Argument

India is Trump’s Next Target in the Trade War

Ending India’s preferential trade treatment won’t hurt economically—but it is politically dangerous.

U.S. President Donald Trump and Indian Prime Minister Narendra Modi deliver joint statements in the Rose Garden of the White House on June 26, 2017. (Win McNamee/Getty Images)
U.S. President Donald Trump and Indian Prime Minister Narendra Modi deliver joint statements in the Rose Garden of the White House on June 26, 2017. (Win McNamee/Getty Images)

Just as tensions with China have started to ease, U.S. President Donald Trump has opened a new front in his trade war: India. On March 4, 2019, he fired the first shot by notifying Congress of his intention to end the favorable treatment India has enjoyed under the Generalized System of Preferences (GSP). Negotiated during the 1970s under the auspices of the General Agreement on Tariffs and Trade, and later subsumed into the World Trade Organization, GSP allows many products from India and other developing countries to enter the United States duty-free.

Trump’s decision to end GSP did not come as a surprise. Despite close cooperation between the world’s two largest democracies in defense and other areas, trade relations between them have been prickly for some time. They acquired an extra edge under Trump, who has sarcastically described India as “the tariff king.”

Trump’s favorite complaint is India’s high tariff on Harley Davidson. But that isn’t the only one. He’s also irked that the United States runs a substantial trade deficit—to the tune of $27.3 billion in 2017—with India. Another problem is India’s protectionist impulses, especially in agriculture. And during the last two years, the country also raised tariffs on several manufactured products, such as mobile phones and auto parts.

Further, India’s intellectual-property rights regime has been a source of concern for the United States for a long time. Because of its restrictive patent law, the United States has placed India on the “Priority Watch List” of its Special 301 Report, which identifies countries that don’t adequately protect intellectual property, multiple times—including in 2017.

Finally, India has recently made several decisions that have hurt U.S. tech companies. It passed laws requiring certain data to be stored locally, which adds to affected U.S. companies’ operating costs. New e-commerce regulations have likewise prohibited online marketplaces from selling any products from companies in which the marketplaces have significant stakes. This has resulted in some short-run costs for Amazon and Walmart, which manage the two largest online marketplaces in India and sell millions of dollars’ worth of products in which they hold indirect equity stakes. Finally, India is tightening the rules under which online content providers can operate.

India’s list of complaints about the United States is not nearly as long, but it does contain some significant concerns. For one, the country has long argued that U.S. restrictions on H-1B visa workers have harmed the development of its software industry. India’s concerns relate to long delays before visas are issued and the Trump administration’s proposals to limit them to highly skilled workers and to deny work permits for spouses. Meanwhile, U.S. tariffs on steel and aluminum have hurt Indian exports of those products. Unlike Canada, China, Mexico, Turkey, and the European Union, however, India has refrained from taking retaliatory action so far. It has drawn up a list of 29 products imported from the United States—almonds, apples, and phosphoric acid among them—on which it has threatened to raise duties. But it has postponed taking action multiple times. The latest deadline is set for April 1, 2019.

Finally, India fears collateral damage from the U.S. sanctions against Iran and Russia.  In both cases, the United States has vowed to penalize third-party countries that do business with those two nations. So far, however, Washington has granted waivers that protect India, which is heavily dependent on defense equipment purchases from sanctioned Russian companies and oil imports from Iran, from getting dinged. But the waivers are only temporary, and the country has already had to reduce its oil imports from Iran and may eventually have to eliminate them altogether.

From an economic perspective, Trump’s withdrawal of GSP won’t make relations much worse. First, only a fraction of India’s exports to the United States enjoy GSP preferences to begin with. In fact, India estimates that the amount saved on customs duties thanks to GSP added up to just $190 million a year. Second, GSP was never going to apply to India’s successful export products anyway. Once the value of exports of a particular product crosses a specified threshold—set at around $185 million currently—the country loses the GSP benefit on that product. In other words, it would be impossible for a country to become an export juggernaut on the back of GSP. Finally, under World Trade Organization rules, GSP is meant to be unilateral, with no reciprocal concessions granted by the developing country. Yet the United States has repeatedly used the threat of withdrawal of GSP to pressure beneficiary countries on intellectual property and labor standards.

From a political perspective, though, Trump’s move on GSP is dangerous. And it would be imprudent for the United States to push India any further on trade issues. The country is in the midst of parliamentary elections, and the Indian government can ill afford to appear weak. It would likely deny concessions that it would be willing to grant under other circumstances. The government may even choose to retaliate to signal strength to the voters. Therefore, any aggressive action by the United States runs the risk of triggering a trade war that would do little good for either side. From $20 billion in 2000, bilateral trade between the two countries has grown sixfold—to $126 billion in 2017. Cumulative foreign direct investment stands around $45 billion from the United States to India and $10 billion in the opposite direction. No wonder that, so far, Indian officials have been quite measured in their response to the impending withdrawal of GSP. But it is unclear how long such forbearance may last.

Once the Indian elections are over, the new government would do well to undertake a thorough review of all its trade policies and regulations. It should reassess the wisdom of the country’s recent turn to protectionism and import substitution. Such policies were a central factor in India’s economic failure during the first four decades after independence. By contrast, openness to trade and foreign investment have paved the way to economic success in recent times.

In parallel, the United States needs to appreciate that democracy places certain limits on India’s leadership. Sometimes, New Delhi must accommodate political pressures that lead it to choose regulatory policies that are not to Washington’s liking. In the interest of long-run partnership, it would be prudent to occasionally accommodate such behaviors. For example, India’s decision in 2016 to open up online marketplaces to foreign investors resulted in Amazon and Walmart emerging as two largest e-commerce platforms in the country within a short period. That in turn created political pressure to safeguard the interests of local small traders, who form a key constituency of the present government. New Delhi responded by reversing some of the original liberalization, but the net outcome remains an e-commerce sector that is more open to foreign investors.

From a long-term perspective, the two nations must keep in mind the vast potential for cooperation not just defense, but also in trade. The United States remains the richest and most robust economy in the world. India is predicted to grow 7 to 8 percent annually on its path to becoming the third largest economy in a decade. There is vast scope for win-win bargains between the two countries. With some patience, both can benefit as much from cooperation in trade in coming years as they have in defense and related areas in the recent past.

Arvind Panagariya is a professor of economics and the Jagdish Bhagwati professor of Indian political economy at Columbia University.

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