President, Donald Trump has threatened to withdraw the over 5 decades old special dispensation viz. the Generalized System of Preferences [GSP] under which the USA imports goods mostly textiles from India at ‘zero’ customs duty. This would affect exports from India worth US$ 5.6 billion or about Rs 40,000 crore.
The latest missive is in continuation of a series of actions taken against countries world-wide [including India] under his much hyped agenda of “Buy American, Hire American”. Some of these actions having far reaching ramifications include:-
(i) rejecting the demand of developing countries for finding a ‘permanent solution’ to stock-holding for food security despite a decision to this effect at the 9th WTO ministerial held in Bali [2013];
(ii) dumping the Doha Development Agenda [DDA] so assiduously pursued by all members of WTO since 2001;
(iii) hike in customs duty on steel and aluminum to 25% and 10% on imports barring some preferred friends of USA;
(iv) review of the H-1B visa program to restrict the entry of foreign specialists/professionals to only ‘most-skilled and highest-paid applicants’;
(v) blocking appointment of members of the appellate authority of WTO dispute settlement body [DSB].
The action at (v) hits at the very foundation of the WTO [World Trade Organization] as DSB being the authority for adjudicating disputes – arising from non-compliance with the rules – the resolution process will come to a grinding halt. The precariousness of the situation can be gauged from the fact that currently, there are only 3 members in the body against the required strength of 7 which will further reduce to only 1 later this year when 2 of them retire.
The latest decision to dismantle GSP dispensation [on top of earlier regressive measures] will be a big blow to the ability of India to sustain even the current level of exports – forget the ambitious plans of the the two countries to increase the bilateral trade to US$ 500 billion from the existing US$ 140 billion [2017].
The trigger for this sudden move is the clarifications issued by the Indian commerce ministry on December 26, 2018 regarding the Press Note 3 [2016-17] which allows 100% foreign direct investment [FDI] in ‘market-place’ model – a platform where vendors sell their products subject to certain conditions. It clarifies that the marketplace can’t have ownership of the vendors selling on the platform. Further, the former can’t have ‘exclusive’ arrangement with the latter.
The above clarifications [these take effect from February 1, 2019] have forced the US based multinational corporations [MNCs] viz. Amazon, Walmart/Flipkart to rework their business plans. They argue that these tantamount to ‘retrospective’ change in the policy – an argument that Trump buys and has therefore, come out with retaliatory measures such as dismantling of the GSP regime.
However, what these MNCs fail to recognize is that the clarifications deal with the core of the policy which allows FDI only in marketplace but not in inventory model where it is prohibited. Yet, they have set up structures [albeit opaque] enabling them hold stocks and engage in direct selling to consumers. In short, they have been flouting the rules leveraging the ambiguity in the extant PN-3 which has now been removed.
There is no valid reason for Trump to get provoked even as all his previous actions too were ‘unilateral’ and ‘arbitrary’ being completely out of sync with the spirit of ‘free’ and ‘fair’ trade embodied in the WTO. Indeed, he is driving negotiating activity on trade in goods and services – mostly through plurilateral trade pacts involving fewer countries – outside the multilateral body.
In an inter-dependent system whereby countries realize a sizeable portion of their GDP from trading with others, increasing barriers to trade will only be counterproductive. This logic holds as much for USA as for any other country. But, what if Donald Trump refuses to listen and show restraint.
India needs to tread carefully. While, on the one hand, it will have to orchestrate alliances [with developing countries as also the bloc of least developed countries] at the global platforms to identify common ground for reinvigorating the WTO and preserve the sanctity of multilateral rules, on the other, it needs to engage proactively with US to address some of latter’s overarching concerns.
These include (i) uncertainty of the policy environment; (ii) localization of data – both personal and community – generated from transactions by international digital and payment companies from their operations in India ; (iii) high customs duty on import of electronic items especially mobile phones, dairy products and automobiles [in particular, Harley Davidson bikes in which Trump has keen interest]; (iv) control on the price of medical equipment viz. stents, knee implant etc; (v) lack of effective enforcement of laws for protection of intellectual property rights [IPRs]; (vi) absence of a law on data protection.
The government needs to show flexibility in addressing the concerns without compromising our ‘Make in India’ mission. For instance, except for some critical data, it need not insist on storage within India. The policy on foreign investment should be streamlined by allowing 100% FDI in retail in both ‘online’ and ‘offline’ without any riders. The passage of a law on data protection should be expedited and enforcement of patent and other IPR laws made effective.
These steps should help soothe the nerves of President Trump and getting him to refrain from implementing drastic actions such as withdrawal of GSP or scuttling ‘permanent solution’ to stock-holding for food security or restricting the entry of foreign specialists/professionals under H-1B visa program etc.
Team Modi may use the opportunity provided by India-US Commercial Dialogue co-chaired by Wilbur Ross, US Commerce Secretary and Suresh Prabhu, Indian commerce minister [a meeting is scheduled on February 14, 2019] to arrive at a comprehensive settlement of all pending trade and investment issues.