General System of Preferences

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Why in
news?

  • US President
    Donald Trump has said that he intends to end India’s
    preferential trade treatment
     under
    generalized system of preferences (GSP)
  • Trump, who has
    vowed to reduce US trade deficits, has repeatedly called out India for its
    high tariffs. US claiming that New Delhi has failed
    to assure the US of “equitable and reasonable” access to its markets, a
    move India will not have a “significant impact” on its exports to America.
  • This
    move can be a big blow for India’s competitiveness in items groups such as
    garments, engineering and intermediary goods in the American market.

What is
Generalized System of Preferences?

  • The
    Generalized System of Preferences (GSP) is a U.S. trade program designed
    to promote economic growth in the developing world by providing
    preferential duty-free entry for up to 4,800 products from 129 designated
    beneficiary countries and territories. GSP was instituted on January 1,
    1976, by the Trade Act of 1974.
  • The GSP, instituted in 1971 under the aegis of UNCTAD, has
    contributed over the years to creating an enabling trading environment for
    developing countries.
  • It involves reduced/zero tariffs of eligible
    products exported by beneficiary countries to the markets of GSP providing
    countries.

Beneficiaries of GSP:

  • The following 13 countries grant GSP preferences: Australia,
    Belarus, Canada, the European Union, Iceland, Japan, Kazakhstan, New
    Zealand, Norway, the Russian Federation, Switzerland, Turkey and the
    United States of America.
  • The
    beneficiaries of GSP are around 120 developing countries. As on December
    2018, India and Brazil were the major beneficiaries in terms of export
    volume realised under GSP.
  • Imports from
    China and some developing countries are ineligible for GSP benefits. The
    beneficiaries and products covered under the scheme are revised annually.

Objective of GSP:

  • The main
    objective is to give development support to poor countries by promoting
    exports from them into the developed countries.
  • According to
    the US Trade Representative Office (USTR), GSP promotes sustainable
    development in beneficiary countries by helping these countries increase
    and diversify their trade with the United States. “GSP provide
    opportunities for many of the world’s poorest countries to use trade to
    grow their economies and climb out of poverty,” it reads.
  • According to
    the USTR, “GSP also boosts American competitiveness by reducing costs of
    imported inputs used by US companies to manufacture goods in the United
    States.”

How has GPS benefitted India?

  • The benefits amount to a saving of
    around $200 million for India, according to the latest commerce ministry
    data.
  • India was getting a tariff
    preference on 5,111 products, or what are called tariff lines, out of 18,770
    tariff lines in the US.
  • However, the tariff advantage was
    4 per cent and above on only 2,165 tariff lines.

GSP and usual trade agreements under WTO:

  • Under
    the normal trade laws, the WTO members must give equal preferences to
    trade partners. There should not be any discrimination between countries.
    This trade rule under the WTO is called the Most Favored Nation (MFN)
    clause.
  • The MFN instructs
    non-discrimination that any favorable treatment to a particular country.
    At the same time, the WTO allows members to give special and differential
    treatment to from developing countries (like zero tariff imports). This is
    an exemption for MFN. The MSP given by developed countries including the
    US is an exception to MFN.

Advantages of GSP:

  • Generally, developing countries
    export agricultural products, manufactured and semi-manufactured products
    which have a declining trend in the world market.
  • Particularly agricultural products
    have to be marketed in competition with the products of industrially
    advanced countries.
  • As advanced countries make use of
    sophisticated technology, their cost of production is comparatively cheap.
    So, developing countries do not get remunerative prices for their export
    commodities.
  • In view of these, developing
    countries are allowed to compete on preferential basis. While imports of
    products from developed countries are subject to normal rates of duties,
    exports of developing countries would be more competitive.
  • Challenges arise for
    beneficiaries in fully exploiting the market access opportunities
    available under these schemes, including in effectively meeting the rules
    of origin requirements.

Disadvantages or limitations of GSP

In spite of the above advantages, GSP
suffers from certain limitations:

  • The scope of GSP scheme is
    limited. Only dutiable products are covered under this scheme. So, the
    developing countries cannot take advantage of the GSP in respect of duty
    free products. Export of duty free products by developing countries
    suffers.
  • GSP gives only marginal relief to
    the export of agricultural products. In many countries, agricultural
    products are outside the purview of GSP.
  • Even manufactured products like
    textiles, leather products and petroleum products are not covered under
    the scheme.
  • Some of the GSP schemes limit the
    volume of exports. Ceilings that limit the quantity of imports adversely
    affect the export prospects of less developed countries

How
will the suspension impacts India?

  • GSP is meant largely for those
    export-oriented sectors that are labor-intensive. So, if it is withdrawn, it
    will impact jobs. With the leaked NSSO data showing unemployment at a 45-year
    high, this is an important factor.
  • As the Federation of Indian Export
    Organisations points it, India is predominantly exporting intermediate and
    semi-manufactured goods to the US under the GSP. This has helped in
    cost-effectiveness and price competitiveness of the US downstream industry —
    that is, the manufacturing industry that uses inputs covered under GSP.
  • Therefore, withdrawal of GSP will also
    impact the competitiveness of many manufacturing sectors and will hit the
    consumers at the same time.
  • The US import price of most chemicals
    products that constituted a large chunk of India’s exports is expected to
    increase by about 5 per cent.
  • The withdrawal of the GSP benefit will
    also hit the import diversification strategy of US, which is keen to replace
    China as the main supplier to other developing countries of merchandise goods.
  • India
    could lose US market share to rivals like Vietnam and Bangladesh, which
    will continue have duty-free access.

What
next for India?

  • India has made a final plea for continuation of the
    generalized system of preferences (GSP) benefits currently under review
    before the US Trade Representative (USTR), arguing that the cheaper
    imports of intermediary products from India enable availability of
    cost-effective and price-competitive inputs to the US downstream
    industries and helps the US firms remain domestically and internationally
    competitive.
  • India had threatened to drag the US to the dispute settlement
    mechanism of the WTO, claiming withdrawal of the GSP benefits would be
    “discriminatory, arbitrary and detrimental” to its developmental
    needs.
  • However, India on Saturday deferred till 18 September
    tit-for-tat retaliatory tariffs against the 29 US products worth $235
    million intended to counter a US move to unilaterally raise import duties
    on Indian steel and aluminium products. India’s move is seen as a
    conciliatory measure pending the GSP review and the upcoming “2+2″
    dialogue among their foreign and defence ministers on 6 September of the
    two countries.

Way
forward:

  • The GSP remains a central aspect of the overall
    trade engagement and must remain for Indian exporters keen to address the U.S.
    markets.
  • The U.S. should have considered continuing India’s
    GSP eligibility as a gesture of goodwill that reaffirms its commitment to the
    mutually beneficial relationship between our two countries. The India-U.S.
    relationship has continued to grow stronger as India liberalizes along a
    positive and steady trajectory.
  • Today, both the US and India engage in countless
    areas of mutual cooperation and have a convergence of views in a large number
    of global issues. The relationship must not be seen through transactional prism
    only. By doing this the broader strategic dimensions of the partnership could
    get impacted.

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