Kumar Mangalam & Amit Kumar

The U.S. has withdrawn preferential trade benefits extended to India under its Generalized System of Preferences (GSP) program. Can India seek a legal remedy?

USA finally declared on June 5 its decision to withdraw trade benefits provided to India as a developing country under its Generalized System of Preference (GSP) programme. In 2018, India was the largest beneficiary of the United States’ GSP programme as it exported goods worth nearly $ 6.35 billion on preferential tariff rates. This move by the USA will have little impact on India’s economy as 90% of India’s exports to US fall under non-preferential category. But it may have considerable effect on some sectors like plastic articles and iron & steel as more than 50% of their exports to US fall under GSP category.

Generalized System of Preferences (GSP) is a system of preferential tariff benefits provided by developed countries to developing countries. This special and preferential treatment to developing countries is an exception to the Most Favoured Nation (MFN) treatment principle. The MFN principle is embodied in the Article 1 of the General Agreement on Tariffs and Trade (GATT), which governs international trade in goods; this principle requires that countries treat all their trading partners equally and do not give special benefits to selected few. The idea of special trading concessions was first pitched in 1968 New Delhi conference of UNCTAD. This aberration was made possible first by a decision of GATT contracting parties in 1971 to relax the most-favoured nation (non-discrimination) principle in favour of developing countries for 10 years. Later in 1979 the signatories decided to adopt the enabling clause to make the waiver permanent, setting up a mechanism for Generalized System of Preferences (GSP) to allow preferential tariff treatment to products originating in developing countries by developed countries. Under GSP, a developed country extends special trade benefits to developing countries. These benefits may involve tariffs lower than the regular tariff rate under MFN or complete duty-free entry for certain eligible products exported by beneficiary countries to the markets of donor countries.

Several countries provide preferential tariff benefits to India by the way of GSP. Until now, exports by India to USA under GSP were second only to exports to EU, followed by exports to Japan, Russia and Australia respectively. A major chunk of India’s exports to US under the GSP programme were intermediary goods to be used by US downstream industries. Low priced Indian intermediary goods have helped them over the years to minimise production costs. Withdrawal of India from GSP program may impose additional burden of approximately $ 300 million annually on them.

The US GSP programme was authorised under the Trade Act of 1974. The benefits extended under this programme and the criteria for beneficiaries is subject to review by the Congress.

Tariff benefits under US GSP programme is generally provided to some designated beneficiary developing countries (BDCs) and some countries considered as the least-developed beneficiary developing countries (LDBDCs). To be considered for benefits under the US GSP programme a BDC or LDBC must confirm to respecting arbitral awards decided in favour of the US citizens or corporations. Such a country should agree to abide by the regulations on combating child labour and internationally recognised labour laws. It should also ensure adequate protection for intellectual property rights and provide equitable and reasonable market access to the United States. Factors of economic development are also important to determine continuation of a country in the GSP programme.

US authorities have stated that India’s status as a BDC has been terminated as India could not assure “equitable and reasonable access” for the US to its markets. India levies import duties as high as 150% on goods like motorcycles and whiskey imported from the United States. US authorities have expressed that trade relations should be based on fairness and reciprocity.

In this scenario, there arises a pertinent question regarding what should be the response of India after USA removed India from GSP beneficiary country list? India has already responded by imposing retaliatory tariffs on import of goods from US. But it’s important to understand that more than numbers the issue here is of legal principles and systematic impact of USA’s unilateral actions.

Although, there is no obligation on developed countries like USA to pass on GSP benefits to developing countries like India, since GSP is a voluntary exercise on part of developed countries, but the unilateral action taken on part of USA clearly overlooks the objectives enshrined in the “Preamble of WTO Agreement”. The Preamble clearly states that there should be ‘positive efforts’ to ensure that developing countries also get a boost in international Trade in synchronization with their economic development. Hence, the laws of WTO clearly provide that GSP status conferred by a country to another country needs to be adhered to. Also, GSP benefits are “unilateral and non-reciprocal in nature extended to developing countries” as stated by enabling clause  which means US cannot expect trade benefits from India in return for GSP benefits which according to official statement by USA has been sole ground for withdrawal of India as it was not providing “equitable and reasonable market access” to USA.  This amounts to clear violation of non-reciprocity principle of GSP.

Most importantly, this decision goes against the fundamental principle of “Most Favoured Nation” (MFN) of WTO. Since USA will continue to give GSP concessions to a number of other developing countries, this will lead to discrimination between similarly situated developing countries. In cases where ‘Differential treatment’ between developing countries is introduced; it should be because of “different financial, developmental and trade needs of developing countries”. In the current scenario, the GSP benefit was not withdrawn from India because it is not comparable to other developing countries on above mentioned parameters but on account of “equitable and reasonable access”. Hence, the decision by USA violates Most Favoured Nation principle of WTO and is not consistent with the WTO obligations of the member country. The precedents of WTO decisions in similar circumstances also favours India if it were to challenge USA’s decision in WTO. In 2003, India complained before Dispute Settlement Body (DSB) of WTO against differential treatment and undue difficulties created by tariff preference rule for exports of textiles and drugs under the GSP programme of European Council (EC). In this case the decision of the panel and appellate body of DSB was decided in India’s favour, it was ruled that paragraph 2(a) of the enabling clause requires that all similarly-situated GSP beneficiaries should be accorded identical treatment.

Conclusion

The decision of the US authorities to terminate India’s status as a GSP beneficiary goes against the idea of non-reciprocity enshrined in the paragraph 5 of the enabling clause. Moreover, this decision also differentiates among similarly situated developing countries, thus violating the Most Favoured Nation (non-discrimination) principle. This gives India proper cause to complain before WTO Dispute Settlement Body (DSB) against undue treatment being meted out to it.

Both the authors are students of II year B.A, LL.B (Hons.) at the National Law University Odisha, Cuttack.

Image Credits: The Financial Express.