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The Nub Of The India-U.S. Tariff Discord

On February 14, India and U.S. will go head to head on a sensitive trade issue: Washington’s threat to revoke Generalised System of Preferences (GSP) privileges on nearly $6 billion worth of Indian goods (textiles, gems & jewellery, engineering goods and chemical products). These currently enter the United States at zero tariff.

India’s Commerce Minister Suresh Prabhu will demand from his U.S. counterpart Wilbur Ross that the GSP benefits continue, arguing that these are intermediary products that help U.S. downstream industries. He is also expected to seek restitution of suspended GSP benefits on about 50 items worth $70 million announced by Washington last November.

In the larger context of the $130 billion India-U.S. trade, this may seem like chickenfeed. But Prabhu is also expected to make the point that the products under GSP are made by hundreds of small industries employing large numbers of people and these would be hit hard by the U.S. move.

“The U.S. is well aware of Indian sensitivites but they have the moral high ground,” says Rajat Kathuria of the New Delhi-based Indian Council for Research in International Economic Relations (ICRIER). “When the GSP was introduced in January 1976 through the US Trade Act of 1974, it was for a limited period lasting until July 2013. It was extended for another two and a half years, which ended in June 2018. So strictly speaking GSP no longer exists although the original legislation permits retroactive extension of benefits.”

There’s another point. GSP was limited to countries with a per capita income of about $1000. India crossed that milestone some time ago, the World Bank figures of 2018 putting that at $1,942 (Rs 1,38,000). So it’s only a question of time before GSP benefits fade from the India-U.S. trade equation. Then why the fuss?

The U.S. threat on GSP was triggered by India apparently re-working the rules that hit U.S. e-commerce giants Amazon and Walmart-owned Flipkart. They were required to dilute their stakes, Amazon in vendors Cloudtail and Appario, and Flipkart in RetailNet, SuperComNet and OnniTechRetail. These vendors sell thousands of items through Amazon and Flipkart, keeping other retailers out.

The Indian government saw this as bad for the market and bad for consumers, but this was not a recent realisation. “The rules were already there,” notes Kathuria. “All the government did was to clarify the situation and Amazon and Flipkart complied diluting their stakes in these vendors.”

So it would seem all’s well but as mentioned earlier, this was only the “trigger”. The real issue for the Americans is India’s insistence on “data localisation”, meaning the internet servers of big corporations must be located in India. This is to ensure all Indian data remains in India since data is the next big new economy revolution. It would appear that Visa and Mastercard, which do a lot of business in India complained to business lobbies back home, who in turn addressed their concerns to the U.S. government.

India’s imposition of higher tariffs on electronic products and smartphones was another irritant. The U.S. also wants India to relax the price cap on its medical devices exported to this country. But all this could be part of a major U.S. push for a free trade agreement with India, a point already made by Donald Trump.

With around 200 million middle and upper middle class consumers, India is seen as a lucrative market for American business and industry ranging from pharmaceuticals to agriculture and dairy products. Expect tech giants like Microsoft and Google to demand unimpeded market access. The FTA would also come with U.S. rules on intellectual property. Little wonder Indian industry remains firmly opposed to any FTA.

In any case, with an election around the corner, don’t expect the ruling party to concede any ground to the Americans on such issues that could turn voters against them. In fact, far more than FTA, of greater immediate interest is how the Americans could react to India’s request for an extension of the waiver on buying Iranian oil. The waiver ends in March when U.S. sanctions kick in.