Decoding the GSP puzzle

The United States (US), on June 5, withdrew duty-free market access to over 3,600 products that it was providing to India under the Generalised System of Preferences (GSP).  

The GSP was put in place in 1971, under which 13 developed countries provide duty-free access to designated products for beneficiary developing countries.  

While most developed countries introduced the GSP in 1971, the US accepted this system of preferences in 1976, after the Trade Act of 1974 authorised the US president “to extend duty-free treatment to certain eligible products imported into the United States from beneficiary developing countries”.  

The US extended GSP benefits to 104 countries before it removed India from the list of “beneficiary developing countries”.

The Trade Act of 1974 also outlined a set of conditions for determining whether any country should be designated as a beneficiary developing country.

These are: (i) a request by the country to be so designated, (ii) the level of economic development of such a country, (iii) whether or not the other major developed countries extend their GSP scheme to the country, and (iv) the extent to which the country has assured the US of equitable and reasonable access to its market and basic commodity resources.  

These conditions gave the US trade administration discretionary powers.  Alongside, the Act also introduced a mechanism that was to be used to review if specific products originating in the beneficiary developing countries could continue to enjoy the GSP benefits.  

One of the key mechanisms is the Competitive Need Limitations (CNL). This states that a beneficiary developing country could lose its GSP eligibility with respect to any product if the CNLs are exceeded.  

There are two measures for CNLs: (i) when, during any calendar year, import of a particular product into the US from a beneficiary developing country accounts for 50 per cent or more of the value of total imports of that product into the US, or (ii) exceeds a certain dollar value. As per the GSP rules, the dollar-value limit is increased by $5 million annually. The limit set in 2017 was $180 million. There were indications since last year that the Trump Administration was taking steps towards eventually denying India the benefits under GSP.  

The US president, on October 30, 2018, announced the decision to exclude 94 products from the list of GSP-eligible products, for 16 countries beginning November 1, 2018.  

There were 50 products in the exclusion list in which India was the principal beneficiary. The targeted list of products for India was the largest among the 16 countries, whose products lost the GSP beneficiary status.

In March 2019, the United States Trade Representative (USTR) announced the Trump administration’s intent to terminate India’s designation as beneficiary developing country under its GSP programme since it was not complying with the “statutory eligibility criteria”.  

India was targeted, according to the USTR, for its failure to provide the US with “assurances that it will provide equitable and reasonable access to its markets in numerous sectors”.  

This was the beginning of a mandatory 60-day period, which is required to be given before a final decision was taken whether to retain the country in the list of beneficiaries.  

Finally, on May 31, Trump announced his decision to remove India as a beneficiary country under the US GSP programme, effective from June 5.

The decision of the US president was based on an eligibility review conducted by the USTR in April 2018. This review was conducted on “concerns” related to India’s compliance with the GSP market access criterion, but more importantly, on two petitions related to the same criterion.  

The petitions were filed by the US dairy industry and the US medical device industry (Advanced Medical Technology Association) requesting the USTR to withdraw India as a beneficiary country, given Indian trade barriers affecting US exports in those sectors.  

The latter petition was regarding the price controls that the government of India had introduced for coronary stents and knee implants aimed at making such devices affordable in the country.

These expressed reasons for removing India from the list of GSP beneficiaries hardly sound convincing. It is clearly part of a strategy adopted by the Trump administration to target the Indian market.  

Trump has frequently spoken of the “disadvantage” the US faces due to India being a “very high-tariff nation”. There should be no doubt that there will be further measures taken against India, including implementing “a measure in the form of a safeguard to address increased imports of articles that are a substantial cause of serious injury to a domestic industry producing competitive products”; this was mentioned by Trump in his May 31 proclamation.

What are the implications of India’s removal from the list of US GSP beneficiary countries? According to a research conducted for the US Congress, in 2018, India was the largest beneficiary developing country, accounting for over 25% of US imports under GSP.  

India’s exports of GSP beneficiary products were $15 billion during April-February 2018-19, which was just less than a third of the total exports to the US.  

Six sectors – gems and jewellery, electrical and non-electrical machinery, chemicals, auto components and iron and steel products were the main beneficiaries – with each sector exporting more than a billion dollars. These products would now have to pay tariffs to enter the US market.

It may be mentioned that the tariffs on these products is below 3% for nearly a fourth of the total, which are usually called “nuisance tariffs” because they effectively provide no protection to the domestic industry.  

But, these tariffs could cause considerable “nuisance” to the exporters in the form of procedural formalities that would have to be thoroughly reviewed. This would increase the cost of transaction with regard to exporting to the US.  

The author is with Centre for Economic Studies and Planning, JNU