India-US GSP

Why in news: The U.S. has decided to terminate India’s designation as a ‘beneficiary developing country’ under the Generalised System of Preferences (GSP) effective June 5, 2019.

Practice Question: The withdrawal of the Generalised System of Preferences (GSP) from India by the US shall have a prominent impact on both countries. Discuss. – 200 words.

What do you understand by the term ‘enabling clause’ in the context of Generalised System of Preferences (GSP)? How does the enabling clause help developing countries like India? – 150 words. 

What is Generalised System of Preferences?

The Generalized System of Preferences, or GSP, is a preferential tariff system which provides for a formal system of exemption from the more general rules of the World Trade Organisation (WTO). Specifically, it is a system of exemptions from the most favoured nation principle (MFN) that obliges WTO member countries to treat the imports of all other WTO member countries no worse than they treat the imports of their “most favored” trading partner. In essence, MFN requires WTO member countries to treat imports coming from all other WTO member countries equally, that is, by imposing equal tariffs on them. GSP exempts WTO member countries from MFN for the purpose of lowering tariffs for the least developed countries, without also lowering tariffs for rich countries.

Under the programme, India, as a developing country, enjoyed special trade benefits which allowed duty-free entry of Indian goods worth $5.6 billion into the U.S.

The GSP preferential trade term forms a part of the trade obligation of the U.S., and is designed to positively impact the “development, financial and trade needs of developing countries.” Internationally, the legal basis for the GSP programme is found in the Enabling Clause (EC), which is a platform established under the international trade regime of the World Trade Organization (WTO) for developed countries to offer preferential trade treatment on a non-reciprocal basis to products originating in developing countries.

What is the enabling clause?

Internationally, the legal basis for the GSP programme is found in the Enabling Clause (EC), which is a platform established under the international trade regime of the World Trade Organization (WTO) for developed countries to offer preferential trade treatment on a non-reciprocal basis to products originating in developing countries.

The Enabling Clause means to provide differential and more favourable treatment with a view to incentivising developing countries and promote their fuller participation in global trade. Nationally, the U.S. trade obligations have been codified as part of the Trade Act of 1974 under which the GSP system has been established.

Under this system, the U.S. allows preferential duty-free entry for thousands of products from about 120-plus designated beneficiary countries, of which India is one. Thus, products from these countries enter the U.S. duty-free, provided the beneficiary developing countries meet the eligibility criteria.

How will this move impact the U.S.?

  • Withdrawing the GSP will negatively impact small businesses in the U.S. – the GSP programme ultimately benefits U.S. small businesses which import lower cost raw materials, which, in turn, lowers the cost of consumer products in the U.S.
  • The withdrawal of GSP is intended as a sanction towards India and Turkey, thus making the U.S. move a positive violation of the WTO norms.
  • Withdrawing India from the list of GSP beneficiaries will also hurt the U.S. First, a trade war with India will reportedly cost American businesses over $300 million in additional tariffs.

Under such circumstances, India is likely to find support from other similarly situated developing countries. There may be support to challenge this and other unilateral U.S. actions that have come to personify the imbalances of global trade.

Source: The Hindu

Featured image source: The Statesman

For the impact of withdrawal of GSP on India, please read the following articles:

https://pointias.com/india-u-s-gsp/

https://pointias.com/generalised-system-of-preferences/

https://pointias.com/generalised-system-of-preferences-2/