Internal Assessment 3

International Economics
Commentary

IBDP

Date of Accessing the Article –

Date of Writing the Commentary-

Date of Publishing the Article-

URL of the Article – https://www.bbc.com/news/world-asia-india-48482988

 IA 3 International Economics Article

US ends special trade treatment for India amid tariff dispute

The US will end preferential trade status for India next week, President Donald Trump
has confirmed amid a deepening row over protectionism.

India had been the largest beneficiary of a scheme that allows some goods to enter the US
duty-free.

However, that status will end on Wednesday, Mr Trump said.

In March he announced that it would be revoked because India had failed to provide
adequate access to its markets, but Mr Trump gave no date.

On Friday he said: "It is appropriate to terminate India's designation as a beneficiary

developing country."
India had said the move would have a "minimal economic impact", but it comes at a time
lower growth and record unemployment in the country.

Until now, preferential trade treatment for India under the Generalized System of Preferences
(GSP) programme allowed $5.6bn (£4.3bn) worth of exports to enter the US duty free.

The move is the latest push by the Trump administration to redress what it considers to be
unfair trading relationships with other countries.

Last month the US ended Turkey's preferential status under the scheme.
Mr Trump has also imposed tariffs on steel and aluminium imports from countries around
the world. Last year, India retaliated against those tariff hikes by raising import duties on a
range of goods.

Separately, the US is involved in an escalating trade war with China, and recently threatened
tariffs on Mexican goods over illegal migration.
 IA 3 International Economics Commentary

Word Count – 750 words

The article suggests that the Trump administration consider the use of trade protectionism on
India, amid the trade war of United States with different countries. As the article suggest the
reason for this trade protectionism according to the Trump administration is because “India
had failed to provide adequate access to its markets, but Mr Trump gave no date.” Trade
protectionism is a policy that protects domestic industries from unfair competition from
foreign ones1. Till now India was placed in the category of beneficiary developing country
and the Trump administration has decided to terminate India of that status. Although the
president of United States has not suggested any specific policy towards India’s trade, it
would be predictable that Tariffs and Quotas would find their way into Trump’s plans.

A tariff is a tax imposed by one country on the goods and services imported from another
country.2 As stated by the article “preferential trade treatment for India under the Generalized
System of Preferences (GSP) programme allowed $5.6bn (£4.3bn) worth of exports to enter
the US duty free” but if tariffs are imposed in the future, India will not find itself in a good
place economically. The following diagram can explain the process of tariffs in detail

Figure 1: Imposition of Tariffs by the United states

1
TheBalance.com
2
Investopedia
The above diagram depicts the market of the United States, with its initial equilibrium at
point A with market clearing price at Pe and equilibrium quantity at Qe. As United States is
open for trade, the supply from India is perfectly elastic because India has a bigger
comparative advantage in certain products. So now the United States is now open to trade and
is trading from India. Now the price falls down to Ps and the share of domestic producers
falls drastically from “PeAQbO” to “OQ1Eps” and the share of Indian producers factors in to
“Q1ECQ4”. Here we make some assumptions that United States does not import these
products from any other country and hence this model has some limitations. Now after the
trump administration decided to impose protectionism policy of tariffs. After tariffs are
imposed, the price is increased to Pt and now the share of domestic producers shoots up from
“PsOQ1E” to “PtDQ2O” and the share of Indian producers shrinks down from “Q1ECQ4” to
“Q2DBQ3”. But the tariffs now also have an opportunity cost in term of the welfare loss
because India had a comparative advantage and was more efficient in producing certain
products but by applying tariffs, there is a loss in world efficiency.
Tariffs are often considered as a policy where the other country certainly retaliates by
imposing tariffs on the country’s exports. Hence the trump administration might think of
alternate polices like imposing quotas, like it has done by other countries like EU and China.
A quota is the limit established by the government to regulate the number and/or value of
goods and services that are imported from other countries or exported from a country in a
designated timeframe3. Let us look at the diagram below to understand the process:

Figure 2: Imposition of Quotas on United States

The above diagram shows the United States market, and at the initial stage of supply from the
India, the share of domestic producers was “OPeEQ1,” and the share of the Indian producers
is “EQ1Q4C.” If the Trump administration decides to imposes a quota of “Q1Q2” this means
that only this amount of quantity will be imported. The domestic producers will still produce
3
https://study.com/academy/lesson/what-is-a-quota-definition-example.html
“OQ1,” and the Indian producers will produce their quotas of “Q1Q2”. There is still an
excess demand for “Q2Q4,” and hence the domestic producers have an incentive to produce
more due to the excess demand. But the excess demand leads to a rise in price, and the
domestic supply curve shifts to the right giving us a new equilibrium for the “Q2Q3” excess
demand at Pq. The Trump administration might choose the policy of quotas in order to
protect the domestic producers as it is terminating the special status of trade of India.
Both these policies can lead to international escalation of trade wars and involves a lot of
economic and political factors Hence these policies should be critically evaluated by Trump
administration because not only political relations and trade wars at stake but also there is a
waste of resources and loss in world efficiency. There is an alternate policy of providing
subsidies to by the government to the domestic producers. But these protectionism policies
lead to international relations and economic efficiency being degraded and hence other ways
of helping the domestic producers should be explored.

Diagram – wrong labelling

Repeation , weak knowledge, limited application and analysis , almost negligible evaluation