McLARTY TRADE UPDATE: Trump revokes trade preference program for India & Turkey

March 5, 2019

KEY POINTS:

President Trump announced his intention to revoke the Generalized System of Preferences (GSP) designation for India and Turkey. The changes will come into effect at least 60 days after notifying Congress and both governments.
India has been the largest beneficiary of the GSP program and enjoys duty free-exports on 11% or $5.6 billion of its total exports to the United States.
Indian Commerce Secretary Anup Wadhawan downplayed the move, noting that the impacted trade represents a small share of the total volume of trade.
With elections coming in April and little prospect of reversing the decision, the Indian Government is looking to minimize the issue, although the opposition may seize on the loss as a failure of the Modi administration.
Turkish Trade Minister Ruhsar Pekcan criticized the US decision, stating that it would hurt both sides, though she added Turkey continues to pursue the goal of increasing bilateral trade with the US.
The decision on Turkey is seen by some as a politically motivated action that seeks to pressure Ankara into abandoning its purchase of Russian S-400 air defense systems, which are seen in the US as incompatible with US/NATO military technology.

BACKGROUND

On March 4, President Donald Trump notified Congress that he intends to terminate Generalized System of Preferences (GSP), a unilateral trade preference program for developing nations, for both India and Turkey. In a statement late Monday, the Office of the United States Trade Representative (USTR) noted “India’s termination from GSP follows its failure to provide the United States with assurances that it will provide equitable and reasonable access to its markets in numerous sectors” and acknowledged that “despite intensive engagement, India has failed to take the necessary steps to meet the GSP criterion.”

The statement also noted that Turkey’s termination “follows a finding that it is sufficiently economically developed and should no longer benefit from preferential market access to the United States market.” The USTR added that “An increase in Gross National Income (GNI) per capita, declining poverty rates, and export diversification, by trading partner and by sector, are evidence of Turkey’s higher level of economic development.” President Trump’s decision regarding Turkey is a result of a review initiated in August 2018, around the time the US doubled 232 national security tariffs on imports of steel and aluminum from Turkey to 50% and 20%, respectively. Turkish exports to the US include vehicles, machinery, iron and steel, and textile products. Though the move is not expected to have a large impact on Turkey, it had an immediate impact on the Turkish lira.

According to USTR, GSP statutes dictate that “these changes may not take effect until at least 60 days after the notifications to Congress and the governments of India and Turkey and will be enacted by a Presidential Proclamation.”

India’s GSP revocation comes after nearly a year of inconclusive talks over a range of trade barriers. The United States initiated the review of India’s GSP benefits due to market access restrictions in agriculture, milk, and poultry products, in addition to concerns over growing price controls on medical devices. India has been the largest beneficiary of the GSP program with duty free-exports under the program reaching $5.6 billion in 2017, or just over 11% of exports to the United States.

President Trump has long expressed his frustration with India’s trade policies and recently returned to criticizing the country’s high tariffs on Harley Davidson motorcycles. Addressing participants of the Conservative Political Action Conference (CPAC) last weekend, Trump remarked that “India is a very high tariff nation. They charge us a lot…When we send a motorcycle to India, it’s a 100 per cent tariff. They charge 100 per cent. When India sends a motorcycle to us, we brilliantly charge them nothing.”

The move may also affect US producers enjoying lower costs from the nearly 1,937 products covered by GSP. According to the Federation of Indian Export Organizations (FIEO), the sectors that will likely be significantly impacted by the revocation will include the following:

Leather products other than footwear (i.e. handbags and accessories)
Processed foods
Plastic products (i.e. vinyl floor covering and non-adhesive tapes)
Building material and tiles
Hand tools (i.e. spanners, wrenches, and drilling equipment)
Engineering goods (i.e. spark ignition, turbines and pipes, parts of generators)
Made-ups (i.e. pillow and cushion covers, and woven women’s dresses)

Other affected items include Indian exports of farm, marine, and handicraft products, as well as raw materials and intermediate goods such as organic chemicals.

INDIAN RESPONSE

Indian officials have since downplayed the impact of the decision citing the small impact on overall volume of trade. In a press conference in New Delhi, Indian commerce secretary Anup Wadhawan stated that “GSP withdrawal will not have a significant impact on India’s exports to the US,” adding that “the benefits, both in an absolute sense and as a percentage of the trade involved, are very minimal and moderate.” At least one official has privately commented to the media that India “will just have to take it on the chin and move on,” while another pointed out that “the benefit to industry is low, US tariffs are already low. GSP is more symbolic of the strategic relationship, not in value terms.”

As negotiations on a trade package with the US continue, Wadhawan has ruled out discussing retaliatory measures with the United States stating that “discussions are on with the United States, and given cordial and strong ties, keeping retaliatory tariffs out of it. The government will internally review the retaliatory tariff issue.”

TURKISH RESPONSE

The Turkish government criticized the US decision, with trade minister Ruhsar Pekcan stating that the decision will “negatively affect the small and mid-sized companies and manufacturers in the US.” The US imported $1.66 billion in 2017 from Turkey under the GSP program, representing 17.7% of total US imports from Turkey, according to USTR’s website. Pekcan added that the value of US imports from Turkey amounted to $1.74 billion under its GSP scheme in the first 11 months of 2018, making Turkey the fifth largest supplier to the US with a share of 8.2%. Despite the US’ decision, Pekcan tweeted that the Turkish side would still like to pursue the target of increasing bilateral trade with the US, “our strategic partner, without losing any momentum.”

ANALYSIS

The revocation by the Trump administration does not come as a surprise given a range of Indian trade policies that have hurt US companies over the last 18 months. This included higher custom duties on nearly 50 product groups in the 2018-19 Union Budget, import substitution rules on steels and automobiles, and price controls on medical devices and credit card transactions. It is also important to note that actual trade numbers continue to rise with US exports to India increasing 27% over the last 12 months to $32 billion, the highest increase among the United States’ top trading partners.

With elections likely in April and little prospect of reversing the Trump Administration decision, the Indian Government is looking to minimize the issue and move on. However, opposition parties could still seek to capitalize on GSP removal as an opportunity to embarrass the administration.

In terms of the decision regarding Turkey, commentators accused Washington of political motivations. Previous economic penalties from the US have come in response to political and diplomatic disagreements, as when the Trump administration doubled 232 tariffs on Turkish steel and aluminum amid a spat over the arrest of an American pastor and charges against several US officers at the Incirlik Air Base. The decision kicking Turkey out of the GSP program was announced as high-level envoys from the US are in Ankara trying to persuade Turkey to reverse its decision to buy Russian S-400 air defense systems.