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Will Trump’s GSP sanctions persuade India to open up its markets?

June 11, 2019 | Expert Insights

BACKGROUND

 The Generalized System of Preferences (GSP) in an American trade benefits program offering tax incentives to 129 beneficiary nations by providing them with the duty-free entry on up to 4,800 different products in an effort to promote economic growth in developing countries. India is the largest beneficiary of the GSP with a total of $6.35 billion in exports benefiting under GSP in 2018. Donald Trump first began toying with the idea of suspending India’s GSP privileges in March 2019, but formally gave notice of the sanction only on May 31st. The official withdrawal of benefits began on June 5th.

ANALYSIS

Ever since the Trump administration announced its decision to withdraw India from its list of beneficiaries for the GSP program, political analysts have been quick to note that the American president waited for Narendra Modi to be sworn for his second term as India’s prime minister before announcing his proposed sanction. Trump’s timing raises some interesting questions about his motive for revoking India’s GSP privileges. In an official statement, the American president said that “India has not assured the US that it will provide equitable and reasonable access to its markets”. This refers to the fact that Modi has refused to reconsider existing data localization policies which hurt American e-commerce ventures such as Amazon and Walmart and prevents the expansion of US fintech giant PayPal into India.

Modi’s government has responded to the GSP sanction as “unfortunate” but appears to believe that the impact of such an economic sanction is not significant enough to compromise national interests. According to the Federation of Indian Export Organizations, out of the $6.35 billion exports under GSP, Indian exporters enjoy a net benefit of only $260 million. The sectors that stand to lose the most include Imitation Jewelry, Leather Articles, Pharmacy and Surgical, Chemical and Plastics, and Agriculture (basic & processed). The organization’s president Mr. Ganesh Kumar Gupta suggested that the government should extend some additional support to exporters most affected by the loss of GSP by extending the Rebate of State & Central Tax Levies Scheme (RoSCTL) on such products. He also alluded to potential benefits to China as a result of GSP sanctions against India and suggested that this might incentivize the US to rethink their decision.

Interestingly, when the US Commerce Secretary Wilbur Ross and Commerce Minister Suresh Prabhu met in early May, there was no discussion of the plan to withdraw India’s GSP privileges. The topics of discussion included India’s e-commerce policy, data localization for payment companies, high tariffs imposed by the US on steel and aluminum, and visa issues. According to an official statement published by the Commerce Ministry, “Both sides agreed to deepen economic cooperation and bilateral trade by ensuring greater cooperation amongst stakeholders, including Government, businesses, and entrepreneurs,”. Yet, less than a month later, the US removed India from its list of GSP beneficiaries in a move that seems to put pressure on Modi’s government to meet US demands.

COUNTERPOINT

Despite the fact that the Indian Government does not seem too worried about the GSP sanctions, several domestic suppliers are demanding that the benefits be reinstated. India has proposed a retaliatory tariff hike on 29 American goods but has not yet acted on it, and instead decided to postpone the tariff imposition to June 16th. In the past, the U.S has reinstated GSP benefits to nations like Argentina and Myanmar but such reinstatement is conditional and the Indian government does not seem keen on asking for it any time soon.

ASSESSMENT

We think that Trump’s decision to impose GSP sanctions is not an isolated policy decision. The announcement comes at a time when India is seeking alternatives for the procurement of oil after the USA threatened to impose sanctions on nations that try to import oil from Tehran. Reports suggest that both India and China are still trying to find a way to continue buying oil from Iran, which would pose a threat to Trump’s effort to cut off Iran’s oil revenues. But Iran met 10% of India’s oil needs and cutting Iranian oil supply would require the government to fish out an alternative source – the U.S, perhaps?

It is also quite plausible that the GSP sanction is a product of Donald Trump’s Make America Great Again Scheme which got him elected in 2016, and might help him get re-elected in the upcoming 2020 elections. This scheme aims to minimize imports in an effort to encourage domestic production within the USA and generate jobs in the process. But we predict that as a result of the withdrawal of GSP benefits for several products, many American importers (several of which are small businesses) will be burdened with absorbing the additional costs. Such a result would certainly be counterintuitive to Donald Trump’s agenda and might backfire if Modi retaliates with tariffs.

The Indian government, however, remains optimistic that there is only room for growth and improvement and in a statement announced that “In any relationship, in particular in the area of economic ties, there are ongoing issues which get resolved mutually from time to time. We view this issue as a part of this regular process and will continue to build on our strong ties with the US." The determining factor at this point will be whether India decides to impose retaliatory tariffs on 29 American goods post June 16 or bows down to US demands for increased access to Indian markets.