India’s strategy to win the trade war
Trade wars are power wars. President Trump has landed the first big punch in his trade war against India to Make America Great Again. India cannot hope to win by landing a big punch back. The Indian economy is much smaller. India's responses must be strategic to strengthen its economy in the long run.
Asking the US to play by global rules is not an option with Trump. GATT (General Agreement on Trade and Tariffs) was created in 1948 to nurture the growth of weaker economies, thereby enlarging the global economy. The GATT's principles are the foundations of the WTO, which replaced the GATT in 1995. Those principles acknowledge that smaller competitors must not be thrown into the ring with larger ones until they have grown stronger.
Trump's salvo on 'Liberation Day' has imposed a 49 per cent 'reciprocal tariff' on Cambodia and 46 per cent on Bangladesh, two countries whose per capita incomes are 3 per cent of the USA's! Trump's gripe is that these small countries are exporting more to the US than importing from it. Though that is how international trade is expected to grow the global economy equitably, by enabling poorer countries to produce for richer ones, creating employment and incomes for their own citizens to progressively earn and buy more even from richer countries.
India is also in Trump's crosshairs. India's per capita GDP is less than Cambodia's and Bangladesh's, though its GDP is the fifth largest in the world. It has a long way to go to Viksit Bharat.
The US emerged the global hegemon when the Soviet Union collapsed in 1991, with the largest economy, the largest military and control of the global financial system. The US always put its own economic interests, and those of US companies, above democratic values. The US claims it is the global champion of democracy. It led the 'free world' in the fight against 'non-democratic' communism. The US' definition of democracy is governance with a system of popularly elected leaders.
Nevertheless, to maintain its control over petroleum trade, the US overthrew an elected government in a coup d'état in Iran in 1953 and installed the compliant Shah of Iran instead and keeps countries with unelected monarchs in West Asia on its side.
India, the world's largest electoral democracy, has a difficult relationship with the US. The US expects India to be always on its side against any authoritarian country unwilling to toe the US' line. The US considers India immoral for remaining neutral between the Soviet Union and the west in the cold war; it was angry when India was compelled to come closer to Russia when the US supported the Pakistan military dictatorship against India. Trump seems willing to make up with Russia now, but not with China, which has grown into the second largest economy in the world and caught up with the US in advanced technologies.
The US and China are India's largest trading partners, with $118-billion trade with each. Whereas India has a trade deficit of $85 billion with China from where it imports large volumes of manufactured goods, India has a surplus of $37 billion with the US, which is India's largest market for software services. India must tread carefully not to annoy either the US or China. China straddles its northern borders, where tensions continue to simmer. It has become imperative for India to build its own industrial capability, despite Trump's pressure to abandon Make in India.
In 1990, China and India were two equally poor large countries. China's economy and per capita GDP is five times larger now. China's manufacturing sector is seven times larger and its high-tech exports are 43 times higher than India's. The remarkable growth of China's manufacturing sector, and especially its high-tech exports, has alarmed the US. It is the provocation for Trump's campaign to Make America Great Again.
India and China's manufacturing sectors were similar in 1990. India had even established better capabilities in the production of machinery, electrical equipment, commercial vehicles and other capital goods. India-made trucks and power equipment were exported to many countries.
In 1991, India had to turn to the IMF for financial assistance. With the IMF came the Washington formula: Open borders to trade; reduce tariffs drastically; let citizens enjoy products from around the world; dismantle the public sector; abandon industrial policies. China did not succumb to the US ideology; India complied more easily. Now India, like the US, is importing a large range of manufactured products from China, including high-tech ones.
Trump says India's import duties are too high and must be reduced across the board. India has reduced duties on Harley Davidson motorcycles. Trump wants India to reduce duties on all manufactured products and on agricultural products also to enable America's own, highly subsidised, corporate farmers to expand their markets in India. India is resisting, and it must, because its millions of small and poor farmers need higher prices for their products to improve their standard of living.
Indo-US trade negotiations have begun with a declared aim to increase India-US trade to $500 billion annually by 2030. India is being threatened to reduce barriers to imports of US agriculture and manufactured products. Plus, there are apprehensions of dampeners on Indian IT exports to the US. Thus, India-US trade can be increased only by a huge influx of imports from the US. This will reduce the growth of jobs and incomes in India and weaken its economy.
Trump calls India's policies to Make in India 'protectionist' while he is raising trade barriers around the USA, even against tiny Pacific Island countries on whom he has announced reciprocal tariffs! Indian industries have been hoping that US restrictions on Chinese imports will result in openings for India, Vietnam and others to replace China in US supply chains. With Trump adding an additional 34 per cent duty on China, these countries fear that Chinese manufacturers will aggressively sell their products to them instead.
Indian businessmen are already pressing the government to make it easier for them to import Chinese products. To import and sell is easy. Learning to make in India is harder. The time has come for India's manufacturers and the Indian government to stand up against bullying by Trump and his corporate friends and to make India great.
