more than half of the 50 products had import values of less than $1 million in 2017.

The product with the highest import value in 2017, hand-loomed carpet and other textile floor coverings, was just $10.3 million, way below the CNL threshold of $180 million. The Indian products for which US has withdrawn GSP benefits, clearly qualify for de minimis waiver, since their import values were below the threshold of $23.5 million in 2017.

It is time that the Government of India protects the interests of the domestic manufacturing industry from the increasingly protectionist American Administration.

Author is Professor CESP, JNU