On 4 March 2019, The Office of the United States Trade Representative announced through a letter to U.S. Congress that the U.S. intends to terminate India’s designation as a beneficiary developing country under the Generalized System of Preferences (GSP) Scheme.

The move will have direct implications on U.S. businesses that import either finished or intermediate goods from India, increasing their landed costs and further complicating their customs administration.

What is the GSP?

For the uninitiated, GSP is a trade preference program introduced in the U.S. Trade Act of 1974 that provides opportunities for many of the world’s poorest countries to use trade to grow their economies. Several products imported from these countries are extended a preferential treatment, including reduced or waived tariffs. One of the discretionary criteria the U.S. considers when determining the eligibility of a country as a beneficiary of the GSP is whether or not the country being evaluated will provide equitable and reasonable access to its markets and basic commodity resources.

Washington’s recent move to exclude India from the GSP means India-origin goods that were hitherto eligible for preferential treatment will now have import duties imposed, making them more expensive for U.S. importers. 

What caused the change?

U.S. goods and services traded with India totaled an estimated $126.2 billion in 2017. Exports were $49.4 billion and imports were $76.7 billion. The total trade deficit with India was $27.3 billion in 2017. The current U.S. administration is heavily focused on reducing trade deficits, and has taken the view that India has not assured the United States that it will provide equitable and reasonable access to the Indian market.

News reports suggest this was triggered by petitions from the National Milk Producers Federation, the U.S. Dairy Export Council, and the Advanced Medical Technology Association. India requires dairy products to be certified as being sourced from animals that have not consumed internal organs, blood meal or tissues of ruminant origin. The U.S. does not provide such a certification although other exporting countries such as the EU and New Zealand do. India has also recently placed a cap on the prices of medical devices, such as stents, which directly impacts U.S. exporters of these devices to India.

What will be the likely impact?

Experts believe the exclusion of India from the GSP will have a negligible effect on India’s industrial performance as it is expected to affect only about $5.6 billion worth of exports with benefits of about $190 million; an amount that could be absorbed by exporters as an additional cost; or supported by the Indian government through subsidies or similar measures. Others however, note that while the actual duty benefits of the GSP program may be small relative to the country’s total trade activity, they could disproportionately affect India’s small and medium businesses who export intermediate goods – products that are low on the manufacturing value chain and thus not made competitively in the United States. Upcoming national elections in India may also play a part in the government’s approach to the issue.

What happens next?

A mandatory 60 days must now pass after notice has been given to the beneficiary countries and to Congress, during which time the countries can, at least technically, negotiate the changes. After the 60-day period, a beneficiary country can be taken off the GSP list by a presidential proclamation. Sources from the Indian Ministry of External Affairs (MEA) have indicated India will “continue to talk” to the United States government over the 60-day period in hopes of coming to a mutually acceptable agreement.

It must be noted that the two countries are already in discussions to resolve a range of other trade tariff issues, primarily those stemming from the U.S. Administration’s decision not to exempt India from its new steel and aluminium tariffs. India had retaliated by raising import tax on U.S. imports worth $10.6 billion. For example, a tariff of 100% will be applied on imports of U.S. origin almonds and walnuts (up from 30%), and a tariff of 50% will be applied on apples (up from 40%). However, India has delayed implementation of higher tariffs. This is seen by several observers as a sign of India’s willingness to negotiate and arrive at a mutually beneficial solution. On the other hand, the U.S. Administration’s intentions to bring down the overall U.S. trade deficit could see these negotiations fail. 

U.S. importers who bring in products from India should consult with their trade services partners to determine the impact on their overall landed costs and possibly explore alternative sourcing markets that could offer a more favorable tariff regime, shorter transit times or less onerous customs requirements.

Jayachand Pachakkil,is a senior consultant in the Global Trade Consulting division of trade services firm Livingston International. He can be reached at jpachakkil@livingstonintl.com