Ramping up trade tensions with US doesn't bode well for Indian economy
The impact of tit-for-tat tariffs may have little monetary impact but could pose a lasting threat to trade relations
Trade tensions between India and the US are at risk of intensifying, posing concerns to Asia’s third-biggest economic power house. In recent months, the country’s growth has lost steam along with its title of the world’s fastest-growing major economy, analysts say.
India and the US have engaged in tit-for-tat tariff moves this month, escalating what has been a drawn-out trade dispute between the two countries. “If these issues are not resolved in an urgent manner, and given the present leadership in the US, there is a greater possibility that the trade tension might escalate to the next level,” says Deepthi Mathew, an economist at Geojit Financial Services, based in Kerala.
Tensions between New Delhi and Washington have heated up ahead of US Secretary of State Mike Pompeo’s visit to India this week, where he will meet Prime Minister Narendra Modi.
On June 15, India imposed retaliatory tariffs on 28 products imported from the US including almond and apples – a move it had been threatening since last year. New Delhi finally acted on the threat after US president Donald Trump, starting June 5, scrapped India’s preferential trade status, which had allowed the country to enjoy duty-free benefits
on hundreds of goods exported to America. In 2017, $5.6 billion (Dh20.6bn) of products exported from India to the US were covered by this programme.
Mahesh Singhi, the managing director of Singhi Advisors, an investment bank in Mumbai, says the trade tiff is an “unnecessary and avoidable development in an otherwise cordial trade relationship between the two countries”.
With India’s economic growth slowing to a five-year low in the quarter between January and March, Mr Singhi says the state cannot afford the situation “to spin out of hand”.
Exports to the US, which include diamonds, pharmaceuticals and textiles, are critical for India to maintain exports momentum.
The US is India’s second-
largest trading partner after China. Exports to the US from India have surged over the past decade by 111 per cent, reaching $54.4bn last year, according to US government figures.
The value of goods exported to India from the US is far lower, however, at $33.1bn in 2018.
“India has a trade surplus with the US and in such a scenario, India won’t be in a position to prolong its tariff war as it could cause serious damage to the export sector,” says Ms Mathew.
She points out that Indan sectors which export to the US are “labour-intensive”, and therefore, if trade is affected, it could “result in more damage to the unemployment situation in the country”.
The dispute is rooted in the fact the Trump administration does not feel the US is getting equal access to India’s markets – which was cited as reason for withdrawing trade privileges.
India said the removal of preferential status will only have an impact of about $190 million a year. It is the effect on overall relations that is a bigger concern, analysts say.
President Trump, who is well known for his “America first” policy, has been fiercely targeting China with his protectionist measures, and the trade discord with India has been brewing for some time.
Mr Trump criticises India for its high import duties – in some cases as much as 100 per cent – while enjoying duty-free benefits in the US. An example he has illustrated is of Harley-Davidson motorcycles, which incur 50 per cent import taxes in India. Though, all motorbikes that are imported into India are taxed at this rate.
Sujan Hajra, the chief economist and executive director at Anand Rathi, a financial services company in Mumbai, says he does not think the matter is really about America’s displeasure with “the trade surplus” with India. Instead, there are other “bigger issues the US is not happy about” such as India’s new data localisation law and defence equipment purchases from Russia. Certainly, the latest actions are “not a welcome development”, but he says it is not in the interest of the US or India to exacerbate the row.
Along the way, there have been other developments that have added fuel to the dispute.
Last year, the US raised steel and aluminium duties for countries including India, which angered New Delhi, and for the first time, India threatened retaliatory tariffs.
US also pressured India to stop importing crude from Iran in May, when it ended sanction waivers. India, which relies heavily on oil imports to fuel its economy, was dependent on purchase of Iranian oil at very attractive rates.
Meanwhile, Washington was caught off guard in February when New Delhi, at short notice, introduced a new foreign direct investment policy for e-commerce. The legislation has affected US retail giants Amazon and Walmart, which have both injected massive funding into the sector in the Asian nation.
Walmart last year shelled out $16bn for a majority stake in Indian online shopping company Flipkart.
Reserve Bank of India also imposed last year a new data localisation law that requires payment companies to store data on local servers. This has implications for global payments giant MasterCard and other US companies.
Concerns over relations between the two nations also came under the spotlight last week, when a Reuters report citing US officials said that America is looking to cap the number of H-1B work visas it issues for countries which have imposed local data storage laws. India secures about 70 per cent of these visas and many companies that are part of its $150bn IT industry rely on this scheme to send skilled workers such as software developers and engineers to the US.
In a statement in response to the report, the US State Department denied it was looking at imposing such caps in retaliation to India’s data storage rules. However, the authority said it has long been known that “the Trump Administration’s ‘Buy American, Hire American’ executive order called for a broad review of US worker visa programmes, including the H-1B programme”.
Possible cap on H-1B remains a source of worry for India.
Mr Singhi, however, believes the escalation in tensions will turn out to be a “minor and temporary hiccup”.
He says India’s introduction of the retaliatory tariffs can be “seen more as a face-saving gesture by the newly elected government to show to the world and people at home that it would not buckle under pressure from any country, however powerful it is”.
The two states would not want to let the trade dispute grow any further at this stage, Mr Singhi says, because “both India and the US need each other’s markets more than ever”.
“For the US it already has an ongoing and ever-escalating trade war with China, one of the largest markets for the US goods on hand, and hence it could ill afford to open another battle front in the trade war by escalating trade tensions with India,” he says.
India is an important market for many American companies in sectors including aircraft and medical goods.
With emerging markets such as India gaining significance in terms of global consumption trends, both countries would adopt a practical strategy because both need market access, says S Ranganathan, the head of research at LKP Securities.
Mr Pompeo, ahead of his arrival on Tuesday, has already indicated that the US is open to talks to resolve the issues. The visit will pave the way for negotiations between the two countries at the highest level at the G20 summit in Osaka in Japan later this month.
Mr Modi and Mr Trump are set to meet in Japan, and trade concerns are likely to be high up on their agenda, analysts say.
Updated: June 23, 2019 11:52 AM