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India-US trade war next?

February 15, 2019 | Expert Insights

India is still hurting from the Trump administration’s imposition of steel and aluminium tariffs and its move to tighten the rules for H-1B visas, which are granted primarily to Indian technology workers.

Background 

In the 21st century, Indian foreign policy has sought to leverage India's strategic autonomy in order to safeguard sovereign rights and promote national interests within a multi-polar world. Under Presidents Bush and Obama, the United States has demonstrated accommodation to India's core national interests and acknowledged outstanding concerns.

Increase in bilateral trade & investment, cooperation on global security matters, inclusion of India in decision-making on matters of global governance (United Nations Security Council), upgraded representation in trade & investment forums (World Bank, IMF, APEC), admission into multilateral export control regimes (MTCR, Wassenaar Arrangement, Australia Group) and support for admission in ([Nuclear Supplier Group)] and joint-manufacturing through technology sharing arrangements have become key milestones and a measure of speed and advancement on the path to closer US–India relations. In 2016, India and United States signed the Logistics Exchange Memorandum of Agreement and India was declared a Major Defence Partner of the United States.

In the year 2017 bilateral trade (in both goods & services) grew by 9.8% to reach US$126.1 billion. India's exports to the US stood at US$77.3 billion while USA's exports to India stood at US$48.8 billion.                

Analysis 

After months of discussions, an attempt to forge a deal to resolve trade frictions between India and the US has broken down. India’s government has moved ahead with policies on data storage, e-commerce and regulation of online content that have raised hackles among U.S. businesses. National security adviser John Bolton warned countries such as India against supporting the Venezuelan government of President Nicolás Maduro by buying oil from that country.

The relationship between the United States and India runs on two distinct tracks. On matters of defence and geopolitics, the world’s largest democracies are drawing ever closer together. However, on matters of trade and economics, there have been strong disagreements by both countries.

Neither country is in the mood to compromise. India’s national elections are expected to begin in April, and Prime Minister Narendra Modi has struck a protectionist stance as he seeks a second term. The Trump administration continues to focus on eliminating the U.S. trade deficit, which it says stems from unfair practices by other countries, including India.

India is still far lower on the Trump administration’s priority list for trade punishment than, say, China, or even Canada. However, now the United States is reportedly considering withdrawing India’s current privileges under the Generalized System of Preferences, or GSP, a trade regime that allows billions of dollars in Indian goods to enter the United States duty-free.

Into this picture comes Commerce Secretary Wilbur Ross, who was to arrive in New Delhi for his first official visit to India. He was supposed to confer with his Indian counterpart, but because of a flight cancellation, he will participate remotely. A contingent of 20 chief executives of American firms is still expected to attend a forum with Indian business leaders. They are likely to underline the potential to boost trade in areas such as energy and aviation.

In recent months, the United States and India have tried to reach a “fairly modest” agreement to resolve frictions over trade in medical devices, agricultural goods and products such as mobile phones. Also disappointing from the U.S. perspective was India’s surprise announcement in late December revamping the rules for e-commerce marketplaces in the country. The move was aimed squarely at Amazon and Walmart, which have made significant investments in India.

With tensions rising, the notion that the United States could take a punitive step such as revoking India’s trade concessions is a very real possibility right now.

The only reason that the Trump administration would not take such a step, he said, is that it might “tilt the plate and make it way too wobbly to make progress in other areas” — for instance, in military cooperation between the countries.

Assessment 

Our assessment is that a trade imbroglio will continue as both President Trump and Prime Minister Modi have differing priorities. US e-commerce companies are unhappy over the new rules announced in December 2018 that prohibits them from striking exclusive deals with sellers. We feel Prime Minister Modi is under electoral compulsion to appease smaller traders who form a key voter base for the Prime Minister. We feel that President Trump might push for zero tariff for a significant number of goods that is being imported further impacting local industry. We believe that President Trump has serious reservations against India’s “protectionist” import tariffs on US electronic products and we also feel that Secretary Wilbur Ross will bring up the issue of India’s high import tariffs during his visit.