LEGAL UNDERPINNINGS OF THE US WITHDRAWAL OF GENERALIZED SYSTEM OF

PREFERENCES BENEFITS TO INDIA

INTRODUCTION:

The World Trade Organization (“WTO”) is an international organization which regulates the
trade relations between its member nations. The WTO covers both multilateral as well as
Plurilateral Agreements. These Agreements contain certain special provisions for the benefit of
the developing nations in the form of special rights.i These provisions give developed nations
certain rights to treat the developing nations more favorably than other members of the WTO.
These provisions are called “Special and differential treatment provisions”. One such benefit
provided to the developing nations by the developed nations is the Generalized System of
Preferences (“GSP”). The legal basis for the GSP is the Enabling Clause which allowed
developed members to give differential and more favorable treatment to developing countries.
The Enabling Clause states, in paragraph 1:

“Notwithstanding the provisions of Article I of the General Agreement, Members may

accord differential and more favorable treatment to developing countries, without
according such treatment to other Members.”ii

Furthermore, paragraph 2(a) of the Enabling Clause gives legal basis to the GSP as one of the
special treatment to the developing nations. It is worded as:

“Preferential tariff treatment accorded by developed contracting parties to products

originating in developing countries in accordance with the Generalized System of
Preferences”.iii

The Enabling Clause acts as an exception to the general principle of Most Favoured Nation
Treatment (“MFN”) as envisaged in Article I:1 of the GATT 1994.iv This position was endorsed
by the WTO Appellate Body in EC- Tariff Preferences.v MFN treatment requires the member
states to accord equal treatment to all the member states without any discrimination. However,
the Enabling Clause allows the developed nations to treat the developing nations more
favourably, without contravening the principle of MFN treatment.
Additionally, the Enabling Clause also allows the developed nations to grant preferential tariff
treatment to imports from developing nations under the scheme of GSP. vi Therefore, the
Enabling Clause plays a significant role in the pursuit of overall growth and development of
developing nations in international trade.

GSP

GSP is a U.S. preferential trade program which offers possibilities for many of the world's
poorest nations to use trade to develop their economies and emerge from poverty. GSP is the
biggest and oldest preferential trade program in the United States. Established by the 1974 Trade
Act, GSP promotes economic development by eliminating duties on thousands of products when
imported from one of 120 nations and territories designated as beneficiaries. In the developing
world, GSP encourages economic growth and development. By assisting these nations to boost
and diversify their trade with the United States, GSP promotes sustainable development in
beneficiary nations. The GSP program offers extra advantages to products from least developed
countries.

RECENT CONTROVERSY OVER US TERMINATION OF GSP BENEFITS TO INDIA

On March 4, 2019, the office of the United States Trade Representative (USTR) issued a press
release conveying the intention of the US to terminate the Generalized System of Preferences
(GSP) treatment provided to India. According to the Trade Act of 1974, the intended change of
the GSP status for India cannot take effect for at least 60 days after the notification is given to
the Congress and the Government of India. Thus, after lapse of said period of time on 5 th June
President Trump stated that “India has not assured the US that it will provide equitable and
reasonable access to its markets. Accordingly, it is appropriate to terminate India’s designation
as a beneficiary developing country effective June 5, 2019.”vii This move of US has been
severely criticized by Indian as well as US experts because it is going to harm both the countries’
trade. However, more threatening is US’ trade protectionism policy as US wants India to provide
reasonable access to Indian market. Therefore such a move is a step forward toward trade war
among various economies.
 EFFECT OF GST TERMINATION

This move of US president removing GSP privileges for India will have a significant impact on
both the countries however the consequence will be more severe for US instead of India.
American companies that rely on duty-free treatment for India under the GSP will pay millions
of dollars annually in the form of new taxes. In the past, even temporary delays in such
advantages have resulted in firms laying off employees, reducing wages and advantages, and
delaying or canceling job-creating investments in the US. viii President Trump’s decision will cost
American businesses over USD 300 million in additional tariffs every year. Without GSP,
American tiny companies are faced with a fresh tax that will result in work losses, cancellations
and cost increases for customers.ix A total of 29 products imported from the US will face greater
duties, including walnuts, lentils, boric acid and diagnostic reagents, reducing advantages for US
exporters.x Further, it must be noted that the products that receive duty-free treatment under the
GSP program are raw materials and unfinished goods that aid the US manufacturing sector with
resources to further their needs. The actual loss may reflect on the US importers and at the end of
the day customer will have to pay more for finished products. xi For example- the import price of
most of the chemicals products, which constituted a large chunk of India’s exports, is expected to
increase by about 5%. GSP benefit withdrawal will also hit the US import diversification strategy
where it is eager to replace China as the leading provider to other developing countries. xii

Similarly, terminating GSP for India would harm Indian firms wishing to expand their exports to
the US. In 2017, through the GSP program, India exported products worth $5.6 billion out of a
total of $18.6 billion. Indian total exports to the US amounted to $48.6 billion, making GSP up to
11.5% of Indian total exports to India. While this may seem significant, it may not seem so once
real losses are calculated. If tariff levels are to be applied for all GSP products enjoyed by India,
the real loss experienced amounts to $190 million.xiii Some of the product sections that may
experience a decrease in exports to the United States owing to the withdrawal of GSP
concessions include raw materials for plastics, consumer and houseware products and polyester
films.xiv Besides, the exclusion of India from the GSP program will hamper the competitiveness
of the manufacturing sector of India.xv
 DOES US VIOLATE WTO REGULATIONS BY WITHDRAWING GSP BENEFITS TO INDIA?

