Recently, US President Donald Trump has ended India’s preferential trade treatment under generalized system of preferences (GSP) that allows $5.6 billion worth of Indian exports to enter the United States duty free.

According to the United States Trade Representative, India’s termination from the GSP programme follows “its failure to provide the United States with assurances that it will provide equitable and reasonable access to its markets in numerous sectors”.

What is GSP?

Generalized System of Preferences is a preferential tariff system extended by developed countries to developing countries (preference receiving countries or beneficiary countries). It is a preferential arrangement in the sense that it allows concessional low or zero tariff imports from developing countries.

GSP involves reduced or zero tariffs of eligible products exported by beneficiary countries to the markets of GSP providing countries.

According to the Office of the United States Trade Representative, US GSP program provides opportunities for many of the world’s poorest countries to use trade to grow their economies and climb out of poverty.

The products covered under GSP are mainly agricultural products including animal husbandry, meat and fisheries and handicraft products. These products are  generally the specialized products of the developing countries.

It intends to provide economic access to developing countries by removing import tax barriers and increasing their trade with the US.

The GSP also helps keep American companies competitive because it allows cheaper imports into the market and gives the American consumer a greater degree of choice.

Currently, there are 120 beneficiary countries in the American GSP, including Pakistan, Sri Lanka, and Afghanistan.

Why US withdrew  it:

  • In 2018, the US launched a review of India’s compliance with the GSP, particularly looking at whether American goods have “equitable and reasonable market access”.
  • There were two petitions in USTR from entities alleging that India is not complying with the criteria of the GSP––one from the National Milk Producers Federation and US Dairy Export Council and the other from the Advanced Medical Technology Association.
  • A GSP subcommittee reviewing India’s compliance also found that India “implemented trade barriers that create serious negative effects on U.S. commerce”.
  • US terminating India’s beneficiary status was related to the recent change in ecommerce and data localization policies that irked Amazon and Google.
    • Earlier this year, the government introduced an e-commerce law stating that an online platform cannot sell goods from companies it has a stake in. It added that platforms like Amazon must only act as facilitators between vendors and consumers.
    • Tech firms like Google and Amazon were unhappy with the restriction on data flow because it makes tracking consumer behaviour more difficult.

Impact of GSP withdrawal on India:

  • india was the largets beneficiary of GSP. The termination of GSP benefits is likely to adversely affect about $5 billion of India’s annual exports to the US which amounts to 10% of India’s total exports to that country. India exports nearly 50 products of the 94 products on which GSP benefits may be stopped.
  • GSP removal will leave a reasonable impact on India as the country enjoyed preferential tariff on exports worth of nearly $5.6 billion under the GSP route out of the total exports of $48 billion in 2017-18.
  • Removal of GSP indicates a tough trade position by the US; especially for countries like India who benefited much from the scheme.
  • The US was insisting that India reduce its trade surplus. India is the 11th largest trade surplus country for the US and India enjoyed an annual trade surplus of $21 billion in 2017-18.

Way ahead

  • The Indian government has now put on hold its plans to offer a “favourable trade package” to the US. India was planning to offer a considerable trade package to the US, in terms of greater access for American agricultural imports to India through lowering of tariffs. This has been put on hold.
  • The G20 meeting about to happen in Japan soon should provide the platform to iron out this trade difference and pull up a middle path which will provide benefit to both nations.
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