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Indo- US relationship: Developed Tag on India & its implications

  • IASbaba
  • February 17, 2020
  • 0
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International Affairs

Topic: General Studies 2:

  • Effect of policies and politics of developed and developing countries on India’s interests


Indo- US relationship: Developed Tag on India & its implications

Context

U.S. has removed more than a dozen countries, including India, from its list of countries that are classified as “developing” for trade purposes

These countries will now be classified instead as “developed” economies, thus stripping them of various trade benefits.

What is developing country status?

  • The office of the United States Trade Representative (USTR) maintains a list of countries that it classifies as developing, developed, and least-developed. 
  • Countries that are classified as developing are allowed to export certain goods to the U.S. without being hit by punitive tariffs that are usually imposed on goods from developed countries
  • The “developing country” status owes its origin to the U.S. Trade Act of 1974, which authorised the Generalized System of Preferences (GSP) to help poor countries develop faster. 
  • These benefits were extended further under the World Trade Organization wherein rich countries agreed to grant trade benefits to countries that classified themselves as poor.
  • About two-thirds of countries that are members of the WTO classify themselves as “developing” countries and avail benefits.

Benefits of GSP to India

  1. Indian exporters benefit indirectly – through the benefit that accrues to the importer by way of reduced tariff or duty free entry of eligible Indian products
  2. Reduction or removal of import duty on an Indian product makes it more competitive to the importer – other things (e.g. quality) being equal.
  3. This tariff preference helps new exporters to penetrate a market and established exporters to increase their market share and to improve upon the profit margins, in the donor country.

Why is India being stripped of this status?

  • India has traditionally been one of the largest beneficiaries under the GSP, with over 2,000 goods having been exempted from import tariffs (until it was stripped off in 2019). This has also been one of the reasons for India having trade surplus with USA, whereby the Trump administration wants to reduce the gap
  • Trump administration has argued that countries like India and China have witnessed significant growth in the last few decades and thus are not more developing countries
  • USA has further cited the share of global trade enjoyed by India and China and their membership in the G20 club to argue that they enjoy significant economic power

Impact of US decision

  • The task of reclaiming the lost GSP benefits now becomes even harder.
  • It will increase the overall tax burden on Indian goods entering USA, thus making it costlier than before.
  • It will pressurize India to open its market to US goods Ex:  India offered to scale back tariffs on American dairy and other products after the U.S. complained about the restricted access that American companies have. 
  • It will add further pressure on the global economy, which has already witnessed a slowing of growth this year.
  • It may further lead to entrenched Trade war if those countries which were stripped off their developing status, also increases tariffs on US goods

Conclusion

With both the U.S. and its various warring trading partners looking to protect their domestic producers rather than consumers who benefit from lower tariffs, escalations of trade war seem likely.

Connecting the dots!

  • US-China Trade war
  • Developing Status – should it be based on mere economic progress or on broader socio-economic indicators?

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