Generalized System of Preferences (GSP)

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Context: Ahead of President Donald Trump’s visit on February 24-25, the US removed India from its list of developing countries that are exempt from investigations into whether they harm American industry with unfairly subsidised exports. Earlier, the U.S had withdrawn Generalised System of Preferences (GSP) from India, the world’s largest beneficiary of a scheme that has been in force since the 1970s.

Relevance: 
Mains: GS II- Effect of policies and politics of developed and developing countries on India’s interests.

What is the Generalized System of Preferences (GSP)?

  • Trade preferences play an important role in facilitating exports of developing countries to major export markets.
  • The Generalized System of Preferences (GSP), instituted in 1971 under the aegis of UNCTAD, has contributed over the years to creating an enabling trading environment for developing countries.
  • Generalized System of Preferences (GSP) is a preferential tariff system extended by developed countries to developing countries (also known as preference receiving countries or beneficiary countries).
  • It is a preferential arrangement in the sense that it allows concessional low/zero-tariff imports from developing countries.
  • These 13 countries grant GSP preferences- Australia, Belarus, Canada, the European Union, Iceland, Japan, Kazakhstan, New Zealand, Norway, the Russian Federation, Switzerland, Turkey and the United States of America, to the developing countries.
  • GSP involves reduced/zero tariffs of eligible products exported by beneficiary countries to the markets of GSP providing countries.
  • The US has a strong GSP regime for developing countries since its launch in 1976, by the Trade Act of 1974.
  • In the past, thousands of products were imported from nearly 120 designated beneficiary countries and territories.

Background

  • The idea of tariff preferences for developing countries was the subject of considerable discussion within the United Nations Conference on Trade and Development (UNCTAD) in the 1960s.
  • Among other concerns, developing countries claimed that Most-Favoured-Nation was creating a disincentive for richer countries to reduce and eliminate tariffs and other trade restrictions with enough speed to benefit developing countries.
  • In 1971, the GATT followed the lead of UNCTAD and enacted two waivers to the MFN that permitted tariff preferences to be granted to developing country goods. Both these waivers were limited in time to ten years.
  • In 1979, the GATT established a permanent exemption to the MFN obligation by way of the enabling clause.
  • This exemption allowed contracting parties to the GATT (the equivalent of today's WTO members) to establish systems of trade preferences for other countries, with the caveat that these systems had to be “generalized, non-discriminatory and non-reciprocal' with respect to the countries they benefited (so-called “beneficiary” countries).
  • Countries were not supposed to set up GSP programs that benefited just a few of their “friends.'

What is the objective of GSP?

  • The objective of GSP was to give development support to poor countries by promoting exports from them into the developed countries.
  • According to the US Trade Representative Office website, GSP promotes sustainable development in beneficiary countries by helping these countries to increase and diversify their trade with the United States.
  • “GSP provides opportunities for many of the world’s poorest countries to use trade to grow their economies and climb out of poverty” – USTR.
  • According to the USTR, “GSP also boosts American competitiveness by reducing costs of imported inputs used by U.S. companies to manufacture goods in the United States.”

Who are the beneficiaries under GSP?

  • The beneficiaries of GSP are around 120 developing countries.
  • As of 2017, India and Brazil were the major beneficiaries in terms of export volume realized under GSP.
  • Imports from China and some developing countries are ineligible for GSP benefits.
  • The beneficiaries and products covered under the scheme are revised annually.

What is the procedure for GSP in the case of the US?

  • Under GSP, there is zero/low concessional tariff on imports from developing countries. 
  • The US government selects a group of poor countries and a set of products and offers these countries lower-than-normal tariffs than it applies to imports from all other World Trade Organization countries.
  • The USTR makes annual reviews about the types of commodities to be selected under GSP and the countries to be benefited.

Which are the product groups covered under GSP?

  • The products covered under GSP are mainly agricultural products including animal husbandry, meat and fisheries and handicraft products.
  • These products are generally the specialized products of developing countries.

What are the Benefits of the Generalized System of Preferences?

  • Economic growth and development: By helping beneficiary countries to increase and diversify their trade with the developed nations, GSP helps the developing world in their economic growth. 
  • Employment: Moving GSP imports from the docks to consumers, farmers, and manufacturers support tens of thousands of jobs in the developed nation.
  • Competitiveness: Company Competitiveness is boosted by GSP as it reduces the costs of imported inputs used by companies to manufacture goods.
  • Promoting Global Trade Values: GSP promotes Global trade values by supporting beneficiary countries in affording worker rights to their people, enforcing intellectual property rights, and supporting the rule of law.

What is the difference between GSP and the usual trade arrangement under WTO?

  • Under the normal trade laws, the WTO members must give equal preferences to trade partners.
  • There should not be any discrimination between countries. This trade rule under the WTO is called the Most Favored Nation (MFN) clause.
  • The MFN instructs non-discrimination that any favourable treatment to a particular country.
  • At the same time, the WTO allows members to give special and differential treatment from developing countries (like zero-tariff imports).
  • This is an exemption for MFN. The MSP given by developed countries including the US is an exception to MFN.

