The Trump administration notified Congress on Monday that it wants to scrap trade concessions for India, the largest beneficiary of the so-called generalized system of preferences that impacts $5.7 billion worth of goods.
Last year, the United States began reviewing India's eligibility for the program.
The Generalized System of Preferences program gives developing countries duty-free treatment for exports of thousands of products.
In a letter to Congress, the president accused India of shutting out American businesses.
"I will continue to assess whether the Government of India is providing equitable and reasonable access to its markets, in accordance with the GSP eligibility criteria", Trump noted in his letter on India's GSP status.
Commerce Secretary Anup Wadhawan said despite the fact that India was working on an "extensive and reasonable" trade package, the U.S. has chose to go ahead with its decision to scrap the preferential trade benefit after 60 days.
In June 2018, India had made a decision to levy higher tariffs on products such as almonds, apples and phosphoric acid in retaliation to the U.S. unilaterally raising customs duties on certain steel and aluminium products.
Specifically, it said India had implemented trade barriers that have negatively impacted the United States, and it has not taken measures to fix it.
Richard Rossow, senior adviser with the Center for Strategic and International Studies, told Yahoo Finance he wasn't surprised by the move - and he didn't think the Indian government was surprised either.
United States experts and observers of relations with India were disappointed as well because of the administration's failure to see the trade issue in the context of its own national security strategy objectives for Asia, with the threat from China a shared objective.
Both Trump and Modi likely hope to isolate thorny trade issues from their geopolitical ties as both countries position themselves in Asia against an increasingly assertive China.
"This decision contradicts our mutual objective of reaching bilateral trade volume of $75 billion".
"That narrow price differential of pre-GSP and post-GSP - can other countries' exporters fill in that gap?" said Rossow.
The change for India came after "intensive engagement" between New Delhi and Washington, Trump wrote in one letter, released by the White House.
The government had, in the middle of a year ago, decided the list of items on which it would impose retaliatory tariffs but has since then postponed the deadline of implementation six times. Rossow said he does not think India will want to escalate the situation.
"The Indian government hasn't engaged enough to address market access issues", said Chuck Grassley, a Republican from Iowa and Chairman of the Senate Finance Committee. The reckoning is that some day in the near future India would have had to grow out of the GSP regime (as China has done), which was devised on the 1970s to help poor developing world countries, and that day might well be now.
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