US-India trade relationship heads into choppy waters

Indian Prime Minister Narendra Modi hugged US President Donald J. Trump in the Rose Garden of the White House in Washington on June 26, 2017. (Reuters/Kevin Lamarque)

In a letter to the US Congress on March 4, US President Donald J. Trump wrote that he intends to end preferential trade treatment for India. Trump wrote that he had taken the decision because “after intensive engagement between the United States and the Government of India, I have determined that India has not assured the United States that it will provide equitable and reasonable access to the markets of India.” It is important to assess exactly what this decision means and consider the full range of implications for the US-India trade relationship.

First, notwithstanding the terminology in the public announcement by the Office of the US Trade Representative (USTR), this action is really a potential suspension of US Generalized System of Preferences (GSP) status for India, which provides duty-free treatment to goods of designated beneficiary countries, rather than a termination.

There remains the possibility that US and Indian negotiators can engage more intensively in the coming 60-day statutory period and reach agreement on a bilateral package that resolves the issues that have been under negotiation since April of 2018, when the GSP review was launched, such as price controls on medical devices and tariffs on information technology products.

Even if India is removed from beneficiary status, the two sides could continue negotiations and eventually reach an agreement that leads to restoration of India’s GSP status. This situation is not directly akin to that which exists for India with respect to Canada, where Canada graduated India from duty-free treatment under its program, thus terminating its GSP benefits.

Second, continuing negotiations on a bilateral US-India package may be complicated by the fact that USTR chose to fully suspend GSP benefits, rather than partially suspend them. It may be more an issue of nuance, but partial suspension—say, on one-half or one-third of India’s GSP-covered exports—could have provided a more face-saving option for India in negotiating a GSP deal.

India’s opportunity for maintaining GSP benefits or recovering them later might be enhanced if there were a partial suspension because it could increase the avenues for negotiating an outcome.  For example, the United States could have started small with the threat of going bigger down the road in order to create more room for both sides to negotiate over a period of time.  Instead, full suspension right from the start makes it less likely that there might be continuing negotiations once GSP benefits have been removed.

Third, India is probably correct in highlighting that the commercial impact of GSP suspension is likely to be limited.  While India has the largest value of trade covered under the US GSP program of any beneficiary, at roughly $5.6 billion in 2017, duties will increase only to the World Trade Organization (WTO) most-favored-nation (MFN)-bound rates for the United States. In most product categories, this will amount to an increase that is well short of five percent.  However, there is likely to be a symbolic impact.  As Indian Prime Minister Narendra Modi’s government continues to campaign for the general election in April and May, it may feel that it needs to respond in kind to the US decision. Signs of this sensitivity are already emerging with speculation that India will proceed with its announced retaliation against US tariffs on steel and aluminum under Section 232 of the 1962 Trade Act.  Since first announced last July, India has postponed imposition of its retaliatory tariffs multiple times, with the latest extension set to expire on April 1.

Fourth, India has noted in the past that it is ready to file a case in the WTO against the United States for any withdrawal of GSP benefits based on the US statutory criterion that a beneficiary country provides “equitable and reasonable market access” with respect to US exports of goods.  India argues that suspension based on this criterion would constitute a violation of the WTO’s requirements that application of GSP programs be done on a non-discriminatory basis.  There is only one specific WTO case precedent on this question. In 2004, the WTO Dispute Settlement Body adopted the Appellate Body’s report, which upheld an earlier panel report in favor of India, that the European Union’s GSP criterion providing benefits to countries which entered into a special arrangement to combat drug production and trafficking was in violation of the EU’s MFN obligation.

Even if India prevailed in a future case against the United States, which could play out over two-plus years, a possible US response could be to restructure its GSP program along the lines of Canada’s program and permanently terminate India’s participation in the program.

Thus, it seems apparent that the USTR announcement on March 4 is no simple matter.  If we take a step back to try to view the bigger picture, this action could be a first step in a series that might follow, with a cumulative effect of creating significant new tension in the bilateral trade relationship.

There is much anticipation for what the Trump administration might do in its pending Section 232 review on autos and auto parts. While much of the focus of trade experts has been on the impacts on the EU, Japan, and South Korea, Indian exports of motor vehicles and parts are substantial and growing.  If the Trump administration were to impose tariffs across the board, as it did with respect to steel and aluminum, India could be significantly impacted.

Additionally, India’s recent actions in the digital space, including the data localization requirements imposed last year on payment processing by the Reserve Bank of India and the e-commerce policy issued on February 23, have raised US concerns that India is seeking to reduce market opportunities for US firms.  It seems possible that the United States will not stand idly by if new restrictions are implemented.

Looking into the crystal ball, a troubling vision could be emerging in which the missed opportunity of an agreement on a relatively small, but unprecedented bilateral trade package opens a next, more challenging chapter in the trade relationship.

Mark Linscott is a senior fellow with the Atlantic Council’s South Asia Center. He served as the assistant US Trade Representative (USTR) for South and Central Asian Affairs from December 2016 to December 2018 and prior to that the assistant USTR for WTO and multilateral affairs from 2012 to 2016.