Withdrawal of GSP benefits to India by the USA is directly in violation of WTO rules.
Withdrawal of GSP benefits cannot be exercised arbitrarily at the whims and fancies of the
developed nations. Withdrawal of GSP benefits to India by the USA is inconsistent with the
principle of non- discrimination as it discriminates between the developing countries.xvi Because
US has removed GSP to India on the ground of not providing reasonable market access, at the
same time other developing countries are availing GSP even without providing reasonable
market access. Furthermore, the ground “equitable and reasonable market access” cannot be a
justifiable ground for termination of GSP benefits. xvii Developed countries can give preferential
treatment on a non-reciprocal basis under the Enabling Clause of the WTO General Agreement
on Trade and Tariffs. By removing India from the GSP on the basis that the nation does not
provide market access, the US is in breach of this GATT clause. There are certain procedural
requirements which are required to be met before such benefits are withdrawn. Para 4 of the
enabling clause state such requirements as follows:

1. notify the CONTRACTING PARTIES and furnish them with all the information they
may deem appropriate relating to such action;
 
2. afford adequate opportunity for prompt consultations at the request of any interested
contracting party with respect to any difficulty or matter that may arise. The
CONTRACTING PARTIES shall, if requested to do so by such contracting party, consult
with all contracting parties concerned with respect to the matter with a view to reaching
solutions satisfactory to all such contracting parties.xviii

In the instant case of the US, it has not followed the above requirements and did not afford
adequate opportunity for amicable solutions to the problems. It was a unilateral withdrawal by
the United States without trying to reach a solution which could be satisfactory to India as well.
Therefore, termination of GSP to India by the US is a move which has no legal ground and is in
violation of WTO regulations.

WAY FORWARD
India has three options now against the move of US termination of GSP benefits to India. These
options are as follows:-

(1) India moves to WTO appellate body on the ground of discrimination. The same has been
done earlier against EU when it removed GSP benefits to India in 2002. The decision was
in favor of India and GSP benefits restored thereafter.
(2) India charges retaliatory tariffs on US originated product and balance the trade loss
occurred due to termination of GSP benefits.
(3) US- India negotiates on disputed terms and US restores GSP benefits to India. Earlier, in
the past also US restored GSP benefits to Myanmar, Argentina and Liberia etc.
i
https://www.wto.org/english/tratop_e/devel_e/dev_special_differential_provisions_e.htm; accessed 23 June, 2019.
ii
Para 1, GATT, 1979.
iii
Para 2(a), GATT, 1979.
iv
Article I:1, GATT, 1994.
v
Appellate Body Report, EC- Tariff Preferences, WTO Doc.WT/DS24616, (adopted on 20 April 2004).
vi
Peter Van den Bossche, The Law and Policy of the World Trade Organization Text, Cases and Materials, 2005.
vii
https://www.thehindubusinessline.com/economy/trump-terminates-preferential-trade-status-for-india-under-
gsp/article27398318.ece
viii
https://www.businesstoday.in/current/economy-politics/group-of-25-us-lawmakers-urge-authorities-not-to-terminate-
gsp-programme-with-india/story/342819.html

ix
https://www.thehindubusinessline.com/economy/trump-terminates-preferential-trade-status-for-india-under-
gsp/article27398318.ece
x
id.
xi
https://worldtradelaw.typepad.com/ielpblog/2019/03/guest-post-background-and-impact-of-uss-intention-to-
terminate-gsp-benefits-to-india.html
xii
https://www.qweed.in/trump-to-terminate-india-from-gsp-benefits/

xiii
https://worldtradelaw.typepad.com/ielpblog/2019/03/guest-post-background-and-impact-of-uss-intention-to-
terminate-gsp-benefits-to-india.html
xiv
id.
xv
https://www.jagranjosh.com/general-knowledge/generalised-system-of-preferences-and-its-impact-on-india-
1552038434-1
xvi
PTI, US decision to withdraw GSP benefits violates global trade rules: Experts, available at
https://www.thehindubusinessline.com/economy/us-decision-to-withdraw-gsp-benefits-violates-global-trade-rules-
experts/article27508293.ece, accessed 24 June, 2019.
xvii
Office of the United State Trade Representative, available at https://ustr.gov/about-us/policy-offices/press-office/press-
releases/2019/march/united-states-will-terminate-gsp, last accessed 24 June, 2019.
xviii
Para 4, GATT, 1979.