Written by Abhijit Das
With around $60 billion of India’s exports to the US now facing 50 per cent tariffs, over and above the tariffs permitted under the rules of the WTO, US President Donald Trump’s objective is very clear. He is likely to hold on to the penalty tariff as leverage to compel India to acquiesce to his unreasonable demands. In the emerging trade scenario, what should the government do, as well as refrain from doing?
There are no quick-fix solutions to India’s export woes in the US market. The government is reported to be contemplating a multi-pronged strategy aimed at boosting domestic consumption, facilitating diversification of exports to destinations other than the US, and providing a package of incentives to exporters to cushion the hit in the US market. The results of these initiatives could take a few months to materialise. In the meantime, the government could also consider extending benefits to the numerous small and medium enterprises from which the exporters source their final products.
There is no doubt that the India-US relationship is a valuable and multi-dimensional partnership going beyond trade. However, we must not ignore the reality that Trump’s coercive actions on the trade front could cause long-term damage to India’s economic prospects. India needs to create leverage to prevent Trump from taking further disruptive actions. The Department of Commerce, in close coordination with other ministries in the Central government, must prepare a list of measures that could be taken against the US for protecting our national interests. The list could include: Withdrawing customs duty concessions granted to the US in the last budget; imposing retaliatory tariffs on apples, almonds, nuts and other items imported from the US; and reimposing the Equalisation Levy on digital entities.
The measures mentioned above could be rolled out progressively and in a calibrated manner, while taking into account the US response to India’s concerns. If US actions hit India’s services exports, then the Centre must take appropriate action against US entities providing services in India’s financial and entertainment sectors. If the US starts taxing remittances to India, we could also contemplate taxing repatriation of profits and royalties of US entities operating in India.
No doubt this course of action will plunge the bilateral relationship into a crisis. But given Trump’s record of arbitrary actions, this seems to be the only option available to prevent the relationship from getting further skewed against India’s economic interests.
India would also need to work jointly with Brazil, China and South Africa at the WTO and other platforms to explore the possibility of a collective response to the challenges posed by the US to the international trade order. If these countries fail to get their act together, they may be confronted with new rules governing international trade, which may be more imbalanced and unfair to developing countries as compared to the existing WTO rules.
While we have discussed what the government should do, it is equally important to understand what it should not do. First, in pursuit of new markets, there must not be any undue hurry to conclude ongoing FTA negotiations. Any desperation on our part is likely to be leveraged by our negotiating partners for extracting concessions that could be inimical to our long-term economic prospects.
Second, in a rush to explore new markets, the government must not uncritically accept the suggestion being made by some influential economists and foreign policy experts that India should join the mega FTA called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP now comprises Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the UK and Vietnam.
No doubt, the CPTPP provides a significant market for exports. However, India already has FTAs with seven members of the CPTPP, who collectively account for nearly three-fourths of the combined GDP of the mega FTA. Thus, membership of CPTPP is unlikely to impart any significant boost to India’s exports. On the other hand, there would be adverse implications for India of complying with the provisions in the CPTPP on government procurement, digital trade, genetically modified products and trade-related sanctions for failure to comply with labour and environment obligations.
Third, in an environment where domestic reforms have become urgent, the government must tread cautiously on issues related to intellectual property rights (IPR). A narrative is sought to be created by some think tanks and experts that India can transition to an innovation-led economy only by strengthening the protection for IPR, especially for patents. However, this narrative ignores many academic studies which make the following three key points: Countries which are at the technology frontier benefit from strong IPR protection, while technology followers would gain from relatively weaker IP systems; as long as a country is a net consumer of IP developed elsewhere, it is likely to be worse off with strong IP protection; and losses in social welfare on account of monopoly pricing by the IP holder more than offsets the spur to domestic innovation. At its present stage of development, a regime of stronger IPR protection could actually impede innovation in India.
In conclusion, the challenges that India’s trade policy confronts today were never encountered in the past 25 years. The policy choices that would be made by the government to address these challenges are likely to have a significant influence not only on the evolution of India’s trade, but also on the prospects of its overall economic growth.
The writer is an international trade expert and the author of a recently published book titled Strategies in GATT and WTO Negotiations. Views expressed are personal
