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Growing India-US trade conflict

  • Category
    Economy
  • Published
    21st Feb, 2019
  • Recently, USA and Indian officials met in New Delhi to discuss the trade relationship between their countries.
  • India has a $22-billion trade surplus with the US and this aspect is particularly annoying to the Trump administration.

Issue

Context- 

  • Recently, USA and Indian officials met in New Delhi to discuss the trade relationship between their countries.
  • India has a $22-billion trade surplus with the US and this aspect is particularly annoying to the Trump administration.

About-

  • Under Trump’s “America first” doctrine, the US administration is actively taking steps to reduce trade deficits with its major trade partners.
  • With China, America has $566 billion trade deficit.
  • USA has raised objections over India’s growing protectionism. Indian tariffs on solar panels (ironically, meant to control Chinese imports) prompted a U.S. complaint at the World Trade Organization.
  • Then, an Indian attempt to fix the price of stents caused the U.S. medical equipment industry to rise up in protest.

Background -

US-India trade relations:

  • The United States and India view each other as important strategic partners to advance common interests regionally and globally.
  • Bilateral trade in goods and services is about 2% of U.S. world trade, but tripled in value between 2005 and 2017, reaching $126 billion.
  • The trade relationship is more consequential for India, for whom the United States was its second largest export market (16% share) after the European Union (EU, 17%), and third largest source of imports (6%) after China (17%) and the EU (10%) in 2017.
  • S.-India foreign direct investment (FDI) is small but growing defence sales are significant in bilateral trade as well.
  • Civilian nuclear commerce, stalled for years over differences on liability protections, has produced major potential U.S. supply contracts.

Analysis

Why USA keeps a constant tab on Indian economy:

  • India has one of the world’s fastest growing economies and the third largest on a purchasing power parity basis.
  • It is the second most populous country, with a large and growing middle class.
  • Rising world energy prices place pressure on India which imports about 80% of its oil needs.
  • Energy prices and other global factors have caused India’s currency to depreciate against the U.S. dollar, raising concerns about inflation.
  • Still, the economy is projected to grow by 7.3% in 2018, up from 6.7% in 2017 (International Monetary Fund data), as shocks abate from domestic economic measures.

Bone of contention:

  • Now, India has chosen to wage battle against U.S. companies on a completely new front: data localization.
  • Reserve Bank of India told all payments companies to “store the entire data related to payments systems” solely in India.
  • The government followed up with draft policies, one of which ordered e-commerce companies to store user data in India and one which tells all internet companies to store personal data of Indians in India.
  • E-commerce has also been a major flashpoint. The government is going after foreign-owned e-commerce web sites such as Amazon, telling them that they can’t hold any inventory or allow their platform to be used by companies they’d invested in.
  • In other words, Amazon needs to find a middleman to sell Kindles or Echos on its Indian website.
  • Local companies face no such restrictions.

Intellectual Property (IP): 

  • The two sides differ on how to balance IP protection to incentivize innovation and support other policy goals, such as access to medicines.
  • India’s IP regime remains a top concern for the United States, which designated India again on its “Special 301” Priority Watch List for 2017, based on such concerns as its treatment of patents, infringement rates, and protection of trade secret.

Agriculture: 

  • Sanitary and phytosanitary (SPS) barriers in India limit U.S. agricultural exports - The United States questions the scientific and risk-based justifications of such barriers.
  • An ongoing issue is India’s purported compliance with a WTO decision against its ban on U.S. poultry imports and live swine due to avian influenza concerns; the WTO held that India’s measures violated WTO SPS rules.
  • Each side also sees the other’s agricultural support programs as market-distorting; India’s view of its programs from a food security lens complicates matters.

Localization Trade Barriers: 

  • The United States continues to press India on its “forced” localization practices.
  • Initiatives to grow India’s manufacturing base and support jobs include requirements for in-country data storage and local content for government procurement in some sectors.

Services: 

  • The United States and India are competitive in certain services industries.
  • Barriers to U.S. firms’ market access include India’s limits on foreign ownership and local presence requirements.
  • For India, a key issue is U.S. temporary visa policies, which affect Indian nationals working in the United States.
  • India is challenging U.S. fees for worker visas in the WTO, and monitoring potential U.S. action to revise the H-1B (professional worker) visa program.
  • India also continues to seek a “totalization agreement” to coordinate social security protection for workers who split their careers between the two countries.
  • The U.S. can be faulted for not seeing the bigger picture.
  • It’s China that’s distorting the global playing field, and U.S. trade policy should be focused on finding and building alliances with countries such as India to combat that larger problem.
  • India has the potential to be a giant market, which U.S. companies might need if they’re slowly squeezed out of China.

U.S.-India Bilateral Trade and Investment:

For USA

  • S. goods and services trade with India totalled an estimated $126.2 billion in 2017. Exports were $49.4 billion; imports were $76.7 billion.
  • The U.S. goods and services trade deficit with India was $27.3 billion in 2017.
  • Goods exports totalled $25.7 billion; goods imports totalled $48.6 billion. The U.S. goods trade deficit with India was $22.9 billion in 2017
  • Trade in services with India (exports and imports) totalled an estimated $51.9 billion in 2017.
  • Services exports were $23.7 billion; services imports were $28.1 billion. The U.S. services trade deficit with India was $4.4 billion in 2017
  • Exports of Goods and Services to India supported an estimated 197 thousand jobs in 2015 (latest data available) (82 thousand supported by goods exports and 116 thousand supported by services exports).
  • Lobby groups have already started working in the US to influence policies against certain Indian products such as steel.

For India

  • India is currently USA’s 9th largest goods trading partner with $74.3 billion in total (two way) goods trade during 2017.
  • Indian exports to the US, including steel, textiles, gems and jewellery, automobile and components, food and leather, could all be potential targets for restrictions if the country decides to go on a drive to bridge the current deficit by reducing imports.

Way Forward:

India should recognize two basic facts:

  1. If the country starts closing off its market, which right now remains of a speculation than reality, it will find doors closing to its exports as well.
  2. This in turn would reduce its attractiveness as a manufacturing base.

India enjoys tremendous economic growth; each country is trying to increase its role on the world stage. It’s the start of the realignment of the balance of power in Asia.

Learning Aid

Practice Question:

The U.S. goods trade deficit with India was $22.9 billion in 2017, a 6.1% decrease ($1.5 billion) over 2016. Discuss measures, as heard in the news recently, which the Trump administration is mulling to mitigate the bridge and also analyse how this will impact India.

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