India-US Tariff War
| Date :21-May-2019 |
By SUBRATA MAJUMDER:
USA is the second biggest trade partner of India, after China. In 2017-18, USA accounted for 9.7 per cent of India’s total trade. Incidentally, India’s trade relation with China and USA are diagonally opposite to each other. While China is the trigger for trade deficit, USA is a pivotal for export growth, yielding trade surplus.
ON May 5, President Trump tweeted for a fresh look for high tariff on Chinese goods worth US $ 200 billion imports from 10 per cent to 25 per cent, if renewed negotiations failed. USA accused China of backtracking on its previous offers. The negotiations failed. USA activated a new 25 per cent duty on US $ 200 billion worth of exports from China, effective from June 1. India is not far from the pounce of USA high tariff trade war. President Trump slammed India for high tariff, tweeting it a “tariff king” and accused it for trade deficit with USA. During the recent bilateral trade meeting, visiting US Commerce Secretary Willbor Ross blamed India for “overly restrictive” tariff, which brought jolt to USA’s exports to India, and eventually caused trade deficit with India. He said that India ranked 13th of USA’s exports because of high tariff. Whereas, USA is the biggest export destination for India.
India hogged a blemish for “unjust trade” and fell in the warrant list of USA’s high tariff cudgel. USA fixed India in watch list of 301 and threatened to withdraw GSP benefits as a counter attack on India’s price cap on medical devices, such as cardiovascular stent and knee implants. It also threatened to drag India to WTO’s Dispute Settlement Body on export subsidies. India lost the entitlement for subsidies after crossing the cap of US$ 1000 per capita income level. In retaliation, India threatened to impose high tariff on 29 items from USA.
The slugfest between India and USA will linger with no side bowing for adjustment. Against this backdrop, FTA (Free Trade Agreement) could be recourse to resolve the trade dispute. US Ambassador to India Kenneth Juster mulled for FTA between USA and India. A top American business advocacy group, US-India Strategic Partnership Forum (USISPF), asserted for FTA. It believed that FTA would be key to resolve the trade irritants. The President of USISPF believed that “Once you have FTA, all the issues of tariff will go away.” USA is the second biggest trade partner of India, after China. In 2017-18, USA accounted for 9.7 per cent of India’s total trade. Incidentally, India’s trade relation with China and USA are diagonally opposite to each other.
While China is the trigger for trade deficit, USA is a pivot for export growth, yielding trade surplus. It helped in offsetting a chunk of trade deficit, triggered by China. In 2017-18, USA’s trade surplus offset 13 per cent of India’s total trade deficit. Against this backdrop, a lesson can be drawn by India before thinking of retaliation against the USA. In trade and investment relation, USA is more significant to India than vice–versa. USA is the biggest export destination for India and a major foreign investor. To this end, any retaliation by India means opening a Pandora’s Box.
USA is the backbone for India’s export growth. In 2017 – 2018, it shared one sixth of India’s export, accounting for 15.8 per cent. It is a gear to India’s export growth. For example, in 2017-18 India’s total export surged by 10 per cent and USA was the main gear to this growth. It shared 13.4 per cent of India’s export. In the basket of exports also, USA has been playing an important role. It is the biggest importer of readymade garments, marine products, diamonds and pharmaceuticals, which are the major components of India’s exports. Incidentally, besides earning foreign exchange and reducing trade deficit, exports to USA pave the way for generating employment opportunities in India.
This is because garments and diamonds are labour intensive industries. Both World Bank and Peterson Institutes studies have predicted significant gains for both USA and India if a free trade agreement is concluded. Before Trump, USA was believer in low tariff and opposed to protectionism. With a turnaround in the trade policy under the Trump regime, USA and India are in the same boat of protectionism with their aim for America First and Make in India respectively. Given this paradigm shift of USA’s trade policy, FTA will play an important role to gear up the trade relation between the two countries and help end the trade dispute. With tariffs done away under FTA, trade potential between the two countries will increase through trade related investment. USA has the advantage of technology and financial muscle and India has an edge in providing low cost of production base and big domestic demand.
FTA will encourage US investors to invest in India in lure of low cost production, while importing hi-tech products duty free as inputs. Eventually, it will help in reducing trade deficit. Manufacturing of mobile phones by US investors can be a case in point. Currently, more than 85 per cent of components and material costs for making a mobile phone are imported. India produces only 5 – 10 per cent of the billing cost, which include casing, plastic and box packaging. Most of these components and materials are imported from China because of low price advantages. With basic duties on components and materials waived off under FTA, which are around 10 -12 per cent, US manufacturers will have an edge over the manufacturers, who are dependent on imports from China. India is on the trend for heading towards a new manufacturing dynamism after digitisation and automation, which embraces component base industries. These industries require technology and skilled manpower.
FTA with USA will leverage a benefit of technology transfer through import of components and materials at low cost. This will have dual impact on US-India trade relation. On one hand, it will have a propitious impact with the increase in USA’s exports of inputs to India, and on the other side, it can pose a big challenge to China’s low cost goods dumping in India. Increase in USA’s exports will have a cascading impact on USA-India economic relation. It will increase USA’s investment in India, along with exports. Eventually, it will quell US’s ire against India and pitch for win-win situation for both countries.