India’s decision to impose retaliatory tariffs against the US decision to raise steel and aluminum tariffs has surprised many. It has been irksome for those who feel India’s strategic valuable ties with the US should be nursed with caution and care. Retaliatory tariffs might spoil not just the strategic bonhomie, but also jeopardise India-US trade relations, one of the rare trade ties where India enjoys a surplus.
India and the US have overcome frosty ties of the Cold War years to move to a relationship marked by trust, confidence and a matching of wavelengths. But trade issues are major downsides and stick out as sore thumbs in a relationship that has improved phenomenally over the last couple of decades.
On trade, India and the US barely see eye to eye. Nothing highlights this better than their dispute records at the WTO. Soon after the WTO came into force on January 1, 1995, India and the US began taking each other to task at the dispute settlement platform. India set the ball rolling on March 14, 1996, by complaining against the US on safeguard duties imposed on garment exports; the US followed a couple of months later, on July 2, 1996, complaining against India’s lack of adequate patent protection for pharmaceutical and chemical products. Over the last two decades, there have been 18 instances of disputes filed by India and the US against each other at the WTO. India’s specific complaints in recent years have been on the US increasing visa fees for H1-B applicants and cutting their quotas, and subsidies given by some US states to local renewable energy producers. US on the other hand has been challenging India’s agricultural export subsidies, particularly minimum support prices for rice and wheat. Beyond WTO, US and India have been locking horns over intellectual property rights. India continues to figure prominently on the Priority Watch List of the USTR’s Special 301, which identifies countries that according to the US have inadequate IP protection and enforcement capacities.
Back and forth dispute charges at the WTO have not affected growth in bilateral trade. According to the USTR’s statistics, bilateral trade (including both goods and services) increased from $19.1 billion in 2000 to $114.8 billion in 2016. It is not just the nearly six-fold increase in trade that is striking. At the time when US president Donald Trump took office in 2016, his watch over US bilateral trade imbalances would not have failed to reveal that the bilateral trade deficit had increased five-fold; from $6.1 billion in 2000 to $30.8 billion in 2016. In all three major segments of bilateral trade—agriculture, manufacturing, and services—US runs trade deficits with India. Manufacturing tops with $24.2 billion in 2016, followed by commercial services with $6.5 billion and agriculture with +$0.8 billion.
The rise in bilateral trade, along with the US deficit in such trade, might make India a candidate for US trade actions, going by assumptions that the US is out to settle scores with trade partners with whom it runs deficits. Even if it is, it should be noted that US-India trade is much smaller compared with those between the US and some other countries. US-China trade is at a whopping $648.5 billion with the US running a deficit of $385 billion. While the size of the US-EU trade is more than a trillion dollars, the US deficit is a much smaller $92 billion. Similarly, with Japan, US’s total trade is $270.7 billion with it running a deficit of $54.9 billion.
But while the India-US trade size is smaller than the US’s trades with China, Japan and EU, there’s one particular aspect of the India-US trade that is interesting to note. With China, Japan and EU, US runs deficits in goods trade and surpluses in commercial service trade. But with India it runs deficits in both goods and services trade, as mentioned earlier. While it is fatal to draw conclusions from this given the unpredictability of US trade actions, a simple comparative postulate could be as follows.
China, EU and Japan are examples of those trade partners who contribute significantly to the US’s global trade imbalance. The key source of the imbalance is goods trade. These are countries, along with many others, that are at risk of encountering specific trade actions from the US, as China is already facing. China can expect to encounter more actions given its continuation on Priority Watch List of ineffective IP countries. India, clearly, is a lesser evil for the US as far as its role in contributing to the US’s global trade deficit is concerned. While this might protect it from specific trade actions like those on China, notwithstanding its retaliatory tariffs, it runs a different risk. This is in encountering more barriers that affect its services trade. More restrictions on H1-B professional movements, aimed specifically at India, are likely to come up in the medium term, along with more pokes and probes at India’s IP regulations.
Punching retaliatory tariffs on a handful of US imports might not have made any significant dent on strategic goodwill on either side. Indeed, India’s action is likely to go down more as a symbolic reaction than anything else. But India-US trade relations remain rocky and are not expected to improve anytime soon. India should brace for tougher outings on its trade policies at the WTO as well as greater restriction for its service exports.
The author is a Senior research fellow & research lead (trade and economic policy), Institute of South Asian Studies, NUS e-mail: firstname.lastname@example.org. Views are personal