India-US economic ties await a new dawn

Sushma Ramachandran

Senior Financial Journalist

THE election of a new President of a global superpower like the United States has ramifications around the world. For India, the US elections scheduled for November 3 come at a pivotal moment partly because of the Covid crisis and partly because of the current border tensions with China. So far, the Republican Trump administration has been broadly supportive of India in its rift with the northern neighbour. Whether this support will continue if Democratic nominee Joe Biden becomes President is a moot point. Given the Democrats’ preoccupation with Russia as an adversary rather than China, Donald Trump is being considered by many here as a better friend despite his growing eccentricities. The bonhomie with Prime Minister Narendra Modi is seen as another plus point.

What is pushed to the background, however, is Trump’s role in the deterioration of Indo-US economic relations in recent years. In fact, it is this administration that has relentlessly raised tariffs on Indian goods, altered visa terms for software engineers working in that country and also raised concerns over medical device price caps as well as digital economy issues. While the strategic nature of the relationship is indeed critical right now, the collapse in growth owing to the pandemic means that supportive economic ties are likely to become extremely important in the future.

The biggest area of friction between India and the US during the Trump administration’s tenure has been trade and tariffs. In an increasingly protectionist era, both governments have become trigger-happy in terms of import duties. The battle began with the US President deciding to focus on countries with which it had a high trade deficit. India was ranked 10th on the list of such entities in 2016 with a $24.3 billion deficit coming down to $23.3 billion in 2019. Negotiations on this issue have been continuing for quite some with India trying to buy more by importing American crude oil and LNG. But the scenario was embittered last year with the sudden decision to drop this country from the group of developing economies entitled to duty free import tariffs. Known as the Generalised System of Preferences (GSP), the scheme launched in 1975 enables duty free import of goods into the US by developing countries.

India was the largest beneficiary of this programme in 2017 with $5.7 billion worth of goods covered by it. Commerce Ministry officials maintained the withdrawal of concessions would have little impact since the actual benefit amounted to only 190 million dollars annually. But it effectively highlighted the cavalier attitude towards India’s economic concerns despite the apparent deepening of the US-India partnership under the Trump administration.

The reason given for the withdrawal of GSP benefits was the lack of market access provided to American products in this country. Market access issues, however, are not new and have been under negotiation for many years now. So, the decision on GSP not only came as a surprise but ran contrary to the public camaraderie between the heads of government.

Tariff hikes affecting Indian products have also taken place with little compunction for the close strategic ties. The latest round of increase in import duties was on aluminium products from 18 countries, including India, in the first week of October. This is the second wave of tariff hikes on metals. The first came in 2018 when duties were raised by 25 per cent on steel and 10 per cent on aluminium from India and several other countries. India finally retaliated to these measures as well as withdrawal of GSP by imposing higher tariffs on many US imports in June last year. These included apples, almonds, chickpeas, lentils, steel and chemicals. In other words, a mini trade war had erupted between two countries that were becoming close allies in other sectors.

The visa policy for highly skilled software professionals has also been revamped by the Trump administration, making it more expensive to hire foreign personnel. This is an issue that affects both the Indian and the American information technology industries but the policies are becoming more restrictive than ever in the past.

On its part, the US administration has complained about India’s rigid attitude on several key issues, including the imposition of price caps on medical devices like stents and implants. These were imposed in 2017 and staunchly opposed by American manufacturer of such devices. Other criticisms include the failure to allow market access to dairy products on religious grounds as well as long standing issues over intellectual property rights. While President Trump was vocal about the high tariffs on imports of Harley Davidson motorcycles, these are actually bought in minuscule numbers in this country. In contrast, the more relevant issues concerning American corporate investors are the continuation of foreign investment limits in key sectors like insurance, banking and retail. The proposals for a new e-commerce policy and data protection issues have also come under the spotlight amid the focus on swadeshi and the Atmanirbhar drive. India too has been guilty of raising tariffs on a wide range of goods in a surge of protectionism over the past two years.

Unfortunately, the discussions on trade and other economic issues have not only failed to reach any resolution but seem to have worsened the relationship between the two countries in these areas. It is possible that a Biden presidency may lead to better communication on such fractious issues, though one has to be prepared for the Biden camp to try and link other issues like climate change to trade and market access.

As of now, the Democratic candidate appears to be leading in the polls in the run-up to the US elections, though this is never a guarantee of success. In case Biden does win the election, however, the new administration will not necessarily reverse the growing closeness in ties between the two countries. At least as far as the economic relationship is concerned, there is even a possibility that the steady decline in this area may be halted and make the outlook more sanguine in the coming years.

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