Trade deficit: India meets its match in the US as both countries now looking for local

By: | Published: January 11, 2019 2:40 AM

For the first time, however, India encounters a US trade administration that is determined to wipe out trade deficits. Such an attitude is much different from responding to challenges that are regulatory in nature, such as intellectual property

It is clear that notwithstanding the strategic warmth with the US on geopolitics and regional issues such as the Indo-Pacific, India can’t expect leniency from the US as far as trade deficit is concerned.

The US has, reportedly, raised the issue of trade deficit with India once again. This subject figured in a recent telephonic conversation between US President Donald Trump and Prime Minister of India Narendra Modi. It is clear that notwithstanding the strategic warmth with the US on geopolitics and regional issues such as the Indo-Pacific, India can’t expect leniency from the US as far as trade deficit is concerned. On this subject, the US has not discriminated between allies and adversaries. The country has been as vocal about deficits with Europe, Japan, Canada and India, as it has been with China.

Trade surpluses and deficits are not engineered outcomes. These are natural outcomes of what countries buy and sell from each other. Countries run trade deficits with other countries if they buy more than what they sell. Such transactions, again, are not forced. These happen because of insufficient domestic availabilities of what countries require at affordable prices. Excess of imports over exports results from various factors, including domestic demand, endowment of natural resources, the ability of domestic workforces in producing various goods and services, and even local and global factors influencing the cost of production, primarily transport and intermediation costs.

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The result of the US running trade deficits with most countries of the world is due to specific combinations of these various factors. The US is the world’s largest consumer market simply because it buys much more of what the rest of the world produces, than the latter does from it. This ‘natural’ determination of trade relations is scientific, market-driven and logically rational.

Forced correction of deficits means dictating trade patterns in a manner that goes against market principles. The US would want other countries to buy more of its goods and services, while forcing its own consumers to buy less of goods and services produced by other countries. Countries would, therefore, be ‘forced’ to buy American products when they might have access to other cheaper substitutes. On the other hand, American consumers would also be deprived from buying cheaper substitutes from the rest of the world. This peculiar reformation of trade might eventually push America’s trade relations with its major partners to points where they reflect a completely non-market ‘managed’ character. And such a character, over time, might come to influence trade relations between other countries as well.

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India’s case
India, however, does not have much to complain on the subject of trade deficit. Multiple analysts and experts in India have vented their ire and frustration over the trade deficit India has with China and several other countries. They fail to consider the fact that while some parts of these deficits might be corrected through greater market access for Indian products, the substantive parts of the deficits are market-driven. Correcting these deficits would mean depriving Indian consumers from buying cheaper global products, in pretty much the same way the US action on deficits would deprive its own consumers. Paranoia over imports has, time and again, forced India to adopt defensive postures in the free-trade agreements (FTAs) it negotiates. There has not been any shortage of outrage over the allegedly greater imports generated by India’s various FTAs, while conveniently overlooking the fact that the usage rates of these FTAs are remarkably low in the first place. Such outrages continue to prosper opinions resisting India’s participation in the 16-country Regional Comprehensive Economic Partnership (RCEP) and other potential FTAs.

India has finally met its match on trade deficit, with the US steadfastly pressurising it to buy more of its products. This is a new trade policy dilemma for India. Capitulating to the American pressure might mean it yielding greater market access to US imports of automobiles and food products—items on which India has been reluctant to lower tariffs for not just US imports, but those from anywhere. Going ahead, US pressures on greater market access are unlikely to be confined to goods. India is one of the rare trade partners of the US with which it runs trade deficits in both goods and services. India’s data localisation policies and e-commerce regulations aiming to provide greater flexibility to domestic players are certainly not amusing for US businesses. India can expect the US to keep hammering away at the need for relaxing these policies.

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India and the US have always been poles apart on the subject of trade. Both have learnt to live that way. Bilateral trade has continued to grow, notwithstanding differences. But for the first time India encounters a US trade administration that is determined to wipe out trade deficits. Such an attitude is much different from responding to challenges that are regulatory in nature, like intellectual property, and those on which India and the US have agreed to disagree for long.

Until now, India doesn’t seem to have found a solution to responding to the US pressure. Contrasting strategies, such as threatening the US with retaliatory tariffs—which were never imposed—or inviting the US President to the Republic Day parade, have not worked. The strategy of playing a waiting game might not work with the current US administration that is keen on quick solutions. How India handles the US’s ‘nudges and pushes’ will be interesting to watch.

-The author is senior research fellow & research lead (Trade & Economic Policy) at the Institute of South Asian Studies in the National University of Singapore. Views are personal

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