What is the impact of GSP withdrawal on India?

  • GSP benefits Indian exporters indirectly through the benefits that are gained by the importers via reduced tariffs and/or duty-free entry.
  • It also helps new exporters find a new market and established exporters to improve margins in a donor country.
  • India exports nearly 50 products of the 94 products on which GSP benefits are stopped.
  • The GSP removal will leave a reasonable impact on India as the country enjoyed preferential tariff on exports worth of nearly $5.6 billion under the GSP route out of the total exports of $48 bn in 2017-18.   
  • In total India exports nearly 1,937 products to the US under GSP.
  • According to the Washington Post, 90% of Indian/Brazilian exports to America face normal US tariffs and hence will remain unaffected from the exit of the GSP program.
  • The products on which India received GSP benefits belonged to labour-intensive sectors such as textile, handloom and agriculture.
  • India could lose US market share to rivals like Vietnam and Bangladesh, which will continue to have duty-free access.
  • Removal of GSP indicates a tough trade position by the US; especially for countries like India who benefited much from the scheme.
  • The US was insisting India to reduce its trade surplus.
  • India is the 11th largest trade surplus country for the US and India enjoyed an annual trade surplus of $21 bn in 2017-18.

Has the Generalized System of Preferences been effective for Developing Countries?

  • From the perspective of developing countries as a group, GSP programs have been a mixed success.
  • On one hand, most rich countries have complied with the obligation to generalize their programs by offering benefits to a large swath of beneficiaries, generally including nearly every non-OECD member state.
  • Certainly, every GSP program imposes some restrictions.
    • The United States, for instance, has excluded countries from GSP coverage for reasons such as being communist (Vietnam), being placed on the U.S. State Department's list of countries that support terrorism (Libya), and failing to respect U.S. intellectual property laws.
  • Criticism has been levelled noting that most GSP programs are not completely generalized with respect to products, and this is by design.
  • That is, they don't cover products of greatest export interest to low-income developing countries lacking natural resources.
  • In the United States and many other rich countries, domestic producers of “simple” manufactured goods, such as textiles, leather goods, ceramics, glass and steel, have long claimed that they could not compete with large quantities of imports.
  • Thus, such products have been categorically excluded from GSP coverage under the U.S. and many other GSP programs.
  • Critics assert that these excluded products are precisely the kinds of manufacturers that most developing countries are able to export, the argument being that developing countries may not be able to efficiently produce things like locomotives or telecommunications satellites, but they can make shirts.
  • Supporters note that even in the face of its limitations, it would not be accurate to conclude that GSP has failed to benefit developing countries, though some concede GSP has benefited developing countries unevenly.
  • Some assert that, for most of its history, GSP has benefited “richer developing” countries – in early years Mexico, Taiwan, Hong Kong, Singapore, and Malaysia, more recently Brazil and India – while providing virtually no assistance to the world's least developed countries, such as Haiti, Nepal, and most countries in sub-Saharan Africa.
  • The U.S., however, has closed some of these gaps through supplemental preference programs like the African Growth and Opportunity Act and a newer program for Haiti and Europe has done the same with Everything But Arms.
Why is India out of US’ developing nations list for trade benefits and what will be the impacts?

 

 

  • In July last year, Trump directed his administration to change rules to prevent “self-declared developing countries from availing themselves of flexibilities” in global trade, saying that nearly two-thirds of World Trade Organization members had been able to avail themselves of special treatment and take on weaker commitments by designating themselves as developing countries.
  • On February 10, 2020, the US removed India from its list of developing countries that are exempt from investigations into whether they harm American industry with unfairly subsidised exports.
  • The WTO allows countries to self-declare as developing nations (or developed/ least-developed countries).
  • India is one of the WTO’s Asian developing members. The self-declaration, however, can be challenged by member states.
  • The developing country status gives members certain benefits such as the Generalized System of Preferences (GSP) followed by the US.
  • The U.S. eliminated its special preferences for a list of self-declared developing countries that includes: Albania; Argentina; Armenia; Brazil; Bulgaria; China; Colombia; Costa Rica; Georgia; Hong Kong; India; Indonesia; Kazakhstan; the Kyrgyz Republic; Malaysia; Moldova; Montenegro; North Macedonia; Romania; Singapore; South Africa; South Korea; Thailand; Ukraine; and Vietnam.
  • The GSP is America’s oldest preferential trade scheme, which offered Indian exporters tariff-free access. 
  • According to the data from the USTR’s office, India is the largest beneficiary nation under the GSP, with total benefits from tariff exemptions amounting to $260 million in 2018.
  • The US removed India from the list on account of it being a G-20 member and having a share of 0.5% or more of world trade.
  • The removal of India from the US’s internal list of developing nations can negatively impact Indian trade. 
  • The move has cast a shadow on India being able to restore preferential benefits under the Generalised System of Preference (GSP) as part of its trade talks with the US, as only developing countries are eligible for it.
  • India’s share in global exports was 1.67% in 2018. In global imports, it was 2.57%.



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