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Why trade with the US matters to India

  • Category
    India & world
  • Published
    28th Feb, 2020

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?

Issue

Context

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?

Background

  • 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, 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 the 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.
  • While the US’s deficit with India is only a fraction of its deficit with China (over $340 billion in 2019), Americans have repeatedly targeted the “unfair” trade practices followed by India.
  • These include the tariffs that India imposes, which the American administration feels are too high.

Analysis

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, the American administration has complained repeatedly. They have cited the example of Harley-Davidson, the US motorcycle maker. Even after India halved the duty on the bike to 50% in 2018, they 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.

Steel industry hit

  • In 2018, the US imposed additional tariffs of 25% on steel and 10% on aluminium 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 2019, the American 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. 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 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.
  • India is one of the largest importers of almonds from the US, having imported fresh or dried shelled almonds.

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.
  • Trade negotiations over the last one year have grappled with the issue of improved access for American medical devices firms to India.
  • 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.

Some successes so far, some promise ahead

  • While the United States is among India’s top trading partners for goods, India is it’s eighth largest.
  • India’s trade surplus with the US came down to $16.9 billion in 2018-19, and 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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