GSP removal may cut India's trade war gains

At the macro level, the loss to India from the withdrawal of Generalised System of Preference (GSP) by the US may seem minuscule, but it has tilted the scale in the favour of China in the triangular trade equation between India, US and China.

Additionally, India will now have to work on duty concessions for exporters to keep them competitive in the US market at a time when the global demand is weak and our overall exports have not been doing too well.

Sectors such as imitation jewellery, chemical, plastics, leather, pharmaceutical and surgical, basic and processed foods are going to be most affected.

On Friday, the Trump administration decided to terminate the GSP effective from June 5, citing India's reluctance to assure the US an "equitable and reasonable access to its markets".

Ajay Sahai, director general and CEO, Federation of Indian Export Organisations (FIEO), told DNA Money only 12% of India's total exports to the US were under GSP.

However, the recent US move could wipe off all the gains that had come India's way due to the trade friction between the US and China.

"Indirectly, it will be a gain for China. China was exporting to the US under the Most Favoured National (MFN) and India under GSP. Assuming the general tariff on China before the imposition of the punitive tariff was 5% and India was exporting under GSP at 0%. In such a scenario, India's gain was 5%. But the moment US increased tariff on Chinese goods to 20% Indian goods became competitive by 20%. Now, with the removal of GSP, India has moved from 0% to normal tariff. So that much is India's loss. And India's loss is definitely China's gains," he said.

Sahai said of the 1,921 "tariff lines" which come under GSP, close to 150-200 tariff lines will get adversely affected in terms of commercial viability. These are categories, which could see profit margins being totally eroded once the GSP goes and will need duty concessions from the government to sustain their US exports.

"For instance, in imitation jewellery, where my profit is 5.6% and GSP was 11%; naturally, if I have to now (after removal of GSP) pay the 11% GSP, I will be outpriced in the market. In that situation, I will not be able to continue in the market. However, suppose for some products if the GSP was 6.8% and my profit margin was 15%, I can continue in the market by cutting down my profit slightly. In our analysis, the focus should be that we do not lose the market. For that, exporters should cut the margins and the government should extend support to them," he said.

As per the data available from the Office of United States Trade Representative, the total trade between US and India amounted to $142.1 billion in 2018. Of this, India's exports to the US was $83.2 billion and it had a trade surplus of $24.2 billion. India's exports to the US accounted for 2.1% of total imports of the US in 2018.

According to the Department of Commerce in the US, India was the thirteenth largest goods exports market but the tenth largest supplier of goods into the country in 2018.

D K Srivastava, chief policy advisor, EY India, told DNA Money, a lot will depend on the agility of the government to respond to the "new situation" to ensure that Indian exports remain relatively competitive despite the retraction of the GSP.

Ganesh Kumar Gupta, president, FIEO, said on the $6.35 billion exports from India to the US which came under the GSP scheme, the benefits accrued to Indian exporters were only $260 million.

He saw some difficulty for exporters with products, which had GSP of 3% and more, absorbing the loss.

Gupta also saw China gaining from the latest development. "In the first two months of 2019, GSP imports from India are up significantly for products on the Section 301 lists (Chinese goods on which the US increased tariff), but down for products where China does not face new tariffs. For India, 97% of increased 2019 GSP imports are on the China Section 301 lists. GSP imports on Section 301 lists increased 18%, while imports of everything else increased by just 2%. This makes a very strong case for the extension of GSP benefits for India. Indian government should provide some supports to products where GSP loss has been significant so that the (US) market is not lost".

He favoured the extension of Rebate of State & Central Tax Levies Scheme (RoSCTL) on such exports products to the US.

Dan Anthony, executive director, the Coalition for GSP, estimated Trump's GSP decision would cost American businesses over $300 million in additional tariffs every year.

He reportedly said taking back of GSP benefits from India will lead to new taxes for American small businesses, which could result in job losses and cancelled investments and increased cost for consumers.

As per the latest statistic put out by US Department of Commerce, US exports supported 1.97 lakh jobs in 2015.

Sahai believes it was "still not the end of the road" for talks on the issue; "one always has some room for negotiations. We need to tell the US that GSP was also be benefiting the US. Secondly, we also need to highlight that the prime aim of the US was to hit China and that the extension of benefit (GSP to India) served that objective pretty much," he said.

The two major sticky points in the negotiation for the GSP was the tariff on medical diagnostic equipment and the non-vegetarian diet of animals for the dairy products imported by India from the US.