The impact of GSP Graduations on Indian Exporters

This paper studies how exporting firms in India respond to the removal of preferential market access abroad. We exploit episodes of unexpected graduations from the EU Generalized System of Preferences (GSP), whereby the EU removes preferential (i.e. lower than MFN) GSP tariffs from beneficiary countries in sectors in which they are considered to be internationally competitive. Graduations impact on Indian firms in a variety of ways. First, graduations lead to an increase in the likelihood of firms exiting exporting altogether and, for surviving exporters, to a reduction in the total value exported. Second, we find a strong knockon effect from reduced export opportunities to lower purchases of both foreign and domestic inputs. Looking at quantity and prices of sales and inputs separately, we find that firms react mainly along the price margin as unit prices of both sales and purchases fall. Third, graduations trigger a substitution response: firms’ product scope shrinks, and resources are re-oriented internally towards non-affected products, whose sales increase in the aftermath of graduations.