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The U.S. Should Stop Nickel and Diming India and Bangladesh

A low-cost program designed to promote economic development has shut out two key partners in Asia.

By , a 2021-2022 fellow at the Wilson Center.
Indian Prime Minister Narendra Modi and Bangladeshi Prime Minister Sheikh Hasina jointly inaugurate a major road named after former Bangladeshi Prime Minister Sheikh Mujibur Rahman during an agreement signing ceremony in New Delhi on April 8, 2017.
Indian Prime Minister Narendra Modi and Bangladeshi Prime Minister Sheikh Hasina jointly inaugurate a major road named after former Bangladeshi Prime Minister Sheikh Mujibur Rahman during an agreement signing ceremony in New Delhi on April 8, 2017.
Indian Prime Minister Narendra Modi and Bangladeshi Prime Minister Sheikh Hasina jointly inaugurate a major road named after former Bangladeshi Prime Minister Sheikh Mujibur Rahman during an agreement signing ceremony in New Delhi on April 8, 2017. us-india-bangladesh-trade-gsp

The U.S. Generalized System of Preferences (GSP) program, launched in 1975, was designed to promote economic development and diversification among developing countries by encouraging their exports to the United States. Under the GSP, eligible products enter duty-free. As of January 2021, 119 developing countries were beneficiaries of the program.

Bangladesh and India are not current beneficiaries of the U.S. GSP. Although members of the program since 1985 and 1975, respectively, Bangladesh was denied access in 2013 and India in 2019. The United States should consider restoring GSP status for both countries for its own benefit as much as theirs.

India is a critical, long-term partner for the United States. Theirs is a multidimensional and deep partnership, reiterated by the United States in its February Indo-Pacific Strategy document. Bangladesh, meanwhile, is now the second-largest economy in South Asia. It sits at the junction of South Asia and East Asia, exercises growing clout in its neighborhood, and has been recognized by the United States as important for its Indo-Pacific strategy.

The U.S. Generalized System of Preferences (GSP) program, launched in 1975, was designed to promote economic development and diversification among developing countries by encouraging their exports to the United States. Under the GSP, eligible products enter duty-free. As of January 2021, 119 developing countries were beneficiaries of the program.

Bangladesh and India are not current beneficiaries of the U.S. GSP. Although members of the program since 1985 and 1975, respectively, Bangladesh was denied access in 2013 and India in 2019. The United States should consider restoring GSP status for both countries for its own benefit as much as theirs.

India is a critical, long-term partner for the United States. Theirs is a multidimensional and deep partnership, reiterated by the United States in its February Indo-Pacific Strategy document. Bangladesh, meanwhile, is now the second-largest economy in South Asia. It sits at the junction of South Asia and East Asia, exercises growing clout in its neighborhood, and has been recognized by the United States as important for its Indo-Pacific strategy.

Both India and Bangladesh are still home to millions of people in poverty. Trade is a very effective means to address this. That is the reason both countries used to be part of the GSP program. It is also why several other regions—including the European Union, Japan, Australia, Canada, South Korea, and others—have similar GSP programs.

The Trump administration removed India from GSP eligibility effective June 5, 2019, for “failure to provide equitable and reasonable market access.” Although India has seen an upward movement in protectionism in recent years, it is hard to escape the conclusion that its GSP revocation had more to do with the Trump administration’s insistence on reciprocity with trading partners, irrespective of the latter’s average income. The fear was that then-U.S. President Donald Trump, the self-proclaimed “tariff man” who had called out India as a “tariff king,” was just looking for an excuse to raise duties on India to pressure it to reduce its own duties.

Bangladesh was denied access to the GSP in June 2013 based on its failure to meet obligations relating to worker rights. The action was taken in the wake of two major apparel industry tragedies in 2012 and 2013, which killed 112 workers and 1,132 workers, respectively. Thereafter, the industry has taken significant steps to improve worker safety and working conditions, most visible in successive accords on health, fire, and building safety, and it deserves to be rewarded with GSP reinstatement, even as improvement in worker rights, such as freedom of association, remains a work in progress.

The economic costs for the United States—even accepting the mercantilist view that imports are a cost—will be low. The U.S. GSP is a minor consideration in the export performance of India and Bangladesh, as explained below.

Despite being the biggest beneficiary of the GSP scheme (until 2018), only 11.7 percent of India’s goods that were exported to the United States, worth $6.3 billion in 2018, qualified for GSP status. The GSP excludes “import-sensitive” goods from duty-free status, including most textiles and apparel products that form an important share of exports for many developing countries. GSP imports include gold necklaces, travel bags of synthetic fibers, handbags, organic chemicals, vehicles and parts, precious metal jewelry, etc.

The government of India, in a press release, stated that the GSP concessions amounted to “duty reduction of only USD 190 million per annum,” which implies an average tariff of around 3 percent on India’s GSP-qualified exports instead of the zero GSP tariff. In any case, even without the benefit of the GSP, India’s total exports have continued to steadily increase as a share of U.S. imports, from 1.5 percent in 2010 to 2.1 percent in 2018 and further to 2.6 percent or, in absolute terms, $73.3 billion, in 2021.

