With the U.S.-China trade war on a temporary truce, Trump is starting to go after his next target. He decided to end preferential trade treatment for India, which allows a duty exemption on more than $5 billion worth of its goods coming into the U.S. This comes on the grounds of a lack of market access from India, especially at the expense of U.S. dairy suppliers and medical device manufacturers.
Indian officials downplayed the impact of the move, saying the preferential treatment brought benefits of just around $200 million annually. India exported around $50 billion worth of goods to the United States in 2017 (Figure 1), and was the largest beneficiary of the Generalized System of Preferences (GSP) import scheme (Figure 2). Being one of the largest economies of the world, this preferential treatment—which is meant to help develop the markets in the least-developed countries—does seem dispensable. However, it is symbolic of the strategic relationship between the two countries in their common animosity toward China.
Competitiveness at Risk
While the stated benefits of the GSP to India are about $200 million, India loses export competitiveness for goods worth $5.6 billion, especially to markets such as Mexico that have FTAs with the U.S., or others like Bangladesh and Vietnam, which continue to enjoy GSP benefits. Some of the industries that saw large amounts of GSP benefit and may likely be impacted include organic chemicals, plastics and cement.
More importantly, India predominantly exports intermediate and semi-manufactured goods to the U.S. under the GSP, and the loss of price advantage in these could mean a further setback for employment and jobs in the manufacturing sector. There will, however, be some offset from India’s efforts to diversify to Latin American, African as well as ASEAN markets.
Figures 2 and 3: India Is the Largest Beneficiary of the U.S. GSP Import Scheme (USD billions); Some Industries Receive Tariff Waivers for Over $500 Million Worth of Exports (USD millions)
Source: U.S. International Trade Commission Data Web, Continuum Economics
What matters even more will be the political impact, given the Indian national elections this year. Modi’s re-election has been in question because of his unpopular reforms such as demonetization and introduction of GST. His foreign policy setbacks will only further add to the woes.
We expect the impact of these measures to be non-uniform across sectors. While some exporters who face duty loss of 2-3% may face margin pressures, others who had a higher GSP tariff advantage may need targeted support. This could be a fiscal burden for the Indian economy, which is already struggling to remain on the path of fiscal consolidation.
However, as these changes may not take effect for another 60 days, we believe it opens the door for U.S.-India trade negotiations–and a trade deal may be on the table. This will be more likely if India adopts a firm stance and imposes retaliatory tariffs on U.S. goods, which were proposed in June 2018 but have been continually postponed and are now scheduled to go in effect on April 1.