US-India Trade War

A day after the swearing in of Prime Minister Narendra Modi for a second term, the Trump administration opened another salvo in its trade war with India. Earlier it had retained India on the ‘Priority Watch List’ of its Special 301 Report for alleged violations of Intellectual Property Rights. Before this it had withdrawn concessional tariffs for a variety of Indian goods under the Generalized System of Preferences (GSP), claiming India’s high import duties and price controls on medical devices and implants, harmed the US.

On March 4, 2019, President Trump had notified Congress of his intention to end the favorable treatment India has enjoyed under the GSP. Negotiated during the 1970s under the auspices of the General Agreement on Tariffs and Trade, and later subsumed into the World Trade Organization, GSP allows selected products from India and other developing countries to enter the United States duty-free. Trump’s decision to end GSP did not come as a surprise. Despite close cooperation between the two in defense and other areas, trade relations between them have been prickly for some time. They acquired an extra edge under Trump, who has sarcastically described India as “the tariff king.”

India has recently made several decisions that have hurt U.S. tech companies. It passed laws requiring certain data to be stored locally, which adds to affected U.S. companies’ operating costs. New e-commerce regulations have likewise prohibited online marketplaces from selling any products from companies in which the marketplaces have significant stakes. This has resulted in some short-run costs for Amazon and Walmart, which manage the two
largest online marketplaces in India and sell millions of dollars’ worth of products in which they hold indirect equity stakes. Finally, India is tightening the rules under which online content providers can operate.

In this latest move the United States has terminated India’s designation as a developing nation and thereby eliminating an exception that allowed India to export nearly 2000 products to the US duty free. The action ends India’s preferential treatment under the GSP, a decades old program designed to promote economic development around the world. India is not an exception in this regard as the Trump administration has carried out trade wars with the European Union, Canada and China. The administration believes that the United States has been treated unfairly in trade by the above countries and international organizations for a long time.

This can only be changed by coordinated action of the countries at the receiving end of the Trump administration’s trade policies. But this seems improbable since China and India visualize themselves as economic competitors who cannot possibly join hands to counter the United States. Also the issue is not simply about trade. The designation of a developing nation is itself a controversial one. The Chinese still consider themselves a developing nation even though in most respects they are not. Retaliatory tariffs appear as a probable solution but have the potential to worsen the situation further. The other option is for India to gradually reduce its dependence on the US economy. For this India has to forge closer economic ties with the European Union, Japan, South Korea and Taiwan.

In any case only a fraction of India’s exports to the United States enjoy GSP preferences to begin with. In fact, India estimates that the amount saved on customs duties thanks to GSP added up to just $190 million a year. Second, GSP was never going to apply to India’s successful export products anyway. Once the value of exports of a particular product crosses a specified threshold—set at around $185 million currently—the country loses the GSP benefit on that product. In other words, it would be impossible for a country to become an export juggernaut on the back of GSP. Finally, under World Trade Organization rules, GSP is meant to be unilateral, with no reciprocal concessions granted by the developing country. Yet the United States has repeatedly used the threat of withdrawal of GSP to
pressure beneficiary countries on intellectual property and labor standards.

India must stand up in the international arena for the preservation of the global trade system based on the World Trade Organization (WTO) framework. This is the only way that equitable and fair trade can take place. In any trade relationship there is both trade deficit and trade surplus. Balanced trade is a rarity. However, whatever be the actual trade numbers between India and the United States, India should not buckle under pressure. The Indian economy is not dependent on the United States in the same way that it was before. Thus any shock in replacing the United States in certain sectors with other countries can be handled by India. This will also allow India to take other independent decisions like continuing to import oil from Iran despite continued US pressure to stop this. India fears collateral damage from the U.S. sanctions against Iran and Russia.

From a long-term perspective, the two nations must keep in mind the vast potential for cooperation not just in defense, but also in trade. The United States remains the richest and most robust economy in the world. India is predicted to grow 7 to 8 percent annually on its path to becoming the third largest economy in a decade. There is vast scope for win-win bargains between the two countries. Indian-Americans form a significant part of the US today and the business communities of both countries want a smooth trade relationship. With some patience, both can benefit as much from cooperation in trade in coming years as they have in defense and related areas in the recent past. Ultimately the resolution of the trade dispute is important for both the countries. Economic nationalism taken to its extremes ultimately fails and harms most the country which is pursuing it. Thus it is hoped that good sense will ultimately prevail in Washington.

Anirban Sen

Adjunct Researcher AGA

09-06-2019