US withdrawal of GSP benefits for India

 
By Bhargav Mansatta 

Generalised System of Preferences (GSP) means a mechanism by which imports from developing countries are subject to lower tariffs in the importing country. This system has been implemented by the developed countries such as Canada, EU, US, Australia, Japan, Iceland and Switzerland. The Enabling Clause permitting implementation of GSP by WTO Members is “1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries”. GSP is an exception to the principle of non-discrimination between WTO member countries, i.e. Most-Favoured Nation Principle.

The United States Trade Act, 1974 provides for preferential tariff for several identified products when it is imported from developing countries. However, the GSP beneficiary country is required to, inter alia, assure the United States that it will provide “reasonable and equitable market access”. [See endnote 1] It states:

“Factors affecting country designation In determining whether to designate any country as a beneficiary developing country under this subchapter, the President shall take into account—
…..
(4) the extent to which such country has assured the United States that it will provide equitable and reasonable access to the markets and basic commodity resources of such country and the extent to which such country has assured the United States that it will refrain from engaging in unreasonable export practices.”
 
Failing this requirement, the duty-free treatment to imports of the developing country may be withdrawn.[See Endnote 2] India is a beneficiary country under the GSP regime of the United States. The review of GSP benefits granted to India was initiated in April 2018 by the US Trade Representative (USTR). The USTR concluded that India does not provide reasonable and equitable market access and has therefore failed to meet the eligibility criteria as provided in the statute. The United States has notified its intention to withdraw the GSP benefits to India on all applicable tariff lines. The United States has cited “wide array of trade barriers” by India that create serious negative effects on United States Commerce.[See Endnote 3] Over time the United States has opposed, among others, the introduction or existence of following ‘trade barriers’ by India:

• Price caps on sale of medical devices such as stents, knee implants, etc.
• The certification requirements that seek to ensure that dairy product is sourced from animal that has never been fed animal derived blood meal.
• High customs duties on motorcycles, mobiles, telecom network equipment, smart watches, etc.
• Localisation of data rules mandating that companies collecting critical data about consumers must store and process them within the borders of the country.
• Export incentives to industries under various schemes.

The United States is India’s second biggest trading partner after China. India’s export to the US is approximately $50 billion. Almost 16% of India’s exports is to the United States. India has a trade surplus with the United States. [See Endnote 4] Withdrawal of GSP benefits will not affect all critical sectors of export interest because not all products of export interest were eligible for duty-free treatment. For example, textile products (Chapters 50 to 62), which are of critical export interest, were not eligible for duty-free treatment when imported into the United States from India. Steel and aluminium products, which is also of substantial export interest for India, are already subject to very high additional duty [See Endnote 5]. Customs duty by the United States on import of goods is very low on many products even without the GSP benefit and therefore absence of GSP benefit will not have significant impact. However, it seems that the withdrawal will indeed impact some products of export interest such as chemical products, which will become costlier by 5%.[See Endnote 6]

Be that as it may, it is clear that the United States’ decision is anything but fair and India may not accept it lying down. Special and differential treatment to developing countries is recognised under the GATT and WTO framework. Preamble to the WTO Agreement notes that there is a need for ‘positive efforts’ to ensure that developing countries secure a share in their growth in international trade commensurate with the needs of their economic development. GSP is one of the few effective ways of implementing this principle. It is, by definition, a unilateral extension of tariff preferences by developed countries. Thus, non-reciprocity is the very essence of GSP system. The United States has effectively introduced reciprocity as the requirement for enjoying continued benefit under the GSP. The United States also cannot unilaterally determine what type of ‘trade barriers’ are acceptable to it. It is nobody’s case that there should not be any ‘trade barriers’ by India. Many of these so-called trade barriers, for example high import tariffs, are well within India’s scheduled commitments under the WTO.

More importantly, keeping aside the fairness of the decision, the United States’ decision also goes against the fundamental principle of most favoured nation enshrined in the WTO. The United States is continuing its GSP benefits in favour of host of other developing countries. Withdrawal of GSP benefit will result in discrimination between developing countries which are in similar situation. The United States is under an obligation to not discriminate between “similarly situated” developing countries. Differential treatment between developing countries, if introduced, should be to respond to “different financial, developmental and trade needs of developing countries”. GSP benefit to India is not being withdrawn by the United States because it is un-comparable to other developing countries in terms of its developmental or trade needs.

In the case of European Communities — Conditions for the Granting of Tariff Preferences to Developing Countries (EC-Tariff preferences), WTO Appellate Body, decided that discrimination between similarly situated developing countries is not consistent with the WTO obligations of the member country.

As of now India has downplayed the impact of the announcement of withdrawal of GSP benefits by the United States. Even if some of the trade barriers are WTO inconsistent or unduly harsh, it is clear that the United States has jumped the gun. If India wishes to fight back and is unwilling to allow, what the United States considers as ‘reasonable and equitable market access’ or impose retaliatory tariffs, a formal WTO dispute is the clear way forward.

 [The author is a Joint Partner in International Trade Practice, Lakshmikumaran & Sridharan, New Delhi]