Expert Speak Raisina Debates
Published on Mar 22, 2019
India must be prepared to tackle the uncertainty surrounding international politics and economics, especially the Trump Administration by creating a strong domestic economy with world class infrastructure.
US protectionist strategy to affect Indian labour markets and competition?

The office of the United States Trade Representative (USTR) has announced that India and Turkey may lose their status of Developing Beneficiary Country (BDC) under the General System of Preferences (GSP) of the WTO. According to the GSP, developed countries, in an attempt to aid in the development process, must allow duty free access to the products being manufactured in the Less Developed or Developing countries. In this manner, the former can procure cheap raw materials for the production of high end finished goods while the latter are granted access to competitive markets at lowest barriers.

Requests from the National Milk Producers Federation and the US Dairy Export Council, and the Advanced Medical technology Association of the US against technical barriers to trade by India had prompted the Donald Trump administration to consider revoking BDC status for India.

‘Price controls’ and ‘onerous requirements’ have been cited as examples of New Delhi’s failure to provide ‘equitable and reasonable market access’ to Washington. But the extension of GSP benefits has been used by market fundamentalists, such as the US, to promote subscription to this idea in developing nations.

< style="color: #333333">‘Price controls’ and ‘onerous requirements’ have been cited as examples of New Delhi’s failure to provide ‘equitable and reasonable market access’ to Washington. But the extension of GSP benefits has been used by market fundamentalists, such as the US, to promote subscription to this idea in developing nations. As such, the expectations of reciprocity by United States are contrary to the essence of GSP.

If India is denied the beneficiary status, following the legislative procedure in the following days, it will lead to a higher import duty on Indian products being exported under this scheme. Indian products would be levied the Most Favored Nation (MFN) or effective applied tariff rates, which are higher than those for BDC. Major concerns would be regarding the price competitiveness of these goods in US markets relative to those countries exporting similar products under the GSP scheme. Evidently, this will be discriminatory to Indian exporters. Although most of the products are intermediate goods, the impact of the withdrawal on product categories such as leather goods, textiles and clothing, carpets, miscellaneous items of base metal and articles of stone, plaster, cement, asbestos, mica or similar materials, and precious metal jewelry will require a holistic analysis.

The reductionist idea of looking at trade deficits as measures of the health of an economy can be misleading and have a boomerang effect. Higher duties on these products will raise the cost of production of US goods- affecting their global competitiveness in turn. As a result, efforts to reduce trade deficit by Washington might face a setback.

GSP: Markets, employment and comparative advantage

Majority products exported under the GSP belong to the micro, small and medium enterprises which are labor intensive. These sectors are a major source of employment for the lower middle-income class of the society. The recent trade tension between the two nations will have a spillover effect on this section- especially the semi and unskilled workforce. They are confined to certain sectors and particular occupations (specific factors). If the produce of this sector becomes less competitive in world markets, prices would decline and neo-classical theory of price magnification suggests that this will result in a decline in the wages of the semi-skilled labor employed. Intuitive logic behind the mechanism is that reduction in demand leads to lower production, which subsequently lay off more workers than that which can be absorbed in other sectors of the economy. A situation of excess labor supply reduces the wage rate of semi-skilled laborers. Hence, the wage gap between skilled and unskilled or semi-skilled labor gets widened.

Figure 1: Wage Gap in India

Source: Trading Economics

Thus the argument that the withdrawal of GSP status will not affect Indian economy to a large extent, needs careful analysis. International trade is a dynamic phenomenon with the involvement of different sectors and sections of society. The factors of production involved behave in a very charismatic manner to different policy changes. < style="color: #333333">External shocks such as the imminent withdrawal of duty-free access to US markets will definitely have an effect on the Indian economy. It might lead to unemployment if these export sectors are unable to compete with other countries globally.

External shocks such as the imminent withdrawal of duty-free access to US markets will definitely have an effect on the Indian economy. It might lead to unemployment if these export sectors are unable to compete with other countries globally.

With a huge population and a growing workforce, employment is major problem for India. Unemployment figures for 2018 show a remarkable rise from previous levels. At a situation like this, unfavorable effects via the GSP might lead to unprecedented impacts on the economy.

Figure 2: Unemployment Rate (%) in India

Among India’s competitors in the US markets, who are also beneficiaries under GSP, are Bangladesh, Indonesia, Brazil, Egypt, Cambodia and South Africa. These countries will continue to get duty free market access, while India will be subject to the standard tariff rates. Unless Indian commodities have a genuine comparative advantage, they will lose their competitiveness. In the market for clothing and textile, Bangladesh has a superior position. Although both countries have a comparative advantage in clothing and textile exports, Bangladeshi products are relatively more competitive. In the market for precious and semi-precious metals, India faces stiff competition from South Africa. Removal of BDC status will attract competition from other non-BDC countries such as Vietnam and Canada as well. This is going to hurt Indian exporters a lot as the US is among the top two countries in the ranking of export destinations for Indian goods.

Economic aspirations and objective of acquiring a major share in global trade might face a setback.

Preparing for the future

New Delhi has the option of moving the WTO against this action of the US. However, times have changed since the last time India took such a stance against the EU in 2006. India is in a better position to defend her own interests. Policy should focus on taking a pragmatic stance and resolve the issue by engaging in dialogue with the US.

At the same time, Indian government must also provide incentives to its exporters, in order to ensure that they do not lose their competitiveness in the global market. Goods and Service Tax (GST) relief or exemption for Small and Medium Enterprises will help promote exports and safeguard their competitiveness.

Alternative markets such as the EU and UAE may be explored. New Delhi must take the lead role in initiating talks with these countries and set up Export Promotion Councils with additional emphasis on the intermediate goods sector. The onus should be on state governments to ensure that the SME sectors are provided with adequate infrastructure- both physical and financial.

At this outset, India must be prepared to tackle the uncertainty surrounding international politics and economics, especially the Trump Administration. Creating a strong domestic economy with world class infrastructure and investment should be the policy motive. Unless this is ensured, even small repercussions in global economics, such as the one at hand, will have substantial impacts on the domestic economy.

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Contributor

Roshan Saha

Roshan Saha

Roshan Saha was a Junior Fellow at Observer Research Foundation Kolkata under the Economy and Growth programme. His primary interest is in international and development ...

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