Implications of loss of US preferential trade status

By Manoj Kumar, Hammurabi & Solomon
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As the US announced the withdrawal of preferential trade status enjoyed by India in relation to duty free exports from India to the US, it continues to push India for measures to correct the US trade deficit, pegged at US$27 billion in trade relating to goods and services.

India presently enjoys certain duty free imports under a programme called the Generalized System of Preference of the US, a programme meant for supporting the economic development of eligible developing countries. 2017 figures peg the volume of imports from Indian into the US at US$5.6 billion, approximately 12% of all imports under the Generalized System of Preference programme.

Manoj-Kumar-Hammurabi-&-Solomon
Manoj Kumar
Founder and
managing partner
Hammurabi & Solomon

The programme further requires developing countries benefiting from this duty free import regime to comply with certain market access requirements. The US feels that India has failed to meet these market access requirements, and hence intends to pull the plug on duty free imports from India under the Generalized System of Preference programme.

By way of background, the medical and dairy industries in the US complained about India for failing to provide equitable and reasonable access to its markets, which triggered the review of Generalized System of Preference programme benefits to India.

So, what does the loss of preferential trade status mean for Indian and US businesses?

What started as a market access issue concerning the medical device and dairy product sectors was subsequently expanded by the US to include market access for animal husbandry products, agriculture products, tariff reductions on communications technology products, and the reworking of testing and conformity assessment norms by India for products from the information and communications technology space, to name a few.

On the medical industry’s demands, India seeks an appropriate balance between consumer rights on fair pricing and the supplier’s interests on adequate margins. This means that the balanced approach advocated by India is seen as falling short of the “equitable and reasonable access” defined by the US.

Additionally, on the dairy industry’s denial of market access allegations, India offers a simple but undiluted certification procedure maintaining the requirement that blood from animals has not been fed to the source animal, and that this is non-negotiable. Diluting some of these requirements runs the risks of harming religious and cultural sentiment, and is therefore not an option.

While according equal treatment on testing and conformity assessment norms for products from the information and communications technology space through a mutual recognition agreement is a workable solution from the Indian standpoint, India has offered duty concessions only on information and communications technology products that have a clear US interest, and maintains that the tariffs are already moderate, and therefore cannot be tinkered with across the board.

The US on its part will deny manufacturers based in the US duty free imports of raw materials, parts, equipment, machinery and components under the Generalized System of Preference programme.

This would potentially lead to such products manufactured in the US becoming uncompetitive in the market place owing to an increase in costs of production, apart from dislodging buyer-seller contracts between businesses in both jurisdictions and pushing them towards terminations, dispute claims and renegotiations. The impact may also be felt in both domestic sales arrangements within the US and export order books from the US.

The revenue implication for the US is not expected to be significant; for India, too, the duty benefit lost on account of loss of preferential trade status with the US is about US$190 million a year, again not a significant figure, particularly pegged against the implications of giving into equitable and reasonable market access demands of the US to continue to be eligible for free duty free exports to the US under the Generalized System of Preference programme.

For businesses and consumers, both markets are key and strategic, which makes it inevitable that an understanding be reached in the interests of consumers and businesses in both jurisdictions, and sooner rather than later.

Manoj Kumar is the founder and managing partner at Hammurabi & Solomon.

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