India has imposed higher tariffs on some US products to retaliate for President Donald Trump’s punitive tariffs on Indian goods, even though the United States and India both have strategic reasons to avoid a trade war. Especially when economic foreign policy appears to be a key priority of the Narendra Modi government in its second term.
Frictions on the economic front distract New Delhi and Washington from their shared goal of countering the rise of China and ensuring the continuation of a rules-based international order. But nationalist sentiment and demands of domestic politics is driving them in a direction where the divergence of economic priorities could undermine strategic convergence.
On 5 June the United States government terminated India’s designation as a beneficiary developing nation under the GSP (Generalized System of Preferences) – a trade programme that allowed duty-free entry of products – on grounds that India was not providing the US with “equitable and reasonable” market access. On 15 June India responded by imposing tariffs on 28 American products on grounds that it was “necessary for public interest”.
For the last three decades successive American administrations have argued that enabling the rise of India as an economically and militarily powerful strategic competitor to China was in the US’ strategic interest. Viewing India as a potential regional security provider in South Asia, Washington has sought to help build India’s security capacity through commercial and defence cooperation between the two militaries.
With a population of more than one billion, India is the only country with sufficient human resources to match that of China. India is central to the Indo-Pacific security architecture designed to ensure that China does not transform its considerable economic clout into threatening military muscle.
Ever since the 1990s, Indian leaders have believed that a closer relationship with the United States will help India’s goals of economic development, social upliftment and regional (and Asian) pre-eminence. Indian leaders seek a militarily and economically powerful India, but they understand that can only be achieved if India grows economically.
Differences on economic issues, especially trade, are not new to India-US relations, they date back centuries. When Americans first traded with India, it was still under British colonial rule and at that time it was the British who imposed tariffs and restrictions.
Independent India followed an economic model that was aimed at protecting its infant industries and building a domestic manufacturing base. Nationalisation of major industries and a large public sector meant that until India liberalised and opened its economy in the early 1990s, there were very few American companies in the Indian market. That changed soon, and today India-US bilateral trade stands at $ 142 billion in goods and services.
New Delhi knows that India needs foreign investment, both capital and technology, to help its economy grow. However, as a developing country with almost one-fourth of its population under the poverty line, around 13 lakh young people entering the job market every month, India also needs to protect its domestic market and promote domestic manufacturing.
For the last few years, India and the United States have been in negotiations to address mutual concerns and increase market access for each other.
The pricing of medical devices is a key area of friction between the two countries. The National Pharmaceutical Pricing Authority (NPPA), a government regulatory agency that controls the prices of pharmaceutical drugs in India, imported price caps on medical stents and knee implants. American medical companies would like removal of these price caps and a firm date by when the trade margin (the difference between the price at which the manufacturers sell and the price to patients) would be rationalised for all devices – or Trade Margin Rationalisation (TMR). The US would also like India to eliminate tariffs on all ICT (information and communications technology) products.
In agriculture, the US would like India to increase the import of certain American products (like cherries, apples, alfalfa hay and pork) as well as remove licensing requirements on import of boric acid. New Delhi has offered to discuss these issues as part of a broader deal and in return asked for easing the procedures for export of mangoes and grapes from India.
E-commerce is a growing business in India and many American companies have entered the market, including Amazon and Walmart. In December 2018, responding to concerns expressed by Indian small businesses that the large multinational players were creating ‘an unfair marketplace’, the Indian government banned giant e-commerce companies “from selling products from companies in which they have an equity interest”.
In February 2019, the new e-commerce draft policy called for data localisation and housing of data centres and server farms locally within India because it is “vital” that India “retain control of data to ensure job creation within India”. The US, in turn, hinted that it could impose similar restrictions on Indian companies operating in US jurisdiction and that would raise their costs and impact their model of operations.
As a developing country, India has a history of using tariffs and bureaucratic rules to protect its domestic industries. Leading Indian economists have spoken out against this asking that India not turn protectionist. However, India is not the worst offender when it comes to tariffs. If we look at world tariff profiles published by the World Trade Organization (WTO) in 2018, countries with the highest tariffs include Japan, Korea, the US and even Australia. Further, India is not alone in charging high duties on select products, many countries, including the United States, do this.
Negotiations imply give and take between countries and often require a long-term perspective. As vibrant democracies, India and the US have a lot in common, but this also means that they have domestic constituencies who demand policies that clash with broader strategic interests. New Delhi and Washington need to find a way to assuage their domestic interests while not hurting their strategic goals.
At a time when American and Japanese companies are moving out of the Chinese market, India would benefit by offering incentives to these companies.
The creation of two new cabinet committees focused on job creation and economic development demonstrate this as does the collaboration and integration between Ministries of External Affairs, Finance and Commerce on economic foreign policy. Further, New Delhi could waive tariffs on Harley Davidson motorcycles as an offer to President Trump. Only 84 bikes were exported by Harley Davidson to India in 2017, so, this is a small sacrifice to make for the partnership.
Similarly, instead of penalising a key strategic ally, Washington could argue the same thing it did for years when it came to China. From the 1970s, American policymakers said that the economic rise of China was critical for American national interests and American companies were encouraged to invest in China. Offers of increased foreign investment and transfer of technology to India as part of a negotiated deal would accrue immense benefits to the United States of having a major, one-billion strong nation standing by its side.
Using a metaphor from cricket (and baseball) there is a need to keep ‘an eye on the ball’ i.e. economic differences should not be allowed to detract from the underlying strategic imperative.