AUTO COMPONENT & JEWELRY INDUSTRY DISCUSS U.S. TRADE

UNCLAS SECTION 01 OF 04 MUMBAI 000363 SENSITIVE SIPDIS DEPT PLEASE PASS TO USTR E.O. 12958: N/A TAGS: EAID ECON EIND EINV ELAB ETRD SOCI IN SUBJECT: AUTO COMPONENT & JEWELRY INDUSTRY DISCUSS U.S. TRADE PREFERENCE PROGRAM FOR INDIA MUMBAI 00000363 001.2 OF 004 Summary: 1. (SBU) A Staffdel led by the Senate Finance Committee met the auto component and gems and jewelry industries in Mumbai to assess the impact of the Generalized System of Preferences (GSP) on trade, growth and development of their industries to prepare for the upcoming annual review of GSP in Congress in December 2009. Representatives from the gems and jewelry industry argued that the ending of GSP benefits in 2007 had caused unemployment, reverse migration, and disruption in an industry that depended on these benefits to stay competitive internationally. The auto component industry touted recent investments and foreign collaborations in the sector, and projected future growth expectations as a justification for expanding GSP benefits for other auto component products. Ultimately, in an era when global trade and consumption expanded dramatically for almost all Indian industries, industry representatives could not clearly establish the connection between GSP benefits and the boom in export growth and employment in their industries. End Summary. Staffdel Meets with Mumbai Industry to Study U.S. Trade Preference Program -------------- -------------- -------------- ¶2. (U) A Staffdel led by the Senate Finance Committee met with members from the auto component and gems and jewelry industry in Mumbai to study the U.S. trade preference program for specific Indian products in order to assess the overall impact of the program for the upcoming review in Congress in December 2009. Under the Generalized System of Preferences (GSP),certain designated goods manufactured in India and exported to the U.S. are eligible for duty-free treatment. From 2007-2009, several categories of jewelry manufactured in India were withdrawn from the GSP list as they were found to have exceeded the import ceilings specified under GSP. Specific categories of auto components manufactured in India still receive GSP benefits, currently 86 out of 196 total auto component tariff lines. While the auto component industry justified the need for continuing -- and expanding -- GSP benefits, the jewelry manufacturers pleaded for a re-instatement of GSP privileges. Indian Auto Components Exports an Insignificant Portion of the U.S. Market -------------- -------------- ¶3. (U) In a presentation to the Staffdel, the Auto Component Manufacturer's Association (ACMA) projected a bright outlook for the Indian auto component industry, with revenues expected to double from USD 20 billion to USD 40 billion by 2016. The association estimates exports to grow 13 percent in 2009-10, notwithstanding the economic slowdown and global financial crisis. Of the total Indian auto components market, exports are still a small portion, at about 20 percent of total turnover, or USD 3.8 billion in 2008; however, exports have grown almost threefold from 2004. ACMA members stated that 44 percent of their exports go to Europe while 22 percent go to the U.S. At USD 792 million in 2007-2008, or less than one percent of total U.S. automotive imports, India's share of total auto components imported into the U.S. is also miniscule, they concluded. (Note: According to U.S. Census data, U.S. imports of automotive vehicles and accessories was USD 234 billion in 2008. End Note.) Indian auto components eligible for GSP benefits comprise an even more negligible share of U.S. exports, they admitted. For example, ACMA members pointed out for the last five years, GSP-eligible auto components accounted for less than a quarter of the total export value of the top five auto component exports from India to the U.S. But Indian Auto Components still the Logical Choice for U.S. Car Manufacturers MUMBAI 00000363 002.2 OF 004 -------------- ¶4. (U) Nevertheless, ACMA members saw great potential in the U.S. export market. ACMA pointed to an increasing number of foreign investments, joint ventures, and research and development investments in India from major global auto and auto component makers which will have a significant impact on the size and competitiveness of the India auto component sector in the coming years. Moreover, they claimed that withdrawing existing GSP benefits would affect the cost competitiveness of U.S. car manufacturers who benefit from sourcing lower cost imports from GSP beneficiary countries like India. At the same time, they admitted that the import duty differential may have to be absorbed by Indian auto component suppliers as negotiated export prices are generally fixed in 5-7 year contracts with U.S. car manufacturers. In either case, ACMA pleaded that the GSP preference program for auto components should be expanded to include more Indian auto components and extended for another ten years to foster a deeper partnership between Indian auto component manufacturers and U.S. automobile companies. ACMA members also requested for greater clarity on product eligibility criteria and specifications to understand why only certain categories of auto components were eligible for GSP benefits. ¶5. (U) ACMA members complained that Chinese government subsidies to the industry already places India at a cost competitive disadvantage, even though Indian manufacturers excel at design capabilities and value addition that the Chinese industry cannot match. (Note: While the Indian government may not directly subsidize the auto component industry, tax advantages are available to all Indian companies located in special economic zones. End Note). ACMA members also dismissed the idea of a "zero tariff world," maintaining that non-tariff barriers would continue to exist and discriminate between countries. Market access is not solely dependent on tariffs, so zero tariffs do not necessarily imply efficient competition, they argued. Gems & Jewelry Manufacturers Appeal for Re-instatement of GSP benefits -------------- ¶6. (U) In a presentation to the Staffdel, representatives from the Gems & Jewelry Export Promotion Council (GJPEC),the official representative of all gems and jewelry businesses in India, and the Federation of Indian Chambers of Commerce & Industry's (FICCI) Gem & Jewelry Committee jointly lobbied for the re-instatement of GSP benefits for the jewelry industry. (Note: The U.S. accounts for 70 percent of total gems and jewelry exports from India. From 2001-2006, jewelry manufactured in India could be imported duty-free to the U.S. GSP benefits were withdrawn for gold jewelry, gold chains and necklaces, and silver