The US decision to withdraw concessions granted to Indian exports under the Generalised System of Preferences (GSP) scheme is not a surprise. Differences over trade terms have existed between India and the US for many years but they have aggravated after President Donald Trump took over. Trump’s decision, explained in a letter to the US Congress this week, is the culmination of heightened tensions and a stand-off between the two countries in the past few months. The GSP confers duty-free access on 4,800 products from 131 developing countries. The withdrawal of the concession would hurt Indian exports of some 3,500 items, mostly raw materials and chemicals. These exports are worth $5.6 billion annually, accounting for over 10% of India’s exports to the US. In November last year, the US had withdrawn GSP benefits on 50 items. It had also hiked import tariffs on Indian steel and aluminium and had criticised India’s high tariffs. India reduced duties on motor cycle imports from the US, which were of special interest to President Trump. India has also proposed retaliatory tariffs on 29 US goods but has not given it effect so far.
The government has downplayed the importance of the US decision by claiming that the concessions amounted to less than $200 million a year. But that is a wrong response, because most of those who will be affected are small and medium producers and exporters. They have thin margins, which will come under pressure. India has also said that there is time to sort out the issue during the two months’ time for the decision to come into effect. But considering the hard position taken on such issues with India and other countries, a softening of the US stand seems to be unlikely. If India agrees to reduce import tariffs during the negotiations, imports from the US will increase, without a corresponding increase in exports.
The US may be aiming to force India into accepting a trade package favourable to it as it has done with some other countries. One major grouse Washington has with India is the restriction on import of medical equipment and dairy products from that country. Other issues like e-commerce will also come up during the negotiations. The US may think India is vulnerable to pressure when its economy is facing headwinds and exports are stagnant. It will try to extract the maximum India has to protect its national interests. Trade is transactional and involves give and take, but India should not give away too much. Beyond the short term, the strategy to deal with such pressures is to increase the competitiveness of businesses and to diversify exports.