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INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHBI/AMCONSUL MUMBAI PRIORITY 2658
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 8657
RUEHCI/AMCONSUL KOLKATA PRIORITY 1891
RUEHCG/AMCONSUL CHENNAI PRIORITY 2103
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

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categories of jewelry manufactured in India were withdrawn from 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