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GENERALIZED SYSTEM OF PREFERENCES

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GENERALIZED SYSTEM OF PREFERENCES
By: Mr.M. GOVINDARAJAN
March 9, 2019
  • Contents

The Generalized System of Preferences (‘GSP’ for short), is a preferential tariff system which provides for a formal system of exemption from the more general rules of the World Trade Organization (WTO), (formerly, the General Agreement on Tariffs and Trade.  Specifically, it is a system of exemptions from the most favored nation principle (MFN) that obliges WTO member countries to treat the imports of all other WTO member countries no worse than they treat the imports of their ‘most favored’ trading partner. In essence, MFN requires WTO member countries to treat imports coming from all other WTO member countries equally, that is, by imposing equal tariffs on them.  GSP exempts WTO member countries from MFN for the purpose of lowering tariffs for the least developed countries, without also lowering tariffs for rich countries.

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 MFN 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’.

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 leveled 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 manufactures 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.

The GSP is a program designed to encourage monetary prosperity in developing countries throughout the world. This program provides preferential treatment to beneficiary countries, those which are underdeveloped, on over 3,500 products.

The GSP is a U.S. trade program designed to promote economic growth in the developing world by providing preferential duty-free entry for up to 4,800 products from 129 designated beneficiary countries and territories. GSP was instituted on January 1, 1976, by the Trade Act of 1974.  The main products covered by his scheme are organic chemicals, vehicles, iron and steel articles, electrical machinery, plastics, aluminium, rubber, bedding, mattresses and cement.

India has been the biggest beneficiary of the GSP regime and accounted for over a quarter of the goods that got duty free access into the US in 2017. Exports to the US from India under GSP - at $5.58 billion - were over 12 per cent of India’s total goods exports of $45.2 billion to the US that year. The US goods trade deficit with India was $22.9 billion in 2017.

Last year India was one of the countries on which the US imposed penal import duties on aluminium and steel, citing security threats.  India announced its decision to impost retaliatory duties on 29 American products but has been postponing the intended implementation date.  The new date is 01.04.2019 but the Government has not decided yet on what it plans to do.

The Trump Administration has decided to withdraw then benefits under the GSP.  The decision has been taken on the ground that India is not providing equitable market access to American business.  However our country felt that the withdrawal of the scheme will not have a significant impact on exports to America as the benefits to exporters added up to just about $ 190 million annually.  Our country will continue its talks with Washington to sort out mutual concerns. 

The withdrawal of the benefits under this scheme will have a marginal impact on a few domestic sectors such as processed food, leather, plastics and engineering products.  These sectors were availing higher GSP benefits.  The Federation urged the Government to look at providing fiscal support to these segments.   The other sectors that were enjoying the duty benefits include building material and tiles, hand tools, engineering goods such as spark ignition, turbines and pipes, parts of generators, cycles, made ups (pillow and cushion covers) and women’s woven dress.   

The Industry for readymade garments felt that the withdrawal of GSP will not have a big impact on their industry.  The trade would be impacted to the extent of $ 17 million as the product cost for the buyer will increase by 7%, given that the China is the main competitor in these categories.  There were 15 products under HSN 61 and 62 in readymade garments category and these contributed to imports worth $17.97 million from India.  The MFN tariff on the 15 products varied from 0.86% to 14.60% on which India got duty access with 100% margin of preference.

The scrapping of these benefits will take at least 60 days after notifications to the US congress and the Indian Government.

 

By: Mr.M. GOVINDARAJAN - March 9, 2019

 

 

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