As the government led by Narendra Modi begins its well-earned second term, India is facing twin challenges on the trade front. Both these challenges emanate from the decisions of the pugnacious and unpredictable President Donald Trump who seems intent on fighting for the interests of his nation even if it means declaring a trade war with other nations such as China, Mexico, Turkey and, now, India.
The first decision, not aimed exclusively at India, was to end waivers to all eight countries importing oil from Iran. The second, somewhat more unexpected and aimed specifically at India, is the presidential proclamation ending, effective on June 5, India’s access to preferential trade terms under the US’ Generalized System of Preferences (GSP) effective on June 5.
Ending oil imports from Iran
In November, the US granted a six-month waiver to India and seven other countries to continue importing oil from Iran. The waiver ended in early May. Following the ending of the waiver, India had to stop importing oil from Iran, the third-largest oil supplier to India after Iraq and Saudi Arabia.
Iranian Foreign Minister Javad Zarif visited India just days after the United States had ended its waiver. Zarif’s visit was intended to persuade India to continue importing oil from Iran. The External Affairs Ministry appears to have only blandly reiterated the position that a decision will be taken keeping in mind commercial considerations and energy security by the new government that takes office following the announcement of the results of the general elections.
So far, the Indian government has not condemned the sanctions against Iran and its approach appears to be in complete compliance with the sanctions even though they harm India’s interests and limit its autonomy.
The new government is unlikely to defy US sanctions and import oil from Iran. Thus, it appears for the time being that India, which bought 23.6 million tons of Iranian oil in the financial year ending in March 2019, will fill the gaps left by Iranian oil with imports from other major oil-producing nations such as Saudi Arabia, Mexico, Nigeria and the USA.
Indian refiners such as Indian Oil Corporation (IOC) has signed two-term contracts for the import of crude from the USA - with Norwegian oil company Equinor for buying three million tonnes of crude and 1.6 million tonnes from Algerian national oil company Sonatrach.
Ending India’s special trade benefits
Peeved at India not providing assurances on equitable and reasonable access for American products to India’s vast market, effective on June 5, Trump ended India’s designation as a “beneficiary developing country” under the Generalised System of Preferences (GSP). Under GSP, the US allows preferential duty-free entry for thousands of products from about 120-plus designated beneficiary countries. India is the largest beneficiary nation under the GSP and exported goods worth $6.35 billion to the US.
The major attraction of the GSP benefits was that they were unilateral and non-reciprocal. The GSP program, while ostensibly designed to help the so-called developing countries, also benefited US small businesses as they could import materials from India without paying duties and, thereby, keep the cost of finished consumer products in the US low.
Trump’s decision to remove India from the list of GSP beneficiaries could end up costing American businesses over $300 million in additional tariffs, according to one American estimate.
The impact on India
India’s total benefits from GSP tariff exemptions amounted to $260 million in 2018, according to the data from the Office of the United States Trade Representative. The Indian government’s reaction to Trump’s decision to end India’s tariff-free access to the US market has been unusually mature and cool. An official release merely termed it as “unfortunate”.
Piyush Goyal, the minister for Commerce and Industry, does not seem unusually perturbed. “India will try to build up export competitiveness in its own right without depending on the GSP scheme provided by the US, “It’s not something that any of the exporters raised as a matter of life and death. It has had an impact on some sectors, some places...1 percent, 2 percent...India is no more an underdeveloped or least developed country that we will look at that kind of support,” said Goyal.
The trade associations were less sanguine. The Federation of Indian Export Organisations (FIEO) reckons that, while for products having GSP benefits of 3 percent or more, exporters might find it difficult to absorb the loss. The impact will only be marginal on sectors such as processed food, leather, plastic, building material and tiles, engineering goods, and hand tools. Some exporters fear that the termination of GSP benefits could mean handing away the market share to low-cost producers in other countries who continue to enjoy GSP benefits.
Outlook
The much-maligned President Trump’s approach to any problem appears to be that of a shrewd businessman and one not concerned with diplomatic niceties or precedents. His standard tactic of unilaterally announcing the ending of long-standing agreements is designed to bring the other side to the negotiating table so that he can wrest some benefits for his country.
Even the ending of a waiver on oil imports is to force Iran to the negotiating table. Thus, it is possible that the benefits could be reinstated after India assures the USA at the negotiating table to provide equitable and reasonable access to its markets.
(The author is from Escorts Securities)
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