US withdrawal of trade benefits could hurt India’s export competitiveness, margins

  • 07-Mar-2019
  • US withdrawal of trade benefits could hurt India’s export competitiveness, margins

The Trump administration on March 5 scrapped preferential trade treatment for India. This will impact Indian exports worth $5.6 billion. The withdrawal of duty benefit that accounts for roughly 3.4 percent of designated exports will take 60 days to be implemented and hit India’s export competitiveness in engineering goods, chemicals and pesticides sectors.

The said withdrawal of trade benefits is implemented through GSP (Generalized System of Preferences) programme, the largest US trade preference program that promotes economic development by allowing duty-free entry imports of designated products from the select beneficiary countries.

From the US perspective, GSP helps in competitiveness by reducing costs of imported inputs used by the US companies to manufacture goods in the country. As per USTR (United States Trade Representative), GSP is crucial for US small businesses and helps in competitiveness.

What triggered the annulment of the US GSP?

Back in April 2018, USTR launched a GSP eligibility review of India based on concerns related to GSP market access criterion. The petitions filed by the US’ dairy and medical devices industry noted trade barriers on the Indian side were affecting US exports in those sectors.

US authorities and the corporate world there has been worried over an array of trade barriers raised by India in recent times to pursue its Make in India programme. Price control regulation on drugs and medical devices (like cardiac stents) and related intellectual property policies have also been a source of concern. To add to the woes, India recently implemented a few e-commerce rules that impact US companies such as Walmart and Amazon.

What is the impact of the withdrawal of GSP?

India’s duty-free exports to the US under GSP was about $5.6 billion or 12 percent of total exports to the US in FY18. Duty benefits under the programme totalled $190 million or 3.4 percent. GSP benefits were availed by 13 sectors with 1,900 products exported under the scheme out of eligible 3,700 products.

Among the key sectors that get impacted by the withdrawal are machinery and parts, iron and steel articles, chemicals, pesticides, and electrical machinery. A large number of products are inputs for the downstream industries and hence could impact them. Interestingly, Walmart had earlier submitted to USTR in favour of continuing with the GSP programme and maintained that it provides tangible benefits to Walmart customers suppliers due to lower input costs.

Having said that, part of the increased duties would be passed through to the end clients. But a partial cost may have to be borne by the Indian companies given the competitive pressure from the other developing countries. Exports margins in many of such products would be in mid-single digits. And hence, a partial absorption of the duties by the exporters may substantially dent the exporters operating margins. A back of an envelope calculation suggests if Indian exports absorb even half of the higher duties, there could be an impact of roughly 200 basis points for a 10 percent export margin business.

What next?

Media reports speak about retaliatory tariffs from the Indian side as well. In June 2018, India announced higher tariffs on imported products from the US such as agriculture goods (Apples, Almonds) and phosphoric acid. This was in retaliation to the US action of raising custom duties on Indian steel and aluminium products. However, India deferred this decision due to ongoing trade talks. Interestingly, deadline in this case for a higher tariff is likely to kick in on April 1.

Secondly, India might approach WTO for resolution. However, since 60 days are left before GSP annulment kick in, there is still some leeway for bilateral negotiations and concessions from India’s side. This may involve providing greater market access in the areas like animal husbandry, agriculture and information and communication technology.

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