The Welfare Effects of Trade Preferences Removal: Evidence for UK–India Trade

This paper examines the welfare effects of the unilateral trade preferences scheme of the Generalized System of Preferences (GSP) for United Kingdom (UK)–India trade on households in India. The design of unilateral trade preference schemes has been linked to significant uncertainty about preferential market access. And the removal of trade preferences requires adjustments raising trade costs with corresponding effects for workers in sectors reliant on exports in beneficiary countries. I investigate India’s sectoral graduations from the European Union (EU) GSP in 2014 and 2017 that were applicable to the UK until 2020. I also predict the welfare effects of the UK’s Developing Countries Trading Scheme (DCTS) as a hypothetical scenario. These scenarios are of importance as they reflect the combined effect of higher tariffs and uncertainty attached with unilateral preference schemes that could be addressed by a move to a free trade agreement (FTA). Also, there is limited empirical evidence on how unexpected changes in unilateral preferences such as the GSP may specifically affect employment and wage dynamics. Given that the UK aims to balance trade preferences with social equity, the lack of evidence should be of particular importance to the UK. I compute a trade exposure measure and estimate its differential welfare effects using an ordinary least squares (OLS) and quantile regression approach with UK–India trade data and granular high-frequency household-level data for India from 2014–19. I find considerable differences in the effects of trade exposure at the district level with the UK on household welfare in India. The negative welfare effect of trade exposure to graduated sectors appears on wage incomes, especially for lower-income households in urban areas. The overall results show GSP removals affecting the poorest, while the benefits concentrating at higher-income levels. The DCTS predictions suggest arguably these sectoral graduations are designed in a more targeted way as the negative effects are across all income levels, and the benefits also span across income distributions.