US President Donald Trump notified Congress on March 4 after months of speculation that he would terminate the Generalized System of Preferences (GSP) for India and Turkey, starting a 60-day countdown period, after which the US President has the right to take action against the two countries on his own authority.
This was after the US had in April last year started a review process of this preferential program as some US companies had complained of non-tariff barriers being imposed on their exports to India. India, according to the US, had failed to provide any assurance of unhindered market access to its products in the Indian market which was perceived by the Trump administration as creating a negative impact on equitable and reasonable market access.
The discussions between the US and India were quite extensive and there was hope that things would be worked out in such a way that India would be able to continue to be part of the GSP, and the complaints in the area of dairy and medical devices would be looked into by India.
Under this program, India in 2017 exported duty-free goods worth $5.7 billion, including auto components, industrial valves and textile materials to the US. India exported a total of $48 billion worth of goods to the US in 2018 with a trade surplus of $21 billion. India was also placed on a watch list of the treasury department for currency manipulation.
India had behaved with great restraint to not retaliate when the US unilaterally increased duty on a range of Indian products. Commerce Secretary Anup Wadhawan said that the withdrawal of GSP will have a minimal effect on India’s exports and India would keep working at addressing the issues the US had.
The US has indeed opened a new front in the trade war by taking this decision against India and Turkey, even when the big issue of working out a trade deal with China is still ongoing.
For India, which is going into a general election that will be held in seven phases from April 11 to May 19, the announcement was bad news as the opposition will surely make use of this as one of the failures of the Modi government, even though the government spokesperson has pointed toward only an impact of $190 million per year. Already there is a lot of pressure in India because economic growth has not created the jobs that are so critical for inclusive development, nor have exports grown as planned.
Exports do create a lot of jobs directly and indirectly. There is indeed a more pronounced political affect as there are growing voices in India calling for a tougher stand on trade negotiations with other countries, including the US.
In the US, Trump has made trade negotiations a rallying point and before the next elections, we are certainly going to see a new round of tensions with key trading nations and the US.
There is a lot of chatter about the US considering revoking India’s Most Favored Nation status.
Here again most Indians feel that this is more positioning intended to put pressure on India to give more access to US companies. India has its own domestic concerns which make it not possible to give into the pressures of the US administration.
This first salvo from the US side of giving notice of its intent to terminate India from its GSP will put a lot of pressure on the Indian side, and it will need to take the bilateral talks on the liberalization of its economy with the US much more seriously.
As the general elections are just round the corner in India, where there will be 900 million voters taking part in this election to select 543 seats in the lower house, one can’t expect much will happen in the next 60 days as things will only start to move after the election results are out on May 23.
The relationship between India and the US is very important, and both sides realize the importance of having a fair and equitable trade mechanism in place.
Politically, it is quite likely that we will see both countries working together more closely in many areas. Being large countries with strong democratic political systems, there is a lot of common ground to build a future relationship on.
But certainly, they have to treat each other with respect, and the US has to understand the political and economic compulsions of any government in New Delhi and give them the right environment to open up further and at the same time be able to achieve higher growth rates. This should be a win-win for both countries.
After 2017, the US, Japan, India and Australia have become closer with the Quadrilateral Security Dialogue being revived. All eyes will now be on the economic relationships and how these two important partners of the QUAD group sit across the table to work out their trade differences. Looking at the bigger picture, we can be quite optimistic of a good outcome.