Indo-US Trade & Defence Agreement

With the US President’s visit, will India and US conclude the long-overdue deals?

US President Donald Trump’s maiden visit to India is scheduled from 24 to 25 Feb 2020. The President and PM Narendra Modi apparently share a special relationship, and there is cautious optimism that the two leaders may be able to conclude the trade and defence agreements that could invigorate the ailing Indian economy.  

US’s Alleged National Security Concerns

On 23 Mar 2018, the Trump Administration imposed 25% tariff on steel and 10% tariff on aluminium, imported from India. India was not alone in being targeted with tariffs; Canada, EU, China, Mexico, Turkey and Russia were also targeted, over vaguely articulated national security concerns. All the nations, except India, reciprocated with immediate reciprocal tariffs on US imports. India instead, chose to file a formal complaint with WTO and issued a warning (to the US) that it could impose reciprocal tariffs. As a result of the US tariffs, India’s steel and aluminium exports to the US, have fallen substantially.

In June 2019, President Trump terminated India's preferential status from the GSP (Generalized System of Preferences); meant to promote economic development by permitting duty-free entry of certain products from beneficiary countries. In 2017, under GSP, Indian exports to the US benefited about US$ 240 million, in trade concessions. Faced with the second set of tariffs, India finally imposed reciprocal tariffs on US imports of fruits & nuts (Almonds & Walnuts from California and Apples from Washington) and other products including steel and chemicals. The new US tariffs affect about 14% of India’s exports to the US, while India’s reciprocal tariffs affect only 6% of US exports.

Analysis: India enjoys a trade surplus with the US; in 2018-19, it was US$ 17 billion. President Trump has called India the ‘Tariff King’ and repeatedly pointed out America’s adverse balance of trade, with India. However, this trade surplus is minor compared to other US trade partners; China – US$ 350 billion, Japan – US$ 70 billion, Germany – US$ 65 billion and Mexico – US$ 63 billion.

Negotiations for a Trade Deal

Since 2018, Indian and the US have been working towards a trade deal. The Indian side has been working under the leadership of Shri Piyush Goyal, Union Minister for Commerce & Industry; while, the US team is led by US Trade Representative, Ambassador Robert Lighthizer. Indian negotiators will like to see the rolling back of tariffs on steel & aluminium and readmission to the GSP program. The US is likely to push for greater access to the Indian market, particularly manufactured products, farm equipment, dairy products, medical devices and ICT (Information & Communication Technology) products.

Analysis: Ambassador Robert Lighthizer is an experienced trade negotiator, having served as the Deputy Trade Representative, in the Reagan Administration, in the 1980s. He assumed the current office in May 2017; and is one of few surviving senior Presidential nominees, in the tempestuous Trump Administration. Sometimes called the ‘battle-scarred veteran of trade negotiations’, under his stewardship, President Trump has claimed victory in trade wars, with Mexico, Canada and China. Ambassador Robert Lighthizer recently called off a scheduled visit to India, in Feb 2020.

Assessment: In response to the first set of US tariffs (2018), India made only a complaint to the WTO. Though India responded with reciprocal tariffs, when the US removed India from preferential status under GSP (2019), the response was mild and not even matching. India is also not a major trade surplus nation with the US; yet, the trade deal has been languishing from the US-side. Are there larger considerations?  

Defence Deal

Since the NSSP (Next Steps towards Strategic Partnership) was announced in 2004, Indo-US military engagements have progressively improved. Since 2007, India and the US have inked more than US$ 17 billion in arms imports; progressively reducing dependence on Russian equipment. In Dec 2019 Union Defence Minister Rajnath Singh and Union External Affairs Minister S Jaishankar held strategic-level discussions in Washington DC, with US Secretary of State Mike Pompeo and Secretary of Defence Mark Esper. 

Projects in Pipeline

Maritime Reconnaissance. India is likely to purchase ten more Boeing-manufactured Poseidon – 8I long-range maritime patrol aircraft, for approximately US$ 3 billion. These naval force-multipliers are in addition to the 12 similar aircraft purchased, in January 2009. Further, India would like to purchase 24 multi-role MH-60 (R) helicopters, at an estimated cost of US$ 2.6 billion.

Analysis:  Both these naval assets are important, as many Indian Naval warships are bereft of helicopters, which are considered as ‘critical operational necessity’, in the face of PLA submarines making increasing forays into the IOR (Indian Ocean Region).

Drones. India would also like to acquire 30 Predator B drones; 10 each for the Indian Army, Navy and Air Force, at an estimated cost of US$ 2.5 billion.

Attack Helicopters. India would also like to order six more Apache AH-64E helicopters, armed with Stinger (Air to Air) and Hellfire (Air to Ground) missile systems, at an estimated cost of US$ 930 million. In September 2015, India had purchased 22 such helicopters.

Analysis: In Oct 2018, India had inked the US$ 5.43 billion deal with Russia for the S-400 air-defence system. At that juncture, the US had threatened sanctions on India, quoting CAATSA (Countering American Adversaries Through Sanctions Act); which, prohibits trade with Russia, Iran and North Korea. However, the US President is empowered to grant waiver (from sanctions), and India feels entitled to the same.

The Game Changer Project

MMRCA 2.0. In April 2019 the IAF initiated the global tender for the acquisition of 114 fighter-aircraft, as a ‘Make in India’ initiative. The deal estimated at US$ 21 billion is currently the largest deal of its kind in the world. All major aircraft manufacturers have indicated interest and are participating, in the process; including Sukhoi & MiG from Russia, Boeing & Lockheed Martin from the US, Eurofighter from the EU and Saab Group from Sweden.

Analysis: President Donald Trump is a shrewd businessman and will view the MMRCA 2.0 as the game-changer. Should he be able to swing the deal in favour of either Lockheed Martin or Boeing, the US economy stands to benefit, as also his electoral fortunes, later this year. 

Overall Assessment

From an overall perspective, winning MMRCA 2.0 is most important for the US. The trade requirements of rolling back the steel & aluminium tariffs and re-admitting India to the GSP should be relatively easy incentives, for the US to provide. Even the provision of maritime reconnaissance assets and Apache helicopters, should not be difficult to finalize, in the bonhomie that will follow the possible MMRCA deal. However, from an Indian perspective, the fighter aircraft being offered (F-16, F-15 Ex and the F/A 18) by Boeing and Lockheed Martin are 4th Generation fighter aircraft. India should logically bid for the 5th Generation aircraft, the F-22 and the F-35, which are currently in service, with the USAF.

 In Jul 2019, the US removed Turkey from the F-35 program because of the latter’s procurement of Russia’s S-400 Air Defence System. US claims that S-400 should not operate with the F-35 because the former will glean information from the aircraft and jeopardize security in future combat when the equipment is on opposing sides. US will certainly raise the same objection with India, to deny the F-35 because of India’s procurement of the same Russian equipment. Will India be prepared to cancel the US$ 5.43 billion S-400 deal with Russia, if the US were to offer the Lockheed Martin F-35 with the transfer of technology? New Delhi could benefit from ‘Chanakya’s wisdom’, in the challenging negotiations ahead.