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Explained: Why trade with the US matters to India

India and the US 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. What is the current state of play?

Written by Prabha Raghavan | New Delhi |
Updated: February 20, 2020 9:01:30 am
Explained: Why trade with the US matters to India A billboard in Ahmedabad ahead of President Trump’s visit. (Express Photo: Javed Raja)

President Donald Trump arrives in India on February 24, months after he went on stage with Prime Minister Narendra 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. What is the current state of play?

Explained: 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 Regional Comprehensive Economic Partnership (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 — and 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 products and services of these countries.

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.

Explained: Why trade with the US matters to India Source: Ministry of Commerce and Industry

In March 2017, soon after taking office following an election campaign focused on “making America great again”, Donald Trump ordered the “first-ever comprehensive review” of the trade deficits of the United States, and “all violations” of trade rules that harmed American workers. 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.

A trade package with the US was in the spotlight last year, and Commerce Minister Piyush Goyal had said that the two countries had “almost resolved the broad contours” of the deal.

“We will hopefully come out with our first set of agreements soon, but we both believe that India and the US should look at larger engagement in the days ahead, possibly even leading to an announcement for a bilateral agreement that will go beyond the mere tinkering that we are doing at present,” Goyal had said in October 2019.

Nothing has been announced since then.

Also read | In Budget itself, signals that a major India-US dairy deal is unlikely

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 (taxes or duties on imports), 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.

The ‘Harley tariffs’ 

India is a “tariff king” that imposes “tremendously high” import duties, President Donald Trump has complained repeatedly. He has cited the example of Harley-Davidson, the US motorcyclemaker. Even after India halved the duty on the bike to 50% in 2018, he has said the rate is “still unacceptable”.

While it is often assumed that duties on the large-engine motorcycles have put them beyond the reach of most Indian consumers, the fact is that a plant at Bawal in Haryana has been assembling the bikes since 2011, and Harley has still not captured a sizeable chunk of the Indian market. Fewer than 3,700 of the motorcycles were sold in India in 2017, according to an analysis by Alyssa Ayres of the American think tank Council on Foreign Relations, and that too mostly cheaper models that were assembled in the country.

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Steel industry hit 

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.

GSP axe and response 

In June 2019, the Trump administration decided to terminate India’s benefits under the Generalised 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.

The US accused India of taking decisions over the previous few years that prevented “equitable and reasonable access” for Americans to its markets. These included a decision to slash maximum retail prices of life-saving cardiac stents and essential knee implants by 65%-80%, put tariffs on information and communication technology products, and demand that exporters of dairy products certify their produce was derived from animals not fed food containing internal organs.

Explained: Why trade with the US matters to India ‘Namaste Trump’ is written on a billboard near Motera stadium in Ahmedabad. (Express Photo: Javed Raja)

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. However, on February 10 this year, 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.

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.

Read | What is GSP, and how did India gain from being on US trade preference list?

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.

Farms, medical devices 

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.

“In the recent past, India has shown its resolve in an international trade deal (RCEP) to protect the interests of its farmers and dairy industry. We expect the same resolve to be reflected in the case of the India-US trade deal,” Ashwani Mahajan, national co-convener of the RSS-affiliated Swadeshi Jagran Manch said.

Trade negotiations over the last one year have grappled with the issue of improved access for American medical devices firms to India. Commerce Minister Piyush Goyal even included the US ambassador, Kenneth Juster, in a discussion with government officials and multinational medical device firms on this.

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. It is unclear whether this would mean the government might be willing to reconsider its earlier, widely publicised decision to slash, in the public interest, prices of stents and knee implants.

The health cess on imported medical devices announced in the Budget for 2020-21 too, may be seen as a negative for the American side, as the US is among the top three exporters of these categories of products to India.

Explained: Why trade with the US matters to India An artist paints a mural of Modi, Trump in Ahmedabad. Express Photo: Javed Raja)

Some successes so far, some promise ahead

While the United States is among India’s top trading partners for goods, India is its eighth largest. In comments on Wednesday, US President Donald Trump 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.

“Well, we can have a trade deal with India but I’m really saving the big deal for later on. We’re doing a very big trade deal with India. We’ll have it,” Trump said. “I don’t know if it will be done before the [US presidential] election, but we’ll have a very big deal with India. We’re not treated very well by India, but I happen to like Prime Minister Modi a lot,” he said.

India’s trade surplus with the US came down to $16.9 billion in 2018-19, and the previous Commerce Minister, Suresh Prabhu, had said last year that the surplus could be reduced further through imports of products such as aircraft from American firms.

Experts feel that 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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