The Looming U.S.-India Trade War

If international relations were about cultivating personal chemistry, you might assume that the U.S.-India relationship has never been stronger. Indian Prime Minister Narendra Modi’s visit to Washington last September, full of warm and fuzzy moments and buoyed by a sense of bonhomie, suggested a growing camaraderie between the nations. Following closely on the heels of that meeting, President Barack Obama became the first sitting president in history to visit India twice, and the first to be named guest of honor at its Republic Day celebrations on January 26, 2015.

But look past the veneer of chumminess, and you’ll see that the era of good feelings is likely to be short-lived, as simmering disputes between Washington and New Delhi retake their place at center stage. Among the most important are likely to be their vastly differing trade priorities, as each competes for a piece of the world market and plays a high-stakes game to ensure that its businesses and workers get a larger share of the pie.

One of the key sticking points is a trade disagreement that has now reached the dispute settlement body of the World Trade Organization (WTO). The United States alleges that India’s domestic procurement requirements for solar cells and modules violate WTO rules, which mandate fair and non-discriminatory access to both foreign and domestic firms, while India contends that the United States unfairly subsidizes its own solar technology manufacturers. Typically, a case under the dispute settlement body runs anywhere from a year to a year and a half, and the decision is binding for the losing party.

It’s difficult to see how India and the United States will find common ground on this issue. Obama has made it abundantly clear that one of his administration’s key goals is to create high-quality jobs by pushing U.S. exports and manufacturing in overseas markets. This was a central theme in the State of the Union address, which he delivered just before coming to India, and one he reiterated at a summit of American and Indian business leaders in New Delhi. Washington will not take kindly to being shut out of a large and growing market for solar technology in India, a key plank in Modi’s plan to increase the share of renewables in India’s energy mix.

For its part, the Indian government has made it very clear that promoting domestic manufacturing under the “Make in India” program is a cornerstone of its policy to jumpstart growth and generate millions of new jobs. For better or worse, domestic procurement rules are one of the time-tested tools that governments around the world use to even the competition for domestic manufacturers.

New Delhi and Washington’s positions seem downright irreconcilable. In fact, shortly after Obama’s visit, reports in India suggested that the state-owned National Thermal Power Corporation would soon put out bids for new solar projects, available only to domestic manufacturers. That’s unlikely to help resolve things.

But the solar dispute is only one piece of a much larger philosophical divide. An equally important, unresolved source of friction between India and the United States is their positions on intellectual property protection (IPP), and on the relationship of IPP and international trade agreements.

Large, deep-pocketed American pharmaceutical companies with powerful lobbies in Washington want India to strengthen its regulatory regime. For instance: they want India to extend patent protections to new drugs and not allow compulsory licensing, whereby makers of generic drugs are allowed to manufacture patented pharmaceuticals.

Here, India appears to have made a fairly major concession to the United States. Its long-standing position has been that IPP is a domestic matter, not one to be negotiated with trading partners. But during Modi’s visit to the United States last fall, India agreed to discuss its evolving IPP regime in a joint working group with U.S. experts. The report from those discussions has yet to be released, perhaps suggesting some difficulty in reaching a consensus.

On the other side of the fence, Indian generics manufacturers — the largest source of generics in the world — fear that they will lose much of their business if India adopts U.S.-style patent protection, which privileges the inventors of new drugs and limits availability of cheaper generic alternatives. What’s more, public health advocates and non-governmental organizations fear that moving to a tougher regime would raise the cost of life-saving drugs for those both in India and in developing countries that depend on its generics instead of the costly American originals.

The IPP issue resides at the heart of the proposed Trans Pacific Partnership (TPP), a free trade agreement among 12 nations in the Asia Pacific accounting for 40 percent of world gross domestic product and one-third of world trade. Pointedly, the TPP includes neither China nor India.

If India remains outside the TPP — the likely outcome, as there is no indication that the original 12 wish to open up to potential new members until they have first struck a deal among themselves — India is likely to lose out on major market access. One study from the Indian Institute of Foreign Trade, a think tank, released in May 2014 finds that the TPP’s big winners would be countries like Japan, Korea and Malaysia. India, meanwhile, is likely to end up a loser, due to what economists call “trade diversion.” This occurs when a free trade area shifts production away from more efficient suppliers locked out of the agreement, to less efficient suppliers that are part of the agreement. This would hurt India. Its textile manufacturers, for example, worry that they will lose out on the lucrative U.S. market, in favor of suppliers in Vietnam, a TPP member.

Intellectual property regulations would be at the core of the TPP’s potential negative impacts on India. If India joined the TPP in the future, it would almost certainly have to replicate the patent regime built into the agreement. This would extend and worsen the difficulties India faces on pharmaceuticals into a range of sectors where trademark and copyright laws are important, including publishing, music, and film production — the TPP’s IPP regulations, after all, are more stringent. Another study, also by the Indian Institute of Foreign Trade in May 2014, concludes: “the costs of conforming to the TPP’s [intellectual property regime] Chapter are greater than any potential market access gains from joining the TPP.”

The TPP also includes a host of stringent labor and environment standards that India — and, for that matter, most emerging economies — would fail to meet. There’s no indication that the Modi government has any plans to cave on these standards, the adoption of which would seriously erode India’s competitiveness, anymore than it has shown any inclination to cave on climate change — yet another area where India and the United States remain at logger heads.

It’s very hard to see how the new-found friendship between Obama and Modi can resolve these tensions. Now that he’s unburdened by the need to win another election or help his party win, Obama is free to be as aggressive as he wishes in pursuing his policy agenda. In search of a legacy, bringing the TPP to fruition would be a feather in his cap, much as the India-US civil nuclear accord became a late foreign policy triumph for George W. Bush back in 2009.

Obama’s State of the Union was quite striking for the strength of its rhetoric. Indeed, when it comes to the rules of global commerce, he said: “We should write those rules.” This may play well in Peoria. But leaders of other major economies like India are unlikely to sit back and accept dictation from Washington on how to run their own economies.

Saul Loeb / AFP