Corporate & Commercial Law

Legal Underpinnings of the US withdrawal of Generalized System of Preferences benefits to India

The World Trade Organization (“WTO”) is an international organization which regulates the trade relations between its member nations. The WTO covers both multilateral as well as Plurilateral Agreements. These Agreements contain certain special provisions for the benefit of the developing nations in the form of special rights. These provisions give developed nations certain rights to treat the developing nations more favourably than other members of the WTO. These provisions are called “Special and differential treatment provisions”. One such benefit provided to the developing nations by the developed nations is the Generalized System of Preferences (“GSP”). The legal basis for the GSP is the Enabling Clause which allowed developing countries to get favourable and differential treatment by developed countries. The Enabling Clause states, in paragraph 1:

Notwithstanding the provisions of Article I of the General Agreement, Members may accord differential and more favourable treatment to developing countries, without according such treatment to other Members.”

Furthermore, paragraph 2(a) of the Enabling Clause gives legal basis to the GSP as one of the special treatment to the developing nations. It is worded as:

“Preferential tariff treatment accorded by developed contracting parties to products originating in developing countries in accordance with the Generalized System of Preferences”.

The Enabling Clause acts as an exception to the general principle of Most Favoured Nation Treatment (“MFN”) as envisaged in Article I:1 of the GATT 1994. This position was endorsed by the WTO Appellate Body in EC- Tariff Preferences. MFN treatment requires the member states to accord equal treatment to all the member states without any discrimination. However, the Enabling Clause allows the developed nations to treat the developing nations more favourably, without contravening the principle of MFN treatment.

Additionally, the Enabling Clause also allows the developed nations to grant preferential tariff treatment to imports from developing nations under the scheme of GSP.[i] Therefore, the Enabling Clause plays a significant role in the pursuit of overall growth and development of developing nations in international trade.

 

[Suvam Kumar and Devesh Kumar are students of  BA LL.B (Hons.) at the National Law University, Jodhpur]

 

Significance Of GSP In International Trade:

GSP is a U.S. preferential trade program which offers possibilities for many of the world’s poorest nations to use trade to develop their economies and emerge from poverty. GSP is the biggest and oldest preferential trade program in the United States. GSP was established by the Trade Act of 1974 in order to promote the economic development of beneficiary nations by eliminating duties on import/ export. In the developing world, GSP encourages economic growth and development. By assisting these nations to boost and diversify their trade with the United States, GSP promotes sustainable development in beneficiary nations. The GSP program offers extra advantages to products from the least developed countries.

 

Recent controversy over US termination of GSP benefits to India

On March 4, 2019, the United States Trade Representative office issued a press release conveying the intention to terminate the GSP treatment to India. However, as per Trade Act 1974, the intended change of the GSP status for India cannot take effect for at least 60 days after the notification is given to the Congress and the Government of India. Thus, after the lapse of the said period of time on 5th June President Trump stated that “India has not assured the US that it will provide equitable and reasonable access to its markets. Accordingly, it is appropriate to terminate India’s designation as a beneficiary developing country effective June 5, 2019.” This move of the US has been severely criticized by Indian as well as US experts because it is going to harm both the countries’ trade. However, more threatening is US’ trade protectionism policy as the US wants India to provide reasonable access to the Indian market. Therefore such a move is a step forward toward trade war among various economies.

 

Effect of GST termination

This move of US president removing GSP privileges for India will have a significant impact on both the countries however the consequence will be more severe for US. American companies that rely on duty-free treatment for India under the GSP will pay millions of dollars annually in the form of new taxes. In the past, even temporary delays in such advantages have resulted in firms laying off employees, reducing wages and advantages, and delaying or cancelling job-creating investments in the US. This decision will cost American businesses over 290 million dollars in additional tariffs every year. Without GSP, American tiny companies are faced with a fresh tax that will result in work losses, cancellations and cost increases for customers. A total of 29 products imported from the US will face greater duties, including walnuts, lentils, boric acid and diagnostic reagents, reducing advantages for US exporters. Further, it must be noted that GSP beneficial goods are mostly raw material and unfinished goods. The actual loss may reflect on the US importers and at the end of the day customer will have to pay more for finished products. GSP benefit withdrawal will also hit the US import diversification strategy where it is eager to replace China as the leading provider to other developing countries.

Similarly, terminating GSP for India would harm Indian firms wishing to expand their exports to the US. In 2017, through the GSP program, India exported products worth $5.6 billion out of a total of $18.6 billion. Indian total exports to the US amounted to $48.6 billion, making GSP up to 11.5% of Indian total exports to India. While this may seem significant, it may not seem so once real losses are calculated. If tariff levels are to be applied for all GSP products enjoyed by India, the real loss experienced amounts to $190 million. Some of the product sections that may experience a decrease in exports to the United States owing to the withdrawal of GSP concessions include raw materials for plastics, consumer and houseware products and polyester films.[ii] Besides, the exclusion of India from the GSP program will hamper the competitiveness of the manufacturing sector of India.

 

Withdrawal of GSP Benefits to India In Light Of WTO Rules

Withdrawal of GSP benefits to India by the USA is directly in violation of WTO rules. Withdrawal of GSP benefits cannot be exercised arbitrarily at the whims and fancies of the developed nations. Withdrawal of GSP benefits to India by the USA is inconsistent with the principle of non- discrimination as it discriminates between the developing countries. Because US has removed GSP to India on the ground of not providing reasonable market access, at the same time other developing countries are availing GSP even without providing reasonable market access. Furthermore, the ground “equitable and reasonable market access” cannot be a justifiable ground for termination of GSP benefits. Developed countries can give preferential treatment on a non-reciprocal basis under the Enabling Clause of the WTO General Agreement on Trade and Tariffs. By removing India from the GSP on the basis that the nation does not provide market access, the US is in breach of this GATT clause. Therefore, the US move removing GSP is inconsistent with WTO rules.

 

Way Forward For India:

India has three options now against the move of US termination of GSP benefits to India. These options are as follows:-

  • India moves to WTO appellate body on the ground of discrimination. The same has been done earlier against the EU when it removed GSP benefits to India in 2002. The decision was in favour of India and GSP benefits restored thereafter.
  • India charges retaliatory tariffs on US-originated product in order to balance the trade loss occurred due to termination of GSP benefits.
  • US- India negotiates on disputed terms and US restores GSP benefits to India. Earlier, in the past also US restored GSP benefits to Myanmar, Argentina and Liberia etc.

 

Conclusion

One of the sole objectives of international trade law is the sustainable development of all the member states in the field of trade. The sustainable development includes both intergenerational as well as intragenerational development. The Generalized System of Preferences promotes this objective of sustainable development with a major focus on intragenerational development. This objective is achieved by helping the developing nations boost their trade relations with the developed nations by promoting export from these developing nations into the developed nations. The United States play one of the significant role in promoting sustainable development by providing opportunities to poor countries to trade with them and become prosperous. Hence, the withdrawal of GSP benefits to India by the US raises a serious concern in the field of sustainable development of the developing nations. It has serious potential of adversely affecting India, which has been benefited much from this scheme. Therefore, the US needs to rethink its decision of withdrawing GSP benefits to India.

 


Endnotes:

[i] Peter Van den Bossche, The Law and Policy of the World Trade Organization Text, Cases and Materials, 2005.


 

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