As Trump talks tough on US-India trade terms, India needs to now look at ways to improve its leverage and reduce its dependence on the American market.

HEAD SHOT

Donald Trump has called India a ‘high tariff nation’ and the US has withdrawn duty benefits from India under GSP. India’s tariffs have come down drastically from their high levels in the 1990s, but the US is looking for tariff reductions in a number of items. The trade balance between India and US has shifted decisively in India’s favour over the years. Donald Trump is looking at ways to reduce the deficit by negotiating new terms with India to tilt the balance in his favour.

US President Donald Trump has raised the rhetoric yet again on Indo-US trade relations. Referring back to his oft repeated example of Harley Davidson motorcycles, Trump commented in a speech to the Conservative Political Action Conference (CPAC) in Maryland, a suburb of Washington DC:

“India is a very high-tariff nation. They charge us a lot… When we send a motorcycle to India, it’s a hundred per cent tariff… when India sends a motorcycle to us, we brilliantly charge them nothing… So, I want a reciprocal tax or at least, I want to charge a tax. It’s called the mirror tax, but it’s reciprocal.”

Early this year, Trump had called and got India to reduce tariffs of motorcycles from 100% to 50%. But Trump is still not satisfied, since the tariff on motorcycle imports to the US is still 2.4%.

In the latest development, US has decided to withdraw duty benefits that were provided to India under the Generalised System of Preferences (GSP). The programme allowed duty free access to 1,784 products from India including textiles, engineering, gems and jewellery and chemical products. India has benefited from tariff concessions of around US$ 5.6 billion worth of exports under GSP. The office of the US Trade Representative (USTR) commented:

“India has implemented a wide array of trade barriers that create serious negative effects on United States commerce. Despite intensive engagement, India has failed to take the necessary steps to meet the GSP criterion.”

Why is Trump so upset?

Even as the Indian economy liberalized in 1991, customs duties remained at fairly high levels till the late 1990s. Peak customs duty on non-agricultural products came down steadily from 150% in 1991-92 to 40% in 1997-98, 20% in 2004-05 and finally to 10% in 2007-08.

India’s average applied tariff is at 13% according to WTO data, and it is looking to reach average levels of 5% over time in line with ASEAN rates. But the Modi government has also raised duties in the past few years on some products. Some of the items where the US wants tariffs to be reduced include flowers, natural rubber, automobiles and motorcycles, alcoholic beverages and textiles.

The US is also peeved at the differences between bound rates and MFN rates. Average applied tariff to MFN nations by India is 13.4%, but customs duty to other nations averages 48.5%.

Trump wants a re-balancing of America’s relationship with all its trade partners. One key element of this is removal of trade subsidies that countries like India and China have leveraged over the years. Trump proudly stated last year that Indian officials had called to start talking about a trade deal for the first time.

The shoe that bites

This is also an acknowledgement by Trump of the changing balance of power. Two decades ago, US was the only economic superpower after the collapse of the USSR. But we now live in a multi-polar world, where US holds neither the power nor the influence it used to wield at that time. In fact Trump himself acknowledges that the US is now a developing country and cannot be satisfied with 1% growth when India and China are growing at high single digits:

“When India has six, seven, eight per cent, when China used to have 11, 12%, they’re still at six or seven, when they’re at seven per cent they’re feeling badly. And I’d say, ‘How come we have to be at one per cent?” Well, it’s the size. I said, ‘Really? Well, China is bigger than we are and India has 1.5 billion people. How come they’re at 10 per cent and 11 per cent?’ Well, they can’t answer it.”

Simultaneously, US-India trade balance has decisively shifted in India’s favour over the years. India’s trade surplus with the US (goods and services) was at US$ 2 billion in 1995 and increased to US$ 27.3 billion in 2017. India is among the top 10 countries in terms of having a trade surplus with the US.

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Source: Office of US Trade Representative, DKODING Intelligence; *All figures in US$ billion

Yet, India has sought to convince the US that it must not be equated with China, which enjoys a trade surplus of US$ 375 billion with the US. Two key imports that are expected to increase for India in the coming years are oil & gas, drones and airplanes. India will potentially import around 500 planes from Boeing in the coming 5-10 years.

India’s stand has been largely defensive and accommodating so far. Prime Minister Narendra Modi has not responded to Trump’s rather crude comments against him for reducing motorcycle tariffs. The US imposed tariffs on steel and aluminium imports last year. India planned to impose retaliatory tariffs but has resisted the urge so far.

Other irritants include India’s new e-commerce policy and data localization rules and the demand by US dairy exporters for unconditional access to the Indian market. India’s policy to raise tariffs on solar panels and fix price of stents has invited protests from the US industry as well. On its part, India has been hit by changes in the H1B visa rules.

The decision to remove India’s benefits under GSP has a lot more symbolic value. Data shows that the US imports in 2017 stood at US$ 2.4 trillion, out of which a mere US$ 21.2 billion came in via GSP (<1% of total US imports). Out of total Indian exports of US$ 5.6 billion under GSP, the annual duty benefit is just around US$ 190 million. On the other hand, it actually benefits US consumers by giving them access to a lot of cheaper products.

But given that the US is talking tough, India may have to be more accommodating in its import policy and get into a lengthy negotiation process. However, India must be cognizant of the fact that the US is still our largest export market, with merchandise exports in 2017-18 at US$ 47.9 billion, around 15.77% of India’s total. India would do well to de-risk its trade from the US and increase the share of other markets. That will certainly provide more bargaining power across the table.

PARTING SHOT