Trade war or pact: What’s next for India and US?

Opening a new front in Trump administration’s trade war, India has decided to impose retaliatory higher duties after first announcing them in June last year

After months of postponement, India has announced it will raise tariffs on US imports, signalling an escalation in the trade war. Opening a new front in Trump administration’s tariff war, India has finally stepped up and decided to impose retaliatory higher duties after first announcing them last June.

There will be no further extension, government sources said Friday, adding that the commerce and external affairs ministry are on the same page regarding the decision. A notification will be issued soon but it is expected to take effect on June 16.

The proposed retaliatory tariffs, imposed against the US plan to levy 25% and 10% tariffs on certain steel and aluminum imports, respectively, are expected to bring in an estimated $217-235 million in additional revenue for India. The commerce department has said this will offset the losses incurred after last year’s steel and aluminium tariffs, which kicked off the trade war.

Finer details

Import taxes—higher by up to 50%—will be levied on 29 agricultural and industrial US goods, including almonds, apples, pears, walnuts, pulses, shrimps, boric acid, and diagnostic reagents, according to The Economic Times. There are some iron and steel products, too, including flat-rolled stainless goods, alloy steel, tube and pipe fittings, screws, bolts, and rivets.

While the import duty on walnuts is likely to be raised to 120% from 30%, that on chickpeas, Bengal gram, and masoor dal could be hiked to 70% from 30%.

India ranked third as a destination for US apple exports in 2017, purchasing $97 million of US apples, or 10% of total exports, as per US government data.

How did we get here?

Standing up to increasing pressure on bilateral trade and commerce, the move follows Washington’s suspension of India’s preferential trade status under the Generalised System of Preferences (GSP) earlier this month, citing failure to meet eligibility criteria.

According to the US, India failed to give “assurances that will provide equitable and reasonable access to its markets in numerous sectors”, implying that while India is trading duty-free in the US, American products are paying import taxes. First announced in March, the US government later promised not to suspend benefits under the GSP scheme, until the general elections were over.

Finally taking effect on June 5, the move now stands to affect 3,500 Indian goods and benefits worth $190 million a year, and effectively demotes India from a beneficiary developing nation.

India’s retributive measure also arrives in the wake of the US curb on importing Iranian oil in April and tightening visa restrictions for India migrant students and workers. Experts presume the changes introduced to the H1-B worker’s visa starting this season will not only cripple the American labour sector but also deliver a huge blow to the prospects of Indian workers and students in the US.

The start of the trade war

In 2018, the US first announced it will increase duties on steel and aluminium exports on a number of countries, beginning notably with China, followed by India.

India, exporting steel and aluminium products worth about $1.5 billion to the US every year, is one of its biggest suppliers. The hiked customs led to a $240 million revenue loss for the domestic industry, over which New Delhi has even dragged Washington to the World Trade Organisation.

Last June, India broached the prospect of introducing retaliatory measures for the first time, with the same taking effect in August; however, they were deferred eight times since, due to ongoing dialogue between the two nations.

On that front, US commerce secretary Wilbur Ross on Thursday asked New Delhi to remove restrictive market access barriers for American companies and ignored the request to exempt India from the higher steel and aluminium tariffs.

India was only the 13th largest export market for America, Ross pointed out, while the US is India’s largest, accounting for 20% of all its exports. 

Friday’s announcement also follows a discussion on the subject of retaliatory taxes between Commerce and Industry Minister Piyush Goyal and US Ambassador to India Kenneth Juster last week.

Trump and protectionism

Trade differences and simmering tensions continued over the last year, marked predominantly by Donald Trump’s relentless reference to India’s policies as “unfair trade practices”. He has singled PM Modi out on numerous occasions, accusing his government of imposing unnecessarily high tariffs on US goods, citing levies on Harley Davidson motorcycles.

India had, in fact, cut customs duty on motorcycles to 50% from 100% in 2018 after Trump raised the issue. But unfair duties were not the end of his grievances; the US trade deficit with India, which stood at $27.3 billion in 2017 and India’s new e-commerce rules have also drawn the ire of US lawmakers and industrialists alike.

In the weeks leading up to the withdrawal of GSP benefits, Trump described India as the “tariff king” and issued numerous threats to “punish India” for “stupid trade”. Addressing a four-day annual Conservative Political Action Conference in April, the US President, known for his ‘America First’ policies, threatened to match New Delhi’s heavy duties with “a reciprocal tax”.

At the Republican Jewish Coalition in Las Vegas the same month, Trump had said, “We have a case where a certain country,” he said referring to India, “[…]what great country, a great friend, Prime Minister Modi—charging us over 100% for many things.”

Calling out Modi for the trade imbalance with the US, he ramped up the anti-India rhetoric, saying, “I have Senators who say, you can’t do that. It’s not free trade. Where did they come from?”

“Who the hell makes these deals? Those are not good negotiators. Actually, Democrats made a lot of them though. But Republicans met a lot of up too[sic], that’s the amazing thing. They made USD 800 billion. But we’re getting it back. We’ll get to give back. We’re going to be getting a lot of it,” he is reported as addressing the convention.

What’s next

Notably enough, the growing friction between India and US did not seem to have led to decelerated US exports to India, which according to the Washington Post, have grown by 25% in the last 12 months.

India’s exports to the US in 2017-18 stood at $47.9 billion, while imports were at $26.7 billion. So, the trade balance is in favour of India for now.

But these developments will foreground the upcoming G20 Summit where Modi is likely to meet Trump; he has already called out American protectionism at the ongoing SCO meet in Kyrgyzstan.

Experts are of the opinion that all this will lead to a bilateral trade pact more in line with Trump’s demands, and one that makes India sign away concessions on e-commerce. To de-escalate the situation, analysts have called for caution in responding to increased pressure from the US.

There is legitimate concern that rising stakes in the trade war will also have an adverse impact on other aspects of India-US relations, especially in terms of political, strategic, and security issues.

Last year, both countries arrived at a landmark deal to develop India’s nuclear power for civil use, with the US funding the construction of six reactors. New Delhi is also a crucial ally in Trump’s war on Beijing, as a regional power in the SAARC region. Crippling one of the fastest growing economies is not a good move if the US really wishes to take on China’s exponential growth.

US Secretary of State Mike Pompeo is arriving in India for bilateral talks with External Affairs Minister S Jaishankar next week. Pompeo said on Thursday that the US was open to discussions on the GSP.

Prarthana Mitra is a Staff Writer at Qrius

Indo-USTrade war