Us to End Preferential Trade Status for India

US to end preferential trade status for India

Abstract: On March 4, 2019, U.S. President Donald Trump notified Congress of his intention to end the favorable treatment India has enjoyed under the Generalized System of Preferences (GSP). Negotiated during the 1970s under the auspices of the General Agreement on Tariffs and Trade, and later subsumed into the World Trade Organization, GSP allows many products from India and other developing countries to enter the United States duty-free. Trump’s decision to end GSP did not come as a surprise. Despite close cooperation between the world’s two largest democracies in defense and other areas, trade relations between them have been prickly for some time. They acquired an extra edge under Trump, who has sarcastically described India as “the tariff king.” India exported goods worth $6.2 billion in 2018 under the GSP, the highest since 1997. However, the GSP’s share in India’s total exports to the U.S. has come down recently after peaking in the mid-2000s.

Introduction

 The United States and India view each other as important strategic partners to advance common interests regionally and globally. Bilateral trade in goods and services is about 2% of U.S. world trade, but tripled in value between 2005 and 2017, reaching $126 billion. The trade relationship is more consequential for India, for whom the United States was its second largest export market (16% share) after the European Union (EU, 17%), and third largest source of imports (6%) after China (17%) and the EU (10%) in 2017. U.S.-India foreign direct investment (FDI) is small but growing. Defense sales are significant in bilateral trade as well. Civilian nuclear commerce, stalled for years over differences on liability protections, has produced major potential U.S. supply contracts. Many observers believe bilateral commercial ties could be more extensive if trade and investment barriers were addressed. Bilateral trade frictions exist on numerous fronts, though the two sides are working to resolve some issues.

 India has one of the world’s fastest growing economies and the third largest on a purchasing power parity basis. It is the second most populous country, with a large and growing middle class. It also faces economic challenges, including poverty, difficulty absorbing the millions of young new workers joining the labor force, and infrastructure gaps. Rising world energy prices place pressure on India, which imports about 80% of its oil needs. Energy prices and other global factors have caused India’s currency to depreciate against the U.S. dollar, raising concerns about inflation. Still, the economy is projected to grow by 7.3% in 2018, up from 6.7% in 2017 (International Monetary Fund data), as shocks abate from domestic economic measures, e.g, “demonetization” in 2016, which removed about 86% of currency by value from circulation in India to address tax evasion and corruption, and the roll-out of a nationwide value-added goods and service tax in 2017 to streamline the tax regime. The effectiveness of both reforms is debated.[pic 1]