The Generalized System of Preferences (GSP) is a trade initiative that enables developed nations to offer non-reciprocal preferential tariff rates on specific goods imported from developing countries. Its primary aim is to foster economic growth and development in these nations by enhancing their access to global markets.
The GSP program provides numerous advantages to developing countries, such as:
1. Lowering or eliminating tariffs on qualifying products, which boosts their competitiveness in the international market.
2. Increasing export opportunities and generating higher revenue for enterprises.
3. Attracting foreign investments and facilitating local job creation.
India has benefited significantly from the GSP program, especially in the US market. However, in 2019, the US revoked India's GSP status, citing the country's expanding economy and its inability to show adequate reciprocity in trade relations. This decision has had a considerable impact on India's duty-free exports to the US, affecting various industries, including textiles, leather goods, pharmaceuticals, surgical products, plastics, chemicals, imitation jewelry, and machinery.
The following section provides a detailed analysis of the financial losses by sector, based on data from recent reports, while acknowledging that precise figures beyond 2023 are limited due to insufficient updates.
Overall Financial Impact
Before the termination of GSP benefits, India was the leading beneficiary of the program, with approximately $5.6 billion in exports (across 1,945 products) enjoying duty-free access to the US market during the 2017-18 period. The tariff reductions resulted in annual savings for Indian exporters estimated between $190 million to $241 million, depending on the source.
Estimated Annual Loss: The removal of GSP status led to the reintroduction of Most Favored Nation (MFN) tariffs, which increased export costs by an estimated $190 million annually, according to the Indian government, and up to $241 million based on ORF estimates. Some analyses suggest that certain sectors may experience even higher losses due to competitive disadvantages.
Cumulative Loss (2019–2023): Assuming a consistent annual loss of between $190 million and $241 million over the four years from June 2019 to June 2023, the total financial burden on Indian exporters could range from $760 million to $964 million. This estimate does not account for potential market share losses or indirect effects, which could further elevate the total. Looking ahead to 2024 and beyond, if GSP status is not reinstated, losses are anticipated to continue at a similar rate, although precise figures are not yet available. Additionally, the situation has resulted in an estimated loss of around 3 million jobs in India, particularly affecting the small and medium-sized enterprise (SME) sector.
Sectoral Impact
The repercussions varied across different sectors; while some experienced significant losses, others demonstrated resilience. The Generalized System of Preferences (GSP) encompassed labor-intensive and intermediary goods, and the reintroduction of tariffs diminished competitiveness, particularly for Micro, Small, and Medium Enterprises (MSMEs). Below is a summary of key sectors based on the conducted analyses.
Leather Articles:
Before the GSP withdrawal, leather articles accounted for 50.19% of India's GSP exports, underscoring their significance in the export market. After the withdrawal, 50% of leather products that previously benefited from zero tariffs were subjected to a Most Favored Nation (MFN) tariff rate of 7.73%, the highest among the affected sectors. This adjustment led to increased export costs.
Gems and Jewelry:
Prior to GSP Withdrawal: This sector significantly benefited from the GSP, contributing to $5.6 billion in duty-free exports.
The elimination of duty-free access resulted in increased tariffs, typically between 2% and 3% under Most Favored Nation (MFN) rates, raising costs for exporters. Consequently, this industry faced the threat of losing market share to competitors like Vietnam and Bangladesh, which continued to receive GSP benefits.
Chemicals:
Prior to GSP Withdrawal: This sector included essential raw materials and intermediates vital for GSP.
The reintroduction of Most Favored Nation (MFN) tariffs, ranging from 2% to 7% depending on the product, reduced cost advantages, particularly affecting small enterprises. The industry struggled to maintain its market share, especially for intermediates sensitive to price changes.
Textiles and Handlooms:
Before GSP Withdrawal: Textiles were among the 1,900 products eligible for GSP, enjoying duty-free status.
The withdrawal of GSP resulted in increased tariffs, negatively impacting small producers and micro, small, and medium enterprises (MSMEs). This sector faced the risk of losing market share to countries that continued to benefit from GSP. Potential losses for certain textile products could range from 2% to 10% of their export value, depending on the tariff increases.
Agriculture and Processed Foods:
Before GSP Withdrawal: This category included vital products such as rice, which heavily depended on GSP benefits.
Some agricultural exports, particularly certain varieties of rice, suffered losses exceeding 10% of their export value due to the reinstatement of tariffs. This situation weakened the competitiveness of Indian products against those from countries benefiting from GSP.
Engineering Goods and Automobile Parts:
Prior to the Withdrawal of GSP: In 2018, engineering goods, particularly auto parts, constituted one of the most significant GSP categories in terms of value.
Notably, some sub-sectors, like electrical machinery, saw an increase in exports following the withdrawal, showcasing resilience fueled by robust demand in the US or other competitive dynamics. In contrast, other engineering goods encountered higher tariffs, leading to overall declines.
Pharmaceuticals:
Prior to the Withdrawal of GSP: This sector gained advantages from GSP for certain intermediary products.
As tariffs increased, small and medium-sized exporters faced elevated costs. However, India’s pharmaceutical exports continue to be relatively competitive, and the negative impacts were less severe compared to those experienced in labor-intensive sectors.
The revocation of India’s GSP status in 2019 led to immediate financial setbacks. Industries such as leather, gems and jewelry, textiles, agriculture, and organic chemicals were particularly impacted, with tariff hikes diminishing competitiveness, especially for MSMEs. It is crucial to prioritize the reinstatement of India's GSP status; the Government of India (GOI) should enhance diplomatic ties and engage in trade negotiations. Addressing American concerns about market access, particularly in the dairy, medical devices, and IT sectors, through reciprocal concessions is essential. Collaborating with the US Trade Representative and Congress to highlight mutual benefits, such as job preservation in the US and reducing China's supply chain influence, is critical. A comprehensive trade proposal that includes tariff reductions and reforms in data localization could expedite the restoration process. Furthermore, the GOI should leverage bipartisan support in the US for GSP renewal to strengthen bilateral relations.
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