The U.S. and India are headed for a trade war over immigration and protectionism. Can it be stopped before it's too late?
India and the United States have come a long way over the past two decades. A once fraught relationship has developed real strategic significance, especially as both nations face major security challenges in Asia. Much of this progress has been fueled by the enthusiasm of U.S. businesses, who recognize that to be successful in a globalized economy, they need access to Indian talent and the giant subcontinental market. India also understands that to lift itself out of poverty and become globally competitive, it needs access to U.S. markets and the capital and technology of American firms. As a result, bilateral trade has quadrupled to nearly $100 billion since 2006 and, with this, cooperation has blossomed in many other areas — including intelligence and security.
However, with U.S. Vice President Joe Biden visiting Mumbai and New Delhi this week, it’s worth noting that over the past three or four years, the business environment for U.S. firms in India has deteriorated, and tensions have grown over trade and investment matters. American pharmaceutical firms and multinational companies are concerned about how policies and regulation compromise their business model. Many others face nightmarish tax challenges. For their part, Indian IT companies are very concerned about proposed changes in the U.S. Senate’s immigration bill to the rules on skilled Indian workers who want to emigrate to the United States.
All companies, Indian and American, face severe headwinds in their day-to-day business operations. As a result, the business ties that have been a pillar in U.S.-India relations for decades have been dramatically weakened. Honeywell CEO and co-Chairman of the U.S.-India CEO Forum Dave Cote spoke for many of his colleagues recently when he said, "Over the last two years, we have felt a cooling when it comes to U.S. interests in investing in India." Ajay Banga, CEO of Mastercard and chairman of the U.S.-India Business Council added frankly, "There are cracks in our relationship." But this cooling may not remain restricted to trade and investment alone; the United States and India may be headed for a collision that could be seriously detrimental to the strategic interests of both nations unless U.S. President Barack Obama and Indian Prime Minister Manmohan Singh lead forcefully and personally to get things back on track
The list of grievances on both sides is long. For U.S. firms operating in India, relentless harassment by tax authorities is at the top of this list. Add to this the much-criticized Preferential Market Access (PMA), a proposed policy that would give preference in government procurement contracts to domestically manufactured electronic, computing, and telecommunciations hardware. Pharmaceutical companies are concerned about intellectual property rights protection and enforcement. Solar panel manufacturers, and companies in insurance, retail, and defense complain about continued regulatory and bureaucratic hurdles to market access in their sectors. Progress on the civil nuclear agreement between the two countries that was signed with much fanfare in 2008 remains stalled over concerns on liability which has scared away French, Russian, and American firms.
Lack of progress on improving infrastructure, a rapidly slowing economy and a rapidly depreciating currency raise further concerns about India’s economic progress. For multinational companies eager to enter the Indian market, the mounting list of issues is causing frustration and annoyance to mutate into anger as more and more CEOs fear that India is discriminating against U.S. firms and failing in its obligations as an emerging economic power.
U.S. government officials expect India to collaborate with them in multilateral trade negotiations to shape the global trading system rather than setting dangerous precedents that other countries might emulate. This would drive a stake through the heart of the global expansion of American firms. It is a matter of paramount importance and urgency therefore to get India to act responsibly.
From India’s standpoint, the most urgent and lethal threat is that some of the provisions of the U.S. immigration bill currently being considered by Congress would create a huge problem for the country’s flagship IT industry, not to mention the American companies that are its clients. The most onerous proposal is one that prevents U.S. technology firms from placing personnel at client’s sites if more than 15 percent of their employees are on H1-B visas. This destroys the business models of many global IT service providers and is also extremely problematic for U.S. companies that have become dependent on the amazingly competitive, 24/7 capability provided by Indian firms.
For Indians, it seems as if U.S. officials only criticize protectionist policies when other countries put them in place. From their point of view, India’s Preferential Market Access policy is simply a way to encourage electronic hardware firms to manufacture locally in India. Such incentives are essential to creating jobs and reducing the huge balance of payments problem faced by the country. The policy is compliant with World Trade Organization rules and, anyway, how is this different in principle from the provisions of the immigration bill which aims to create more IT jobs in America, they wonder? How can a country which has a Buy American Act, which requires that the U.S. government give preference to U.S.-made products in its purchases, criticize the PMA? In a country with a legacy of colonial rule and socialism, where many Indians are still distrustful of businesses in general and foreign companies in particular, the vigorous approach of American firms and the U.S. government smacks of economic imperialism and awakens protectionist instincts.
The list of issues is mounting and emotions are rising on both sides. Left unchecked, this dynamic could trigger a spiral of finger pointing and retaliation that will damage the hard-won gains in trust and trade between the two countries. Moreover, it threatens to get in the way of the strategic cooperation between the countries as they address complex issues ranging from withdrawal in Afghanistan to simmering problems in Pakistan to China’s rise. As Mahatma Gandhi famously said, "An eye for an eye will only make the whole world blind."
The reality is that India and the United States are natural allies and clear strategic partners. In addition to being enormous markets for each other’s goods and services, the United States and India both stand to benefit from a more stable, less dangerous Asia. New Delhi needs Washington to stay engaged, focusing its attention and resources on the region. And Washington needs New Delhi to remain a welcoming partner, happy to share both its strategic location and deeper cultural understanding of an enormous turbulent swath of the world. It is vital therefore that the leaders of both countries take a strategic rather than tactical, short-term, and commercial approach to resolving their differences.
Unfortunately, the timing of the negotiations couldn’t be more challenging. In both countries the political system is polarized. There is also an asymmetry to the dialogue. The U.S. economy and business confidence is recovering. And with new U.S. Trade Representative Mike Froman at the helm, the administration is approaching these matters forcefully. In India, however, the economy is sputtering and the coalition government has its eye more on the upcoming 2014 election than on governing.
Delhi did make a few promising recent moves in early July, when Preferential Market Access was put on hold and caps on foreign investment in a number of industries were raised. These changes signal that Indian officials are belatedly listening to American concerns. On the other hand, the Obama administration has remained ominously silent on India’s grave concerns about the immigration bill. It would make it hard for the United States to make the case for India to open its markets if, with the immigration reform bill, it is closing its own market. Both countries need a stable, fair, mutually acceptable framework for trade relations, and that can only come through joint development of principles that establish parallel lines that separate free trade from tolerated protectionism in each country.
With the August session of the Indian Parliament about to commence, Prime Minister Singh has a final window of opportunity to reach across party lines — especially to the opposition BJP — before next year’s election and forge a consensus on how to revive the economy. The passage of just a few important bills could restore optimism and trigger several billion dollars of much needed investment to jump-start the economy. This opportunity must not be wasted.
Singh must also reach out to Obama to ensure that both countries take a more strategic approach to reviving the economic partnership. Overcoming tough challenges requires committed leadership on both sides and even more, a personal chemistry between the leaders that is not currently in abundance. Yet given what is at stake for both nations, Obama and Singh must show personal commitment to finding acceptable solutions to these vexing issues. They need to sponsor a cabinet-level working group that tackles a few tough issues and settles them in a very finite period of time. This could then build the foundation of mutual confidence and trust to set the stage for the next government to negotiate a more sweeping bilateral trade and investment treaty.
Leaders in Delhi and Washington find themselves at a critical moment. They must decide whether they will make the relationship into a truly strategic and valuable partnership or allow it to deteriorate into a welter of finger pointing. Despite the political constraints on both sides, it is worth remembering what is at stake here, and how far we’ve come already.