Trade face-off

The Trump administration’s decision to take India off preferential trade list has triggered the talk of India imposing retaliatory duties on US goods. Care ratings chief economist Madan Sabnavis feels India must not take decision without understanding the consequences.

The Generalised System of Preferences (GSP) is a set of trade laws in the United States of America introduced some four and a half decades back in 1974. Under the GSP, the US allows imports of various goods from a set of over 120 developing countries at zero tariffs. The idea was two-fold. The first was to enable developing countries to increase their exports and growth and second to get in cheaper imports that would lower domestic cost of production as the goods covered were mainly raw materials and intermediate goods. It was hence a win-win situation for all.

India has been singled out by President Donald Trump for keeping tariffs on US goods high and making laws restrictive in terms of fostering trade and investment. In fact when Mr Trump took over as the President his trade related objective was to straighten out such unequal practices of trading partners and while China was the main target, India did not escape notice. While the initial objection was on export of automobiles to India (the Harley Davidson case), it came down to medical products, dairy goods etc. among others. While the FDI rules relating to ecommerce did not get specific mention, the US is not too happy over the new rules which affect Amazon.

By taking India off the list, exports of $5.6 billion would be affected in leather products, carpets, textiles, gems and jewellery etc. The US is a major trade hub for India and exports are valued at around $50 billion. The government has argued that this is just 10 per cent of exports to the US and the cost would be $190 million which is not much when we look at the larger picture. Individual industry units would get affected by this move of the US even though aggregate exports may not get impacted significantly. The argument is that with the tariffs coming in, their relative export competitiveness would get affected which can make other country imports to US cheaper. This cannot be ruled out. And given that these products typically have inelastic demand, getting replacement markets will not be easy.

How is one to look at this issue? To begin with it must be said that getting extra privileges under the GSP is quite anachronistic as India is no longer the country it was in 1974. We do lay claims to being the fastest growing economy and along with BRICS have sufficient economic clout in the world economy as well as at WTO. Therefore, it is time we moved out of this shelter.

Second, being a sovereign nation, India has a right to decide on its trade rules and hence should not bend back for the US. This was a case of standing by our principles and not getting pushed around. This is important because when GSP was introduced at no stage did the US talk of reciprocal rights. This has been an addition brought by Mr Trump and hence was new.

Third, Indian exporters too need to be pushed to become more competitive and look for more markets rather than depend on the US only. As long as there is an implicit protection, there would be less drive to become self-reliant.

On the other side from the point of view of exporters which would tend to be in the SME sector, this comes as a shock. Although this was on the cards, it was assumed that it would be excused just as China has been given some more time for negotiation. The 60 days period for us is too short to expect any change of stance. The Indian exporters have always been crying for relief from the government as they have several disadvantages in the international market. Therefore instead of getting support, they have to fend for themselves and would expect the government to come up with some alternative package for them just like they do for other sector like textiles or sugar or steel. It may pointed out that most of the goods affected are labour intensive and hence can lead to some employment challenges if these exports are not made up. Also, for the present China can leverage this loss of GSP status for India to push their goods to the US at a lower cost.

The US position is also quite singular. At a time when it is fighting a hard trade battle with China, it may have been expected that it would cosy up to India. But it does appear that President Trump is more keen on furthering his policy of equal trade treatment by its partners. India may not be a big exporter for the US at around $50 billion but there is a deficit run (around $24-27 billion) which makes it important.

At the broader level, India may have to be more flexible with the trade relations with the US as GSP has to be seen with respect to both political issues as well as future investment. At the political side, the US need to be made an ally especially with hostile neighbours which includes China. While non-alignment is the stated policy, taking a flexible stance on issues like tariff could help India in the long run.

The other part is that if there is any thought of retaliation with the US on the trade front, it would affect us more as it is our major export market and with India competing with countries like Bangladesh, Sri Lanka, China, and East Asia, there could be further repercussions.

On the investment front too, India may have to relook at its policies as we need more of such flows and the policies pursued in the past have been less friendly at a time when funds have other options. Therefore, there is a view that we should also be ready to talk rather than be brash about FDI in the name of protectionism especially in case of ecommerce as it sends wrong messages which can take the flows away from the country.

While compromising domestic industry should certainly not be allowed taking a stance of hubris may also be detrimental especially at a time when the world is getting closed with protectionism as limited growth in the last decade has made countries more inward looking.

Therefore, before we really consider retaliation, it may be useful to understand the consequences as another event called Brexit  is on the anvil which has consequences that are not evident to us presently. But one can never tell.

(The writer is the chief economist of Care Ratings. Views are personal)