Business as unusual

THERE is one simple question about US President Donald Trump’s grouse against India that few economists have asked. What is wrong if a less developed economy, with a per capita income of less than $3,000, runs a large trade surplus against the world’s richest economy which has a per capita income close to $90,000?

India ought to have challenged outright the economic and moral foundation of Trump’s tariff tantrum. It is a different matter that as a weaker power, we have finally agreed to have our arms twisted, but why accept the logic of the demand? And, what is the economic logic of zero tariffs on any US imports?

Incidentally, some members of the Union government’s economic policy team have often claimed that while the reforms of 1991 were undertaken under external pressure, this government has been voluntarily pursuing reforms. If a government wakes up after nearly 12 years in office to unveil radical trade reforms, it is surely not out of conviction but owing to the external pressure being exerted. The trade policy reform unveiled through the recent Union Budget as well as the concessions being granted to the US, especially in trade in agricultural products, are all in response to such pressure.

Much is being made of how the 18% tariff announced by President Trump through a tweet places India at an advantage vis-à-vis many South-East Asian economies that face US tariff rates of over 18%. This is a laughable claim. Even with a few percentage points’ disadvantage, many Asian economies can out-compete India because of lower costs and their economies being more competitive.

Another laughable proposition, instantly peddled by apologists for the US in India, is that Trump’s tariff reduction from 50% to 18% has restored the India-US strategic partnership. Even if that 18% is far above an earlier 0-5% rate. That this somehow places the relationship on a sound and durable foundation. This is the hope of a desperate nation. Not the aspiration of a rising power.

The fact is that over the past year, President Trump has pursued an avowedly anti-India policy, insulting Indian leadership and questioning Indian domestic and foreign policies. It is claimed that Prime Minister Narendra Modi has exercised ‘strategic patience’. Silence is golden, speech would have been wooden. Fair enough. But what exactly has Trump’s unilaterally announced ‘trade deal’ done to restore trust to the damaged relationship?

The fact also is that we are still no wiser on what exactly the ‘deal’ is. A deal by definition has two sides to the equation. Even after Commerce Minister Piyush Goyal’s press conference, the terms of the ‘deal’ remain hazy. Different claims are being made in New Delhi and Washington DC.

To begin with, the first 25% tariff against India and a second 25% imposed due to India purchasing Russian oil were both levied through executive orders issued by the President. These orders are still being challenged in American courts. The presidential tariff tweet has not yet become an executive order and does not clarify if he is bringing the effective tariff down from 50% to 18% or from 25% to 18%. India has said nothing about stopping the purchase of Russian oil.

Such uncertainties would not have been important in a strategic relationship based on trust, which is what India and the US established under the leadership of President George W Bush and Prime Minister Manmohan Singh. But with trust gone, presidential tweets have to be followed by executive orders before foreign policy analysts go gaga.

How will the world, and especially India’s neighbours, view the US-India relationship as it has evolved over the past one year? The evidence would suggest that it is no longer a “strategic partnership”, as defined by President Bush and Prime Minister Singh, nor the “defining partnership of the 21st century”, as President Barack Obama claimed.

Despite all the talk about President Trump and Prime Minister Modi being friends and buddies, the Trump administration has not dealt with India any differently than it has dealt with Pakistan or most other developing economies. While China and Brazil have been particularly targeted and India is the only member of BRICS that has found some favour with Trump, most countries would see that Trump’s US has lost Indian trust.

An 18% tariff for India over a 19% for Pakistan is not going to help. Is India’s friendship worth only one percentage point more than Pakistan’s? Would Modi’s support base accept this valuation of Indian friendship?

As for China, while the Trump administration persists with the geo-economic containment of China, it has signalled calming of tensions on Taiwan. India, too, has changed its stance on China. Moreover, India is in no position to supply to the US what China is able to and the US needs. India’s place in America’s ‘China 1’ strategy is marginal. On the other hand, under pressure from the US, the European Union has diluted its China 1 policy and is reaching out to China.

All these developments suggest that President Trump’s overall foreign economic policies and his new national security strategy place India in a position of relative disadvantage, compared to what was the case even a decade ago, and not in any great position of advantage. How this implies any return to a relationship of the early 21st century, as claimed by some in India, is not at all clear. It is misplaced enthusiasm masquerading as expertise.

Finally, as of now, the Modi government has maintained stoic silence on Trump’s claims about India ending the purchase of Russian oil and switching to Venezuelan oil. The US has also demanded an end to Indian import of Iranian oil. If all this turns out to be true, then the Modi government should stop talking about strategic autonomy.

It is not merely by defending one’s borders that a nation secures its sovereignty. Asserting national interest in reducing critical dependencies, as in oil and defence equipment, is also a sovereign decision that should not be bargained away in a trade deal about shrimps and soyabean.