For Bangladesh, the math is even simpler. By far, its biggest export is ready-made garments, accounting for 86 percent of its global goods exports. Since garments are not eligible for GSP treatment, the GSP barely made a dent. It accounted for only 0.7 percent of its exports to the United States in 2012, the year before its GSP access was denied. Assuming the same 0.7 percent share for 2021 and an average tariff of 3 percent, Bangladesh’s total exports to the United States may have declined by less than $2 million in 2021. Its total exports, like India’s, were buoyant, increasing from $4.3 billion (market share of 0.22 percent) in 2010 to $8.3 billion (market share of 0.29 percent) in 2021.

Restoring the GSP to India and Bangladesh, then, may lead to a fractional increase in their exports to the United States—around a quarter to a half of a percent for India and a tenth of that range for Bangladesh. These increases could be termed “roundoff errors.”

On the other hand, the potential benefits to the United States of such a move are significant. At a broader level, it could signal a recognition of the need for consistency between its economic and foreign policies, which have sometimes been at cross-purposes.

Notwithstanding recent differences over Russia, the India-U.S. partnership is wide ranging, deep, and growing, irrespective of the political parties in power. This was evident in a joint statement after U.S. President Joe Biden and Indian Prime Minister Narendra Modi met in September 2021, headlined “A Partnership for Global Good.” Among other things, the statement outlined an ambitious trade and economic cooperation agenda.

After a lull during the Trump administration, the India-United States Trade Policy Forum, a ministerial-level policy dialogue, has resumed with U.S. Trade Representative Katherine Tai’s visit to New Delhi in November 2021. Restoring GSP benefits, as requested by India, will demonstrate U.S. goodwill and impart momentum to the trade dialogue, which has much more salient and long-standing issues on the table. These include ironing out existing irritants and, perhaps more importantly, a long-term agenda that, if implemented efficiently, could lead to enormous changes in investment and supply chains, defense trade, and trade in services, among others.

Other benefits to the United States include a likely withdrawal of India’s retaliatory tariffs, imposed in response to GSP withdrawal and earlier steel and aluminum tariffs. India’s new tariffs covered about 5.5 percent of U.S. exports to India in 2017. The other benefit would be relief to consumers and small firms that import products from India, such as travel goods, as documented in the transcript of the GSP hearing.

The United States and Bangladesh have a 10-year-old partnership dialogue, the latest one just concluding in March. The broad agenda includes trade and investment, governance, maritime security, the Indo-Pacific, and the Rohingya crisis, among others, and is testament to Bangladesh’s increasing global importance. Despite its strategic significance, Bangladesh has often had to confront a tough U.S. approach, especially with regard to human rights and democracy. In recent times, U.S. actions include Treasury Department sanctions, imposed in December 2021, on Bangladesh’s Rapid Action Battalion for human rights violations and a non-invitation to the White House’s virtual Democracy Summit. In such a situation, acceding to Bangladesh’s oft-repeated requests for reinstating the mostly symbolic GSP benefits will restore some bonhomie toward the United States. If it is done in the next few months, the symbolism will be greater because 2022 is the 50th anniversary of the Bangladesh-U.S. partnership. And it also becomes important in a geopolitical context, as the United States grows increasingly worried about Bangladesh’s growing engagement with China.

How could the GSP be restored for India and Bangladesh? The first hurdle is that the program currently awaits reauthorization by Congress, having expired on Dec. 31, 2020. This is a matter of some urgency because trade liberalization can help counter the runaway inflation that the United States is currently experiencing, and GSP reauthorization is part of that trade liberalization package.

Two different versions of GSP renewal are currently part of broader acts that have been passed by Congress. The U.S. House of Representatives has passed the America COMPETES Act, and the U.S. Senate has passed the United States Innovation and Competition Act. Assuming these differences get reconciled and the program gets reauthorized, the administration can make a case for reinstatement of the two countries, based on the eligibility criteria that finally got approved by Congress. Ideally, this should be done unconditionally for the reasons mentioned earlier—and sooner rather than later.

From a U.S. perspective, the downside of unilateral GSP restoration would be to lose a bargaining chip for ongoing discussions on trade/overall economic and bilateral relations with India and Bangladesh as well as potential internal criticism from domestic labor and industrial lobbies. Also, the upcoming U.S. midterm elections in November mean that any trade initiatives, even nuanced ones like the ones being proposed here, may have to wait for the post-election Congress and the possible uncertainty that its new composition may bring. Note that even a conditional GSP restoration (based on some quid pro quo actions by India and Bangladesh) may be acceptable to both countries, though it would be perceived as less generous and go against the spirit of what this note is arguing for.

For both India and Bangladesh, the United States is the single-largest export market. The lack of GSP benefits has not mattered much for their export performance, and in the case of Bangladesh, the GSP benefits are miniscule. Despite that, both countries have regularly requested for restoration of the GSP, and for that reason alone, the United States should accede.

The United States is a superpower. It should not nickel and dime, especially with countries that are crucial to its goals of promoting a “free and open Indo-Pacific.” It costs little and can create momentum for deepening bilateral economic relations with India, a critical partner, and Bangladesh, an increasingly important one.

Sanjay Kathuria is a 2021-2022 fellow at the Wilson Center, an adjunct professor at Georgetown University, part of visiting faculty at Ashoka University, a senior visiting fellow at the Centre for Policy Research in India, and a nonresident senior fellow at the Institute of South Asian Studies in Singapore. Earlier, he worked at the World Bank for 27 years, with assignments in South Asia, Eastern Europe, Latin America, and the Caribbean. Twitter: @Sanjay_1818

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