Foreign Policy Watch: India-United States

Why trade with the US matters to India?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : India-US trade disputes

 

Context

  • US President Trump arrives in India months after he went on stage with PM Modi at the ‘Howdy Modi’ event in Texas.
  • Both countries have repeatedly resolved to strengthen trade ties — however, attempts at working out a short-term agreement have fallen apart in the past, and tensions have risen over tariffs.
  • The US often accuses India of taking decisions over the previous few years that prevented “equitable and reasonable access” for Americans to its markets.
  • Let’s have a look at the current state of play:

Why trade with the US matters to India?

  • India’s existing and stalled bilateral free trade agreements (FTAs) started to receive attention from the government last year, even as the country worked to conclude the seven-year negotiations to join the RCEP, the world’s “largest” regional trade pact.
  • But by backing out of the RCEP in November, India shut the door on the large “integrated market” that the deal was offering.
  • Instead, it increased the pressure on itself to strengthen existing separate trade agreements with each member of the RCEP bloc.
  • Without these, it may not be able to tap a sizeable portion of the global market; also, it may not be able to easily access the products and services of these countries.

Need for more bilateral activities

  • In the backdrop of the global economic slowdown, where India’s global exports have fallen consistently, it is important for the country to diversify and strengthen bilateral relations with other markets.
  • It has set its sights on “large developed markets”, improved access to which would help its industry and services sectors.
  • These include the US, which has, over the last two decades, become a crucial trading partner in terms of both goods and services.

Trump’s advent

  • In March 2017, soon after taking office with election campaign focussing on “making America great again”, Trump ordered “first-ever comprehensive review” of trade deficits of the United States.
  • India was among the countries that exported more to the United States than it imported, and the latter was left with a trade deficit of over $21 billion in 2017-18.
  • While the US’s deficit with India is only a fraction of its deficit with China (over $340 billion in 2019), American officials have repeatedly targeted the “unfair” trade practices followed by India.
  • These include the tariffs that India imposes, which the Trump administration feels are too high — and over which the President has personally called New Delhi out on several occasions.

Locating the main sticking points

  • Negotiations on an India-US trade deal have been ongoing since 2018, but have been slowed by “fundamental” disagreements over tariffs subsidies, intellectual property, data protection, and access for agricultural and dairy produce.
  • The office of the US Trade Representative (USTR) has underlined India’s measures to restrict companies from sending personal data of its citizens outside the country as a “key” barrier to digital trade.
  • The US wants India to strengthen patent regulations, and to ease the limitations American companies investing in India face.

India’s tariffs

  • India is a “tariff king” that imposes “tremendously high” import duties, Trump has complained repeatedly.
  • The health cess on imported medical devices announced in the Budget for 2020-21 too, is seen as a negative for the American side, as the US is among the top three exporters of these categories of products to India.
  • However, India is working to finalise a proposal to move from caps on prices of medical devices to limiting the margins of those involved in the supply of the products.

Agri sector

  • The US has long demanded greater access for American agriculture and dairy products.
  • For India, protecting its domestic agriculture and dairy interests was a major reason to walk out of the RCEP agreement.

US retaliation

1) Tariff on steel

  • In 2018, the US imposed additional tariffs of 25% on steel and 10% on aluminum imports from various countries, including India.
  • While India’s government claims the impact is “limited”, they brought down the US share in India’s steel exports to 2.5% in 2018-19 from 3.3% in 2017-18.
  • In March 2018, India challenged the US decision at the World Trade Organization (WTO).
  • India held off on imposing retaliatory tariffs until the US struck again — by removing it from a scheme of preferential access to the American market.

2) GSP axe and response 

  • In June 2019, the US decided to terminate India’s benefits under the Generalized System of Preferences (GSP) scheme, which provides preferential, duty-free access for over $6 billion worth of products exported from this country to the US.
  • The decision followed a warning earlier that year, after negotiations on a potential trade agreement had broken down.

3) Labelling India as developed country

  • India was the largest beneficiary of the US GSP programme.
  • While duty-free benefits accrued to only around $200 million for the billions of dollars worth of exports, India is understood to have asked for restoration of these benefits in the ongoing trade negotiations.
  • Most recently, the USTR classified India as a “developed” country based on certain metrics. It is not clear whether the upgrade from “developing” will impact the restoration of benefits under the GSP scheme.

The WTO tussle

  • India is one of the largest importers of almonds from the US, having imported fresh or dried shelled almonds worth $615.12 million in 2018-19.
  • Imports from the US of fresh apples stood at $145.20 million, of phosphoric acid at $155.48 million, and of diagnostic reagents at nearly $145 million that year.
  • Removal from the GSP list amidst rising trade tensions prompted India to finally impose retaliatory tariffs on several American imports, including almonds, fresh apples, and phosphoric acid.
  • This was a significant move — and the US approached the WTO against India.

Whats’ next?

  • US administration appeared to suggest that while no deal was imminent, work on a longer-term agreement was progressing well, and that his personal chemistry with Prime Minister Narendra Modi might help.
  • India and the US could begin with some “low-hanging fruit” to indicate their willingness for a deeper economic commitment.
  • This includes the US reinstating India’s benefits under the GSP programme, and India doing away with duties on motorcycles.
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