The glare on the shared ambition of India and the US to reinforce their economic engagement will likely remain bright during President Barack Obama?s India visit beginning this weekend. However, despite the homilies, the inevitable dichotomy between the two countries? policy stances in a changed world could force them to push back on several counts.
The US, with its eroding global competitiveness in manufacturing and services, is faced with the prospect of losing its status as the world?s most productive country. In order to kick-start its economy, it is increasingly relying on large military hardware deals and access for its heavily subsidised farm goods. No wonder it is cajoling India to remove hurdles to its exports of items like poultry, meat, dairy products and nuts, and even lift the ban on genetically modified seeds. What annoys the US are India?s relatively high applied tariffs for farm goods, the large gap between the bound and applied tariffs and the opaqueness of the tax refund system for exporters.
Despite the rising trade between the two countries as well as the increase in their individual shares in world trade, the relative importance of the US as a trading partner for goods for India has been declining since the 1960s. China has taken most of the space ceded by the US. The US?s share of India?s merchandise imports peaked at nearly 40% in the mid-1960s, before falling to about 6% now. It, however, continues to have almost the same share of India?s exports of goods (11-12%) now as back then, which explains the balanced trade between the two countries in recent years.
Exports of IT and IT-enabled services to the US have been the principal driver of India?s 80% annual growth in services exports since 1991. Roughly half of our annual services exports of over a $100 billion goes to the US, helping swing the trade balance India?s way. Transportation, financial and professional services account for a large chunk of US exports to India. There is a huge, untapped potential for the exchange of professional and financial services between the two. Regulatory changes on both sides are crucial for realising this potential.
India has already responded to US pressure to open its markets to American goods and services. During Obama?s India visit, a government-to-government deal in military hardware could be clinched. Mindful of US interests, New Delhi recently signed the multilateral Convention on Supplementary Compensation for Nuclear Damage (CSC), which seeks to ensure that nuclear suppliers? liability on account of accidents would follow international norms. With this, India seeks to address concerns about our civil nuclear liability law that makes suppliers and operators liable for any nuclear accidents.
So, defence giants Lockheed Martin and Boeing could likely win orders worth over $10 billion for fighter jets.
Also, accession to the CSC would reassure corporations like General Electric and Westinghouse which are keen on India?s $150-billion civil nuclear market. There have been signals, albeit subtle, from India that it could also look at other US demands?FDI in multi-brand retailing and enhanced patent rights.
But the question that India needs to ask itself stridently is: What are we getting in return? After all, trade is nothing but give-and-take. Despite the rhetoric, the US is clearly slipping into a protectionist groove, designing and implementing several policies that militate against the spirit of free trade. The proposal to deny tax breaks to US companies not creating domestic jobs and profits as well as higher fees on H1B and L1 visas have adverse implications for the Indian IT industry. There is talk of a carbon tax on companies in high-emitting industries, obviously targeted at those from the developing world?a measure that ignores the historical context of greenhouse gas emissions, and also runs counter to the dialogue on clean energy technology transfer. India is also under pressure to sign a Logistics Support Agreement (LSA), which would let the US armed forces use Indian facilities for operations like refuelling?seen as a security risk by many. New Delhi also feels that the US Administration and the private aerospace and defence companies hold on to their technology, even as they seek exclusive military hardware partnerships here.
The Foreign Manufacturer Legal Accountability Bill in the US Congress is ostensibly aimed at ?levelling the playing field and protecting Americans?. It mandates that certain products sold in the US have a registered manufacturer there, against whom a liability suit can be initiated for violations. Many Indian export items including drugs and cosmetics, biological products, chemicals and pesticides are covered under this proposed law, which, exporters say, would badly hit small and medium firms, with the cost of compliance estimated at $500-700 million.
There?s more. A proposed change in US government procurement rules would encourage purchase of US-made products. As per the proposal, if the cost escalation due to purchase from the US is not more than 20% of the total bill, purchase from US firms would be mandatory. Indian exporters of engineering goods and steel products fear this could affect them. While none of these policies exclusively target India, the country is doubtless among those which will bear the brunt.
Whether by chance or design, US trade policies have not been particularly India-friendly. The US?s safeguard mechanism, supported by the automatic import licensing system (which allows quick action), has been restrictive on Indian steel exports. The method of ?zeroing? followed by the US authorities for calculating dumping margins made its anti-dumping tool unduly sharp, often to the detriment of Indian exports of agricultural and steel products. While India?s competitors in textiles, leather and gems and jewellery exports to the US get duty-free treatment under the Generalised System of Preferences system, India is cut out of this as its exports breached a certain threshold. India has repeatedly complained about the tariff rate quota policy in the US, which slaps prohibitive tariffs on farm goods exports beyond a threshold. Besides, there are several non-tariff barriers?13 for goods and 9 for services to be precise?that India faces in the US market, including access barriers for Indian banks.