jewelry in 2007, 2008, and 2009, respectively. End Note.) According to GJPEC, gems and jewelry exports to the U.S. grew over 200 percent in 2002, the first year the industry received GSP benefits. Exports continued to grow during the subsequent years of GSP privileges (2003-2006), rising from USD 800 million to USD 2.35 billion. However, growth declined significantly after the withdrawal of GSP benefits, falling 39 percent and 30 percent in 2007 and 2008, GJPEC noted. (Note: The export growth decline in 2007 and 2008 was also the result of the economic slowdown and, therefore, the decrease in demand for Indian jewelry in the U.S. is not necessarily the direct consequence of the withdrawal of GSP alone. GJPEC also did offer any evidence to show that GSP was the primary driver of export growth during the export boom of 2001-2006. End Note). ¶7. (U) GJPEC members maintained that these exports from India, coupled with GSP benefits, made diamond jewelry affordable to the U.S. middle class. According to GJPEC, the twin impact of trade benefits withdrawal and the economic recession also MUMBAI 00000363 003.2 OF 004 resulted in a 5-13 percent price increase to the U.S. retailer and consumer. They pointed out that jewelry was a price-sensitive item and afforded small margins, of approximately 6 percent, both for the Indian manufacturers and U.S. vendors (retailers). GPEC claimed that cheap, skilled labor allowed the industry to retrieve and process small stones recovered from the waste of larger stones. These stones could then be mounted and sold to the lower-end market in the U.S. ¶8. (U) In addition, this growth fueled efforts to recruit skilled and semi-skilled workers from rural India, which clearly raised rural incomes for large numbers of workers who would have otherwise earned considerably less. According to GJPEC, unskilled workers typically earn USD 700-1000 per annum while semi-skilled and skilled workers were paid USD 1000-2500 per annum, as compared to the average annual agricultural wage rate of USD 240. These workers were not only protected from the unpredictability of rainfall and market-driven food prices that directly impact the agricultural sector but also got access to healthcare, education, insurance, and skills training as a result of higher wages and absorption into the organized labor stream, GJPEC argued. The subsequent withdrawal of GSP benefits, along with the economic slowdown, caused 300,000 workers to lose their jobs. GJPEC estimates the impact was even broader if dependent family members of the retrenched workers were included, and extended to 1.7 million people in the country. Most of these workers have returned to work in the less remunerative agricultural sector and, consequently, to a lower standard of living, they claimed. No Basis for Withdrawing GSP Benefits for Jewelry -------------- ¶9. (U) GJPEC also questioned the reasoning behind the withdrawal of the GSP benefits for jewelry manufactured in India. Gold jewelry was deemed to be "super competitive" in 2007 and the competitive need limit (CNL) waiver which provides a value-based threshold for products eligible for GSP was revoked. The U.S. administration determined that gold jewelry exports from India to the U.S. was USD 2.2 billion, well over 150 percent of the 2007 CNL of USD 130 million. However, GJPEC members claimed that the revenues from the value-added inputs from the industry - the net retention amount - was only about 20 percent, after the high cost of gold and rough diamond imports were discounted. Since the high cost of inputs ensures that valuations will always remain higher than in other industries, they argued that the net retention amount -- and not export turnover -- should be the threshold for monitoring the CNL. (Comment: By their logic, then, GSP benefits for gold jewelry should be withdrawn, as the net retention amount for gold jewelry exports of USD 2.2 billion is around USD 440 million, still higher than 150 percent of the 2007 CNL of USD 130 million. However, gold necklaces and chains and silver jewelry could benefit by this reasoning; with a total net retention value of USD 82 million, based on total export turnover of USD 409 million, it would not breach the CNL value-based import ceiling. End Comment). ¶10. (U) GJPEC members also argued that other developing countries did not have the skill or expertise to manufacture a similar type of low-cost jewelry exported from India and, therefore, the argument that withdrawal of GSP benefits for Indian jewelry would enable other developing countries to increase their jewelry exports to the U.S. is not justified. They also dismissed the contention that the Indian government taxed exports of gems and jewelry in India, and pointed out that the government provides schemes to neutralize the tax cost on exports in keeping with its reasoning that goods, and not taxes, should be exported. And finally, they maintained that given India's dismal ranking on human development indicators, and low per capita income, India should continue to qualify for development-focused trade initiatives like GSP, regardless of the success of a particular industry. MUMBAI 00000363 004.2 OF 004 ¶10. Comment: (SBU) Representatives of both the gems and jewelry industry and the auto component industry passionately advocated for the continuation and reinstatement of the U.S. trade preference program. However, given the huge increase in growth and trade in almost all Indian industries from 2003-2007, neither could demonstrate a clear, strong linkage between the use of GSP benefits and the growth and success of the respective industry. The jewelry manufacturers insisted that the withdrawal of GSP benefits had resulted in hundreds of thousands of job losses and forced the retrenched workers back to their rural roots, and consequently, to a lower standard of living. However, they could not show a direct relationship between the cessation of GSP benefits and unemployment in the industry, especially since they, themselves, admitted that demand for Indian jewelry in the U.S. was already hit by the economic slowdown at the same time that GSP was withdrawn. The auto component manufacturers were more grounded in their arguments, but they too were not able to explain how GSP had helped their industry to grow, especially since they admitted that thus far, GSP-designated auto components constituted only a minor portion of the total auto component exports from India to the U.S. While it is true that GSP benefits have probably contributed something to growth in these industries, it is still not clear what element of this growth is due to the GSP benefits specifically, rather than global economic trends and U.S. consumer spending. End Comment. TYLER