U.S. is shooting itself in the foot on GSP

Unfair practice: The withdrawal of India’s Generalised System of Preferences benefits is a violation of trade terms.gettyimages/istock   | Photo Credit: gettyimages/istock

After targeting China and Mexico, President Trump has declared a trade war on India. Unsurprisingly, the U.S. decided to terminate India’s designation as a ‘beneficiary developing country’ under the Generalised System of Preferences (GSP) effective June 5, 2019.

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 seeds for this discord were sown way back when the Trump administration introduced steel and aluminum tariffs under Section 232 of the Trade Expansion Act of 1962, citing national security reasons. This subjected imported steel to a tariff, the burden of which would be borne by steel producers outside of the U.S., who stood to either lose a share of the market or a percentage of profits.

India was one of the countries affected by the U.S. steel and aluminum tariffs. India retaliated immediately and announced tariffs on U.S. importations into India worth about $240 million although these are yet to take effect.

With a move to teach India a lesson, the U.S. had been threatening to withdraw India’s benefits from the GSP system. 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.

Enabling clause

The reason for the non-reciprocal arrangement was that 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.

The U.S. Trade Representative’s (USTR) office-established eligibility criteria includes affording worker rights, prohibiting child labour, ensuring occupational safety, etc.

In reality, the Coalition of GSP, which is a think-tank, estimates that 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 Trump administration’s withdrawal of India’s GSP benefits is a violation of the trade terms. That is, in a dispute that involved EC Tariffs, the WTO’s Appellate Body (AB) considered special tariff preferences that EC extended to 12 of its trading partners to the exclusion of some others.

At that time, India challenged the EC’s preferential trade programme. The AB opined that GSP programmes can award different benefits to different developing countries on the condition that any such differential treatment should positively lead to the developmental and trade needs of developing countries, and it should be available to all similarly-situated countries.

Unfortunately, the withdrawal is not based on any criterion that is to be applied to other nations. Nor does this move by the U.S. benefit India. Indeed, it is intended as a sanction towards India and Turkey, thus making the U.S. move a positive violation of the WTO norms.

In reality, 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, as per the Coalition for GSP’s executive director Dan Anthony. Second, America’s belligerent stance has not gone well with most trading partners. Operationally, in order to determine whether trade terms of other countries are fair, America uses the opinions of its industries and corporations.

That is, when the U.S. Trade Representative (USTR) asserts that India or China’s trade terms in, say seed imports, is not to America’s benefit, it is not an impartial determination. USTR’s judgments are based on its seed companies’ submissions.

The problem is that these companies typically consider only what is good for their shareholders and not the local realities or issues of the importing country.

Thus, arguably, America puts itself in a position wherein its trade posture is an echo of the industry’s position rather than as taking a reasoned articulated stance. Third, India may well decide to take this as a dispute to the WTO. The central question for the WTO will be whether the U.S. can suspend GSP benefits to two countries — India and Turkey — as a sanction for not allowing “equitable and reasonable access to its markets.”

Trade imbalances

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.

The world trading system is not based on the leadership of any one country. It is a mechanism to work with trade partners.

The U.S. action, unfortunately, seeks leadership among its trading partners and that hurts America first and its allies next.

(The author, an expert in international trade and intellectual property laws, serves as a Professor of Law at Texas A&M School of Law)

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Printable version | May 13, 2021 3:34:03 AM |

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