The US government has been backing a sustained and tireless campaign by the US-based big pharma companies to overhaul India?s intellectual property rights regime. The pharma giants basically want the criteria for patent grants to be more liberal and make life difficult for India?s highly competitive generic drug industry. Big Pharma has also been lobbying for a ?data exclusivity? law that would prevent the drug regulator from relying on the innovator?s test and other data for new chemical entities to approve their bio-equivalent generics. They say this would help them shift R&D expenditure to India.
India?s generic drug industry has argued that data exclusivity is a ?TRIPS-plus IPR? that could provide an additional period of market exclusivity for many patented products, leading to delayed entry of generics. Big Pharma has made 80% of their R&D expenditure in the US for the last 30 years. There hasn?t been any significant shift in this R&D expenditure from the US, despite many countries allowing data exclusivity (the EU introduced a 10-year data exclusivity in 2005), according to Indian generic companies. If that is so, there is no compelling reason at this juncture for India to harm its robust generic drug industry.
US trade demands are mostly untenable but there is some merit in its argument that the Indian industry must adhere to certain labour standards. This will provide a level playing field for the American industry, which spends extra on this front. Given the high unemployment rate in the US, Washington cannot be blamed for its focus on job creation either; however, steps like banning off-shoring or a new impost on companies creating more jobs outside the US are too harsh and could boomerang.
In broader trade in goods and services, India seems poised to gain more than the US from their mutual engagement. Washington?s best option is to nullify the Indian advantage through large defence deals, supply of nuclear technology and materials and sale of gas turbines.
US non-tariff barriers
* Multiple technical regulations aimed at consumer protection, including those related to health and safety
* Non-transparency in the regulatory framework for biogenerics
* Elaborate labelling requirements
* Frustrating customs formalities for textiles, clothing and footwear, all items of export interest to India
* Stinginess in allowing Para IV market exclusivity, a high risk/high reward option for generic drug makers
* Sundry barriers to insurance firms and telecom service companies
* Tariff rate quota system that hampers Indian tobacco companies? expansion in the US market
* Banking licence to foreign firms very restrictive; activities of ?bank holding companies? confined to closely related banking activities such as sale of insurance policies, mutual funds.
* On the anvil: Purchase from US companies to be made compulsory in bidding for government procurement contracts
* Product liability on foreign manu-factures under a new law in the making; export sectors comprising SMEs to be hit
Irritants
As the US sees them ?Opaqueness? of the tariff system; relatively high applied (actual) tariffs and wide gap between the bound (60-300%) and applied (up to 40%) tariffs in case of farm products. This allegedly creates uncertainty for US exporters Ban on FDI in multi-brand retailing.
US firms like Walmart eager to tap the organised retail market, which is believed to help build cold chain infrastructure and reduce wastage of farm produce
A key provision?Section 3(d)?in India?s Patent Act, which excludes incremental inventions from patenting unless it is proven that they bring substantial improvement in efficacy compared to the original product. US wants the ?efficacy? to be defined under law so that patent authorities have less discretionary powers
Absence of data exclusivity?a provision present in many other jurisdictions including the US, the EU, China and Canada. For the record, this is meant for protecting the test and other data on new chemical entities that the innovator drug company submits for regulatory approvals from unfair commercial use by a third party. Generic companies say this is often misused to unfairly extend the period of market exclusivity for the patented product
The nuclear liability law which, the US private nuclear suppliers fear, could limit their opportunity to sell technology and materials to India for its $150 billion civil nuclear expansion over the next few years
Absence of commitment from India that its defence companies would get India?s military hardware contracts on an exclusive basis
As India sees them
A wide array of non-tariff barriers to trade. The NTB are implemented in a highly discretionary manner and new ones are frequently created
The method of ?zeroing? followed in calculating anti-dumping margin. This keeps the dumping margins positive in all cases and has often affected exports by labour-intensive Indian industries like textiles, polymers, plastics and chemicals.
The safeguard duty mechanism supported by the automatic import licensing system that has put breaks on India?s steel exports
The anti-outsourcing drive?which includes proposed denial of tax breaks to companies not creating jobs in the US and the higher fees on H1B and L1 visas. The restrictions on movement of professionals is expected to hit Indian exports of IT/ITES, medical and paramedical, financial and other professional services
The Anti-Counterfieting Trade Agreement (ACTA), a plurilateral pact, which proposes to link counterfeiting with patents and other IPRs. Although there are reports that the linkage to patents could be avoided, India?s generic drug makers, who export cheap drugs to other developing and under-developed countries, fear that their cargo could be impounded in transit under the ACTA
The proposed policy to make purchase from US firms mandatory for participating in US government contracts