Kimberly Ann Elliott
In its early days, the international trade regime that the United States and its allies created after World War II counted relatively few less-developed countries as members. For the first few decades, developing country members of the General Agreement on Tariffs and Trade, the precursor to the World Trade Organization, remained mostly small in economic size, unimportant in trade and participated little in multilateral trade negotiations. In the 1960s and 1970s, developed countries unilaterally extended preferential market access to poorer countries to spur economic growth and development. As the “newly industrializing countries” of Asia, followed by Brazil, India, Mexico, South Africa and others, succeeded in growing faster and becoming bigger exporters, conflicts grew over the appropriate scope of “preferential and different treatment” for developing countries.
Earlier this year, U.S. negotiators submitted a proposal calling on the WTO to treat larger or more advanced developing countries—such as India, China and other members of the G-20—the same under its rules as it does industrialized members. Beginning in 2014, the European Union decided that upper middle-income countries would no longer be eligible for special access under its Generalized System of Preferences program, known as GSP. Most rich countries, including the U.S., have their own GSP programs that reduce or eliminate tariffs on designated imports from eligible developing countries, but they differ on how they determine eligibility.
“Graduation” from these trade preference programs and special treatment at the WTO is a mark of successful development. But there are costs associated with graduation—in particular, developing countries will face higher tariffs on their exports. And since there are no internationally agreed criteria on when and how this process should occur, it remains a highly contested issue between countries providing preferential treatment and those receiving it.
India, one of those early members in the international trade regime, is illustrative of the difficult questions around these trade preferences for developing countries. It is the 10th-largest source of U.S. imports and, importantly for President Donald Trump, it runs a large trade surplus with the United States. Under Washington’s recent WTO proposal, India would no longer be eligible for “special and differential treatment.”
Last week, the Trump administration upped the stakes, notifying Congress that it would be ending India’s preferential trade status with the United States, which exempts designated Indian exports from American tariffs. The move would also end Turkey’s preferential market access to the United States. Under the terms of the U.S. GSP program, countries that reach high-income country status, as defined by the World Bank, are no longer eligible for preferential treatment in the American market. But the White House has discretion to remove other countries that are deemed sufficiently developed, or specific products from particular countries that reach a threshold where they are deemed competitive. Though the United States has not moved as far as Europe in systematically removing eligibility for upper middle-income countries, it has done so on an ad hoc basis when countries, such as South Korea and Taiwan in the 1980s, reached that income level and became successful exporters. So it is not particularly surprising that Turkey, which is an upper middle-income country with an average per capita income of over $10,000, was deemed no longer eligible.
India recently released a list of U.S. exports on which it could retaliate as early as April 1.
India, by contrast, is still a low middle-income country, with an average income only one-fifth that of Turkey’s. So why India? A relatively large exporter overall and the largest beneficiary of America’s GSP program, India also has a relatively protectionist trade policy. The Trump administration’s investigation into India’s GSP eligibility was based on complaints from the U.S. dairy and medical devices sectors about barriers to their exports. Under the terms of the GSP statute, complainants have argued that India was not providing “equitable and reasonable access to its market.”
It’s worth debating whether India’s size and relative export success should offset its low income level and large numbers of extremely poor people when determining its eligibility for trade preferences. But the Trump administration’s rationale for withdrawing preferential trade benefits is not that India is too competitive; it is that it does not provide sufficient market access for American exporters.
The idea behind GSP programs, however, was to give developing countries a leg up with one-way trade preferences, meaning those countries did not have to reciprocate by opening up their own under-developed markets. The Trump administration’s broad application of the previously unenforced condition requiring beneficiaries to provide “equitable and reasonable market access” would, at a minimum, undermine the spirit of the GSP program. Worse, this standard is so vague and potentially arbitrary in its application that it could introduce significant uncertainty for traders and investors and undermine the effectiveness of the U.S. GSP program as a development tool.
As has become common under Trump, his administration appears to be using the threat of tariffs to get India to concede to its demands that it open up the Indian market. The administration withdrew trade preferences on $75 million in Indian exports last November, using the product-specific competitiveness limits defined in the GSP regulations. They did so even though the value of the affected products fell below a separate minimal threshold that could have allowed preferential treatment to continue.
The regulations require the White House to give Congress notification 60 days before implementing changes to GSP eligibility. If it goes ahead with the decision to withdraw India’s eligibility for preferential trade status in early May, tariffs will go up modestly on around $6 billion in imports from India. That is a tiny share of U.S. imports and only a bit over 10 percent of India’s total $50 billion in exports to the U.S.—not including services. When the Trump administration imposed its tariffs on steel and aluminum imports last year, which affected India, the Indian government held back on retaliating with tariffs of its own. But it recently released a list of U.S. exports on which it could retaliate as early as April 1. Neither action would have a huge economic impact.
Politically, however, the Trump administration appears to be on the cusp of another trade war with another country, this time the world’s second most populous one. It is another shot across the bow of the international trade system and another blow to any hopes of building a broad coalition of countries to take on the global economy’s biggest challenge: China.
Kimberly Ann Elliott is a visiting scholar at the George Washington University Institute for International Economic Policy, and a visiting fellow with the Center for Global Development. Her WPR column appears every Tuesday.
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