Prime Minister Narendra Modi with U.S. President Donald Trump in Manila. (Photograph: Arvind Panagariya/Twitter)

GSP Duty Benefits: Trade Tango With America Begins For India

BloombergQuintOpinion

When President Donald Trump declared “America First”, it set off a chain reaction in the rest of the globe. While America cheered, the rest of world jeered wondering, “if America is first, where do I put my country?” In its most basic sense, the trade terminology of “America First” implies that other trading partners will reduce trade barriers to facilitate the import of American products such that American industries will benefit. There are two issues involved in this.

First, such reduction of trade barriers can come either at a cost of previously negotiated trade flexibilities, or, in a manner interfering with local, national issues and producers. When America wants to import corn to India at a competitive price, for example, the Indian government will have to answer local corn farmers who might lose their market share and profits consequentially.

Second, in order to determine whether the trade terms of other countries are fair, America uses the opinions of its industries and corporations. So, when the United States Trade Representative 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 American seed companies’ submissions. The issue is that these companies typically only consider what is good for their shareholders and never, as a rule, consider local issues of the importing country.

When big pharma complains that India is not paying the full price of a drug and thus violates IP law, it does not consider that the price is inaccessible for more than 80 percent of the Indian population.

Bayer’s submission over Sorafenib priced originally at Rs 2,80,428 for a month’s supply of the medication is a great example. In all, America First can translate for other countries into “facilitate America even at the cost of your citizens.” Thus, it is no surprise that America First has not gone well with most trading partners.

When the Trump administration introduced steel and aluminum tariffs under Section 232 of the Trade Expansion Act of 1962 for national security reasons, it directly implicated some of the trade agreements. The imposed tariffs meant that when other countries imported steel into America, an additional tax will be added to it which will result in steel producers outside of the U.S. either losing a share of the market or a percentage of profits. Either way, when foreign producers who will lose money complain to their respective governments, it will automatically upset the prevailing trade balance.

That is why trade talks tend to involve several countries, to preserve balance.

Needless to state, India was also affected by the U.S. steel and aluminium tariffs. India immediately tried to retaliate and announced tariffs on imports from the U.S. worth about $240 million, although these tariffs on American goods are yet to actually take effect. To teach India a lesson, the U.S. has announced that India will not benefit from the Generalized System of Preferences. The GSP Enabling Clause is essentially an outline of a preferential trade treatment designed specifically to positively impact the “development, financial and trade needs of developing countries.” Recently, it was reported that India was a beneficiary of the program in 2017, according to U.S. data, with exemptions on goods worth $5.6 billion.

Under international trade laws, trade concessions granted to one member should be extended to all members. This principle is termed as the Most Favored Nation Treatment. The MFN principle dictates that any benefit or trade advantage, extended by a member to another member should be applied to all members. Now, the GSP benefits are an exception to the MFN requirement and have been specifically structured such that developing country members can benefit from non-reciprocal preferential treatment based on economic conditions. Examples of such preferential treatment can be offering longer time periods for implementing agreements and commitments or providing special concessions during the dispute settlement process, etc.

For India’s purpose, the U.S. cannot unilaterally threaten to withdraw the GSP benefits of one country unless it can be proved to positively lead to financial and trade needs of India, which it does not.

Such a move by the U.S. is a violation of the World Trade Organization’s Appellate Body.

In a dispute titled EC Tariffs, the Appellate Body opined that no country can unilaterally alter the GSP benefits nor can a country unilaterally threaten to do so. In that dispute, EC extended special tariff preferences to 12 of its trading partners to the exclusion of some of the others. The Appellate Body of the WTO specifically noted that GSP preferences should be tailored to the needs of developing countries. At that time, India challenged the EC program which awarded special and additional GSP benefits to select countries that participated in a special drug eradication program. The AB underscored that GSP programs can award different benefits to different developing countries, but that any such differential treatment is subject to the criteria in Paragraph 3 which requires that the treatment is targeted “positively to the development, financial and trade needs of developing countries.”

In gist, India should take this as a dispute to the World Trade Organization.

India is well-posited to assert before the WTO that any withdrawal of GSP benefits would violate the trade agreement’s GSP enabling clause.

Also read: U.S. Trade Snub Should Be Wake-Up Call for India

It is also fairly certain that if India raises the dispute at the WTO, it is likely to find support from other developing countries. India should be able to implicate unilateral actions of the United States in threatening to withdraw GSP benefit and citations under the Special 301 as violating the dispute settlement understanding between the parties. This would be a great opportunity for India to showcase how the USTR’s Special 301 report that traditionally categorises India as the global pariah violates the Sections 301-310 precedent of the Appellate Body. This may be a way to find global support to challenge unilateral U.S. actions that have come to personify the imbalances of global trade.

The world trading system is not leadership-based. It is a partnership-based system. Trade typically has partners who give and take. The U.S. actions, unfortunately, seek leadership in a partnership.

Srividhya Ragavan, an expert in intellectual property and international trade laws, serves as a Professor of Law at Texas A&M School of Law.

The views expressed here are those of the author and do not necessarily represent the views of Bloomberg Quint or its editorial team.