AUTO COMPONENT & JEWELRY INDUSTRY DISCUSS U.S. TRADE

UNCLAS SECTION 01 OF 04 MUMBAI 000363

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SUBJECT: AUTO COMPONENT & JEWELRY INDUSTRY DISCUSS U.S. TRADE
PREFERENCE PROGRAM FOR INDIA

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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

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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categories of jewelry manufactured in India were withdrawn from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

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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


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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

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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

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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

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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.


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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