Generalized System of Preference (GSP)

• A group of 25 influential American lawmakers has urged the US Trade Representative (USTR) not to terminate the GSP programme with India after the expiry of the 60-day notice.
• They urged to continue negotiating the deal as it protects and promotes jobs that rely on trade both imports and exports with India.
• Further, it has been said that, American companies that rely on duty-free treatment for India under the GSP will pay hundreds of millions of dollars annually in new taxes. In the past, even temporary lapses in such benefits have caused companies to lay off workers, cut salaries and benefits, and delay or cancel job-creating investments in the United States.

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• India has been the largest beneficiary of this US GSP programme.
• In retaliation to US removing India from the list of GSP beneficiaries, it has proposed higher tariffs on high-value US goods.
• But it has — for an unprecedented seventh time — postponed these proposed higher tariffs on high-value goods from Washington, hoping to get a reversal on the US position.
• The government has decided to extend the deadline one last time as it awaits a final confirmation from the US, set to come in the form of a presidential decree.

Background:

• The US last year announced that it will review the eligibility criteria of India currently benefited under the GSP.
• US President Trump in a letter to Congress had said that India's termination from GSP follows its failure to provide the United States with assurances that it will provide equitable and reasonable access to its markets in numerous sectors.
• Hence on March 4, President Donald Trump announced that the US intends to terminate India's designations as a beneficiary developing country under the GSP programme.
• The 60 day notice period is ending this month.
• The USTR through a simple notification in federal register can formally terminate GSP benefits to India.

What is Generalized System of Preference (GSP)?

• It is the largest and oldest United States trade preference program to provide opportunities for many of the world’s poorest countries to use trade to grow their economies and climb out of poverty.
• It is designed to promote economic development by allowing duty-free entry for thousands of products from 120 designated beneficiary countries and territories.
• It was established by the Trade Act of 1974.
• Besides India, some other beneficiaries are- China, Brazil, Indonesia, South Africa, Pakistan, Nepal, Sri Lanka and Afghanistan.

Why was it introduced?

• It promotes economic growth and development in the developing world.
• It promotes sustainable development in beneficiary countries by helping these countries to increase and diversify their trade with the United States. The program provides additional benefits for products from least developed countries.
• The U.S. also benefits from this programme as it moves GSP imports from the docks to U.S. consumers, farmers, and manufacturers. It supports tens of thousands of jobs in the U.S.
• The other benefit is that GSP boosts American competitiveness by reducing the costs of imported inputs used by U.S. companies to manufacture goods in the United States.
• The GSP is important to U.S. small businesses, many of which rely on the programmes’ duty savings to stay competitive.
• The program also supports progress by beneficiary countries in affording worker rights to their people, in enforcing intellectual property rights, and in supporting the rule of law.

Why is USA removing India from its list of GSP beneficiaries?

• The U.S. conducts periodic reviews of the programme. The review for India, taken up last year, focussed on whether it is meeting the eligibility criterion that requires a GSP beneficiary country to assure the U.S. that it will provide equitable and reasonable access to its market.
• The Trade Representative accepted two petitions asserting that India did not meet the criterion: one from the National Milk Producers Federation and the U.S. Dairy Export Council, and the other from the Advanced Medical Technology Association.
• India wants dairy products, which could form part of religious worship, certified that they were only derived from animals that have not been fed food containing internal organs. Other exporters such as EU nations and New Zealand certify their products, but the U.S. has so far not done so.
• Second, India has recently placed a cap on the prices of medical devices, like stents, that impacts U.S. exports of such devices.
• Hence, as India is not providing equal access of its market to some US products, it is considering to remove India from its list of GSP beneficiaries.

What will be the impact of this termination of GSP on India?

• Some of the Indian export industries may not feel the pinch of the GSP removal for India by the U.S because the loss for the industry amounts to about $190 million of total $5.6 billion exports falling under the GSP category which is a small percentage.
• But specific sectors, such as gem and jewellery, leather and processed foods will lose the benefits of the programme.
• Producers from sectors may be able to bear 2-3% of the loss from the change, but not more. The loss, in export in these sectors like some kinds of rice, may even exceed 10%. Hence, it will impact their business.
• The landed price of goods from India will now be higher than it was when GSP was in force. Hence, consumers of those products in the U.S. would gravitate to exporters that enjoy the GSP benefits and hence are able to offer lower prices. The customers of Indian product will get diverted to other nation and it is difficult to get back a customer that a competitor takes away.
• The most potential competitor is China. Several specific products, such as bulk industrial bags, footwear, and plastics are likely to become less competitive against Chinese products without the GSP benefits. For instance, India and China are the two major suppliers of these FIBC bags to the USA, commanding an almost equal share of the market. Without GSP benefits, exported industrial bags will become less competitive vis-à-vis China, allowing the Chinese to increase their market share.

Way forward:

• The basic philosophy behind GSP was to provide duty free imports to US from developing countries. India is still a developing country, hence, USTR should continue to include India in this programme which is in line with its founding principle.
• US should certify its dairy products. This is not something which is new neither it is something which is difficult to do. Some European countries and New Zealand are already certifying their dairy products. This certification will not cause any loss to the exporters of US, it will only increase their business and profits.
• The issue of cap on costlier medical devices is reasonable seeing the poverty in India. However, India can allow costlier imports as the rich in India can afford it. Though this step will not benefit the larger chunk of population constituted by the middle and lower class.
• Lastly, if India is removed from the GSP programme, the government should offer fiscal help to the affected sectors. This will save lay-offs and salary cuts for Indian employees.

Practice Question:

US had put India on 60 days’ notice for being removed as the beneficiary of Generalized System of Preference. Both India and some US Congress leaders are asking the US President to not terminate this GSP programme for India. Discuss, how this termination if executed will impact both the countries.