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On trade tariff, India & US need to place strategy over economy keeping domestic politics out

Closer relationship with US will help India’s goals of economic development, social upliftment and regional pre-eminence.

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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”.


Also read: Pulses to dry fruits — India hikes customs duties on 28 American products


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.


Also read: An unpredictable US means India must get on right side of other big powers, like China


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.


Also read: US needs India as an ally against China and can’t afford to bully it over Iran oil, trade


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.


Also read: Donald Trump says India charging US 100% tariffs on many goods is stupid trade


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.

The author is a Research Fellow and Director, India Initiative at the Washington-DC based Hudson Institute. Her books include ‘Escaping India: Explaining Pakistan’s Foreign Policy’ (Routledge, 2011) and ‘From Chanakya to Modi: The Evolution of India’s Foreign Policy’ (Harper Collins, 2017). Views are personal.

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3 COMMENTS

  1. What On Earth Made You Absorbed in Complete Hate Against A Ruler Who Got Chosen By a Billion Human Beings.Your Choice Of Poorly Constructed Sarcasm Is Pathetic To Its Best.What Are Your Stakes In This Dirty Retro Propoganda?

  2. Nothing will help India. India is like this only because of its stubborn loyalty to failed policies such as India’s Constitution and Social Re engineering in tandem with and aversion to hold Government officials accountable and eradicate corruption.
    This is trade war. All is fair in love and war.
    Tit for tat are the opening moves of any war, leading to escalation.
    India’s tat for the US tit is understandable. Though the US sanctions against India are perfectly justified as India is a command economy and not a free market economy which uses barriers to market entry both tariff and non tariff not only against foreign businesses but even against Indian businesses not favoured by those who hold the levers of power in India.
    The US can win a trade war against India far more easily than with China (though not with Russia) if it was confined to trade war.
    But, I doubt that the US can afford to wage war on India because India is the only credible regional source of cannon fodder (as a front line state against the rising power of China) ) available to it now after turning against Pakistan and China whom the US had set up as a counter poise to India and the Soviet Union as part of the Nixon-Kissinger -Bush (the CIA director who founded his family fortunes with Petro Dollars under the Tent of Saud and set up a US Presidential dynasty) foreign Policies. Obama also turned the US against Russia by bringing down MH-17, blaming it on Russia and fanning EU sanctions on Russia pushing Russia closer to China (and China’s concubine Pakistan).
    While the US wants India to be a loyal obedient client State like Japan or the NATO Countries, India has still not got over its experience with the US where it has been under sanctions of one kind or another by the US since 1970s including embargo on technology while the US turned China into an Economic power house and turned Pakistan into a military power house and global center of Jihad by giving Pakistan more than a trillion dollars in cumulative aid, primarily as weapons, including a Billion Dollars worth of F-16s etc during Obama’s visit as a Chief Guest to India’s Republic Day Parade where he abused Indian hospitality by admonishing Modi, in public, to be more tolerant.
    If the US pushes India too hard, India is likely to form a coalition with Russia and Iran that will twit the US as in such circumstances, Russia will gladly give up China (and Pakistan). This will also leave India in a more comfortable position to deal with Pakistan through Iran and hold China in a Russo-Indian pincer with the single deft move of getting the US off its back.

  3. Helping India to emerge as a great power, a natural foil to China, was an emotion at its peak in the Bush – Rice years. President Obama was more prosaic. The last thing now on President Trump’s mind. Viewed dispassionately from across the Potomac, perhaps India too has not lived up fully to its promise. These retaliatory tariffs are the first of several skirmishes that may lie ahead. MEA now, from its political head to its talented corps of IFS officers, is the domain of professional diplomats. Let them run with the ball.

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