India’s IPR Policies Jeopardize its U.S. Trade Benefits

India’s Commerce and Industry Minister Anand Sharma has been vocal in calling for the U.S. Government to renew its Generalized System of Preferences (GSP) program, which since 1976 has provided preferential duty-free access to imports from developing countries.

It is not hard to understand why India is so interested in seeing Congress pass GSP renewal legislation. Prior to the expiration of GSP program’s authorization in July, 2013, India was the top beneficiary of these unilateral tariff breaks of the 108 eligible countries. In 2012, India exported $4.5 billion of goods duty-free to the United States under the GSP, including automotive parts, steel tubing, and plastic resins.  Still, the removal of GSP tariff preferences does not close off the U.S. market to Indian exports, since the U.S. simple average tariff is bound at low rate of 3.5% under the WTO.

Retroactive renewal of benefits has been the norm during the GSP’s periodic lapses in authorization over the years, so it is anticipated that India will soon regain these tariff preferences. The long-term outlook for India’s GSP status, however, is clouded by Indian economic policies which run counter to the congressional-mandated criteria for country beneficiaries.    In particular, India’s inadequate protection of intellectual property rights (IPR) threatens its continued participation in the GSP program.

Over the past few months, a groundswell of voices in the U.S. business community and U.S. Government has arisen to express frustration with India’s IPR policies. In May, USTR’s annual Special 301 Report highlighted India for the 24th consecutive year, citing growing challenges to IPR protection which raise “serious questions regarding the future condition of the innovation climate in India across multiple sectors and disciplines.”   In June, the Alliance for Fair Trade with India was launched by over a dozen leading U.S. business associations, including the National Association of Manufacturers and the U.S. Chamber of Commerce’s Global Intellectual Property Center, to bring attention to India’s discriminatory trade practices, including the erosion of IPR in India.  In July, Vice President Joe Biden cited IPR protection as an obstacle to expanded U.S.-India trade.   Following a hearing on how India’s industrial policies are hurting U.S. companies, House Energy & Commerce Trade Subcommittee Chair Lee Terry (R-NE) introduced legislation in September to block duty-free access to U.S. markets for countries without adequate protection for intellectual property.

New GSP legislation is not the foremost threat to India’s U.S. trade preferences; the law currently provides the Obama Administration with all the authority it needs to suspend India’s GSP benefits.  In recent years, the White House has revoked GSP benefits from Argentina (in 2012) and Bangladesh (in 2013), and is reviewing Ukraine’s status in the context of a pending trade investigation.  India itself has previously seen its GSP benefits revoked for a large number of products in 1992 due to inadequacy of protection of IPR.  Those benefits were restored in 2005.

An interagency committee conducts annual reviews of product and country-eligibility and makes recommendations to the President.  In determining whether to designate or maintain a country as a GSP beneficiary, the President is required to take into account “the extent to which such country is providing adequate and effective protection of intellectual property rights.”  The GAO has noted that the definition of what constitutes “adequate and effective” IPR protection is left to the President’s discretion, but that the WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement serves as minimum IPR standard.  USTR favors coordinating IPR-based country practice petitions with the Special 301 process in order to make IPR policy “more coherent.”  India is currently on the Special 301’s Priority Watch List, but it may make sense for India to be designated as a Priority Foreign Country (PFC), which is reserved for countries with the most egregious IPR-related policies and practices adversely affecting U.S. products, and that are not making significant progress in providing adequate and effective IPR protection.

The President, at any time, “may withdraw, suspend, or limit the application of the duty?free treatment” under the GSP program for a particular country, considering the factors provided for in the GSP statute, including IPR protection. In addition, the President is specifically precluded from granting GSP status to any country that “has taken steps to repudiate or nullify an existing contract or agreement with a United States citizen or a corporation … the effect of which is to nationalize, expropriate, or otherwise seize ownership or control of property, including patents, trademarks, or copyrights.”

The IPR provisions of the GSP statute are clearly intended to provide the U.S. Government with leverage over trading partners who are receiving tariff preferences.   As then-Deputy U.S. Trade Representative Peter Allgeier testified to the Senate Foreign Relations Committee in 2002, the “threat of loss of GSP … benefits has proven to be an effective point of leverage with some of our trading partners” in confronting IPR theft.  At his confirmation hearing, in response to a question from Senator Charles Grassley (R-IA) about whether countries like India should enjoy such GSP benefits if they shut U.S. companies out of their markets by undermining U.S. intellectual property rights, current U.S. Trade Representative Michael Froman said he would “continue to uphold the use of this GSP eligibility criterion to press beneficiary countries to improve their protection of intellectual property rights.”

That India needs to be pressed to improve its IPR protection is without doubt.  In testimony to the House Ways and Means Trade Subcommittee in March, Pfizer’s Chief Intellectual Property Counsel Roy Waldron outlined how the issuance of unwarranted compulsory licenses, the unfair revocation of valid patents, and the denial of patentability of inventions in India has hindered U.S. exports, harmed U.S. jobs, and jeopardized research of new and innovative medicines.  In a July report, the Global Intellectual Property Center noted that India’s national IP environment has deteriorated markedly since the late 2000s, making the country “an outlier in the international community.”    IPR is not the only concern of the business community. India’s Preferential Market Access (PMA) initiative, establishing forced localization policies for information and communications technology (ICT), also raises questions about whether India is providing equitable and reasonable access to its markets, as required by the GSP law.

At the request of the House and Senate trade committee leadership, the U.S. International Trade Commission (ITC) is currently undertaking a study to determine how India’s policies are affecting the U.S. economy.  In their request letter, the Senate Finance and House Ways and Means Committee chairs and ranking members noted that “India has not yet taken action to fully and effectively protect and enforce copyrights…and has applied its patent law in a discriminatory fashion.”  By November 2014, the ITC’s quantitative analysis will independently verify the consequences of India’s policies on the U.S. economy.

Between now and then India faces a stark choice.  It can continue what some have termed “modern import substitution industrialization polices,” or it can focus on innovation policies to enhance the competitiveness of its domestic economy.   If India chooses to try to advantage its own domestic industry by further weakening IPR protections, the Administration will be left with few choices other than applying the criteria of the GSP program and removing India’s GSP benefits.   There is still time for India to avoid a formal challenge to its GSP benefits by meeting its international commitments on IPR. That would be a win-win scenario for both U.S. innovative industries and Indian exporters.

About the Author

John McDermid serves as President of IBC, a Washington, DC-based international government relations firm that assists businesses on international trade matters. Mr. DcDermid has specialized in advising and representing companies at IBC for over 25 years on international trade negotiations and policies, including the GSP program. Prior to joining IBC, Mr. McDermid was Assistant General Counsel for the National Association of Manufacturers (NAM).