How to deal with the growing India-US trade frictions

The Trump’s administration has finally removed India from its unilateral tariff preference scheme for developing countries. Such exports account for 12.3% ($6.35 billion) of India’s export to the US and tariff benefit is a mere $260 million. Thus, considered in isolation, it may look insignificant. However, things will look different when viewed in totality: India’s merchandise export is hovering around $300 billion for the last eight years now and attempts to push Indian merchandise into Chinese market is not fruitful. The EU is slowing and struggling with Brexit mess. Middle east is troubled by its over-reliance on oil and political instability. That leaves Indian exporters with the US market. 

The exclusion from the US GSP will bring covered Indian merchandise into direct competition with China that doesn't get GSP benefits and dampen prospects of India’s exports to the US. Its export of steel and aluminium is subject to increased import duties from which it hasn’t got exemption. Its other major exports such as clothing and leather goods are struggling against merchandise from countries such as Bangladesh and Ethiopia. India’s services export is now stagnant at $150 billion or so and going forward, software services, the major contributor will be facing headwinds amidst technological disruption and tightening US immigration rules. Thus, every penny counts.

Worse, the USTR is working with the global trade body, WTO to prevent India from taking advantage of the Standard and Differential (S&D) treatment that allows developing countries to commit to less than full-reciprocity in trade. The US argues that many of the GSP beneficiaries such as India are now part of G-20 and no longer poor so don’t deserve differential treatment. If indeed India loses S&D status, among others, it may have to cut back on farm subsidies.

Many observers think that Trump is irked by India’s recent increase in protectionist import barriers to help its struggling Make-in-India initiative. However, it’s not only import duty hikes but a series of market-distorting actions in trade and commerce that are making American companies uneasy. For example, price cap on medical devices puts American companies such as Abbott Laboratories at a disadvantage in Indian device market. 

India has banned imports of American dairy products on religious grounds. It has tweaked its e-commerce rules to restrict Amazon and Walmart-Flipkart from maintaining inventories supposedly to protect small retailers but allegedly to protect favoured organised retailers (mostly offline) that can’t compete with deep pocket global giants. India’s overzealous attempt to push data localisation through its proposed data privacy law is worrying not only the likes of Facebook and Google but also India's export driven IT companies and tech startups fearing increased infrastructure cost. It also wants to check cross border data flows and seek disclosure of source code (used for technology transfer), and “algorithms” of AI-based systems.

The draft policy defines e-commerce as “buying, selling, marketing or distribution of goods, including digital products and services, through electronic network”. Accepting this broader definition will mean classifying video streaming companies such as Netflix, Hot Star and Amazon Prime Video as e-commerce companies and subject them to discriminatory ownership and control regime that applies to foreign-funded online retailers.

India is also trying to block a plurilateral e-commerce agreement being pushed by developed countries such as the EU, Japan and the US on the pretext that any commitment on this will oblige it to permanently accept the current moratorium on imposition of customs duties on electronic transactions that it wants to tax under Section 9(1)(i) of the Income Tax Act. India also fears that if it accepts global discipline on e-commerce, policy space to give preferential treatment to locally-created digital products may shrink.

While newer differences between India and the US are cropping up, the older ones remain unresolved. For instance, New Delhi has not shown any inclination to tighten its lax IPR regime beyond WTO’s TRIPS despite American pressure to allow what’s called ‘ever-greening’ - patenting of incremental changes in existing medicines - and data exclusivity, a move that will be opposed by India’s pharmaceutical companies. 

India’s ‘model’ investment treaty excludes taxation from its purview and warrants that aggrieved investors must exhaust domestic legal remedies before seeking international arbitration, is not to the liking of the US. Modi government’s emphasis on local sourcing norm for industries such as electronics, retail and solar continues to nag American companies. Moreover, despite pressure from President Trump, India hasn’t shown serious intent to break away from Russia and Iran. Moreover, miffed by not getting exemption from hikes in US import duties on steel and aluminium, New Delhi has decided to impose punitive import duties on 29 US products.

Given President Trump’s ‘America First’ approach that seeks reciprocity in relationship and PM Modi’s intent to be seen as a strong decisive leader, the US-India divergences are likely to grow. Worse, the attempt to fill trade gap will see a new roadblock after 737 MAX8 crash with Indian aviation companies having second thought on their order of Boeing airplanes. However, India is finalising its $10 billion defence purchases deal with the US that include Romeo helicopters and armed drones. India and the US are close to signing Industrial pact that will facilitate US defence technology export to India and help fill the trade gap

India would need to do a tightrope walk. It shouldn’t give in on ever-greening and data exclusivity as its IPR regime is fully compliant with WTO. It can’t backtrack on purchase of Russian S-400 missile defence system needed to strengthen its security set up in a hostile neighbourhood. However, it will help if it plays a bit flexible on market distorting price caps on devices. Trade margin cap is certainly an improvement but not enough. 

India also needs to be practical on investment treaties. It must resist domestic lobby pressure on e-commerce regulations and keep the play-field open for all kinds of retailers - online or offline. Data localisation is not the best way to protect privacy and may have negative side-effects. India shouldn’t be too rigid about it. It would help if Trump administration acts sensibly on India’s relationship with Iran (cheapest oil supplier) and Russia, its long-standing defence partner. The US needs to be accommodative of India’s religious sensitivities and comply with its certification requirements like the EU and others to be able to export its dairy products to India. On the other hand, the US can’t say India is a strategic partner and yet continue to trouble it through its unilateral actions on trade, oil and defence procurement.

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An modified version of this op-ed piece catering to international readership was first published by Nikkei Asian Review from Nikkei-Financial Times Group here