Trump terminates trade benefits

US President Donald Trump has announced his intention to end preferential trade treatment for India and Turkey, accusing New Delhi and Ankara of failing to convince Washington that they would provide “equitable and reasonable” access to its markets.

Background

The Generalized System of Preferences, or GSP, is a preferential tariff system which provides for a formal system of exemption from the more general rules of the World Trade Organization (WTO). GSP exempts WTO member countries from MFN for the purpose of lowering tariffs for the least developed countries, without also lowering tariffs for rich countries.

U.S. trade preference programs such as the Generalized System of Preferences (GSP) provide opportunities for many of the world’s poorest countries to use trade to grow their economies and climb out of poverty.   GSP is the largest and oldest U.S. trade preference program. Established by the Trade Act of 1974, GSP promotes economic development by eliminating duties on thousands of products when imported from one of 120 designated beneficiary countries and territories.

India has been the largest beneficiary of the US GSP programme, which was intended to help poor countries develop by providing them with some tariff-free access to the US market.

Analysis

President Donald Trump threw a wrench into trade relations with India and Turkey in his latest move to shake up the global trading system, after deciding goods from these two countries were no longer eligible for preferential, tariff-free access to the US market. In a statement, the US trade representative said Turkey and India no longer qualified as “beneficiary developing countries” under Washington’s Generalized System of Preferences (GSP), which provides many low-income and emerging economies with duty-free access to the US market for some of their exports.

Trade tensions between Washington and New Delhi intensified over the past year, as the US business community fumed over a wide range of Indian tariff and regulatory policies that hurt their prospects in the fast-growing Indian market. In its statement announcing the revocation of GSP privileges, the USTR said New Delhi had failed to assure the US of “equitable and reasonable” market access while Turkey was now “sufficiently economically developed”. The decision risks stoking tension between New Delhi and Washington as Mr. Trump closes in on an agreement with Beijing to end the trade war between the US and China.

The move to end India's participation in the Generalized System of Preferences (GSP) program has been in the works since at least April 2018, after Washington launched a review into New Delhi’s eligibility for the program. All this time Trump has been accusing New Delhi of taking advantage of the arrangement, under which it enjoys zero tariffs on $5.6 billion of exports to the United States. “India is a very high tariff nation,” Trump told the Conservative Political Action Conference on Saturday. “When we send a motorcycle to India, they charge 100 per cent tariff. When India sends a motorcycle to us, we charge nothing.”

Frustration with India is widespread among US businesses. In the past year, India has raised import duties on a wide range of goods as part of Indian prime minister Narendra Modi’s campaign to promote domestic manufacturing, hitting companies such as Apple and Ford. India’s price controls on drugs and medical devices such as cardiac stents — and India’s intellectual property policies — is another big source of friction, as are New Delhi’s volatile restrictions on agricultural commodity imports.

The decision to drop Turkey’s status also comes amid tension between Turkey’s president Recep Tayyip Erdogan and Mr. Trump. The USTR first announced a review of Turkey’s participation in the programme in August, shortly after the eruption of a bitter row between Ankara and Washington over a detained US pastor. Relations between Mr. Trump and Mr. Erdogan have since become less fraught but remain volatile, with disagreements over the US withdrawal from Syria and Turkey’s plan to purchase an air defence system from Russia. In its statement, the USTR said Turkey was graduating from the GSP programme due to its “increase in gross national income per capita, declining poverty rates, and export diversification”.

Assessment

Our assessment is that this could be a road block to rapidly-developing Indo-US relations which has grown by leaps and bounds in the past decade. We believe that the Trump administration may be using the threat of withdrawing India from the GSP program as a negotiation tactic to force New Delhi into reducing its import tariffs.  

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