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Abu Dhabi, UAEWednesday 27 March 2019

Trade squabbles between the US and India ramp up over duty-free tariffs​​​​​​​

Donald Trump's decision to stop preferential treatment on some Indian exports is further increasing tensions

Workers dye fabrics inside a dye factory at an industrial area in Mumbai, India. Textile exports may be at risk amid US-India duties wrangle. Reuters
Workers dye fabrics inside a dye factory at an industrial area in Mumbai, India. Textile exports may be at risk amid US-India duties wrangle. Reuters

Sanjay Jha is lobbying the Indian government to stop US President Donald Trump from withdrawing India’s preferential trade status, which allowed duty-free tariffs for hundreds of products exported from the subcontinent nation to the US.

As chairman of the Confederation of Indian Textile Industry, he is concerned how the move will affect clothing traders in India, particularly those handling silk dresses, which benefit the most from the duty-free allowances. Under Mr Trump’s plans, silk dresses from India will be slapped with import duties of 6.9 per cent.

“We’re taking up the matter with India’s commerce ministry and we hope the status quo is maintained,” says Mr Jha.

Mr Trump announced his intentions to end India’s preferential trade status earlier this month, giving 60 days’ notice. India is the world’s largest beneficiary of what is known as the generalised systems of preferences programme, with $5.6 billion (Dh20.57bn) of its exports to the US enjoying duty-free benefits in 2017. The tariff dates back to the 1970s, when it was set up to assist developing countries.

India and the US have been locked in numerous contentious trade squabbles recently.

Sonal Varma, Nomura

The US is India’s second-largest trading partner after China, with exports to the country surging over the past decade by more than 130 per cent to $47.9bn in the financial year to the end of March 2018, according to figures from the Indian government.

Along with certain textiles products, other affected goods include car components and chemicals. However, Indian Ministry of Commerce has played down the impact of Mr Trump’s move, saying the duty-free benefits only amount to savings of $190m a year, with exports to the US under the programme totalling less than 0.2 per cent of the country’s gross domestic product.

Economists say the end of India’s preferential trade status may not have a huge direct economic impact on the country, but it is a sign of intensifying trade tensions between the two countries.

“India and the US have been locked in numerous contentious trade squabbles recently,” says Sonal Varma, the managing director and chief economist at investment bank Nomura. “India’s exclusion from the list seems to be precipitated by the US’s frustration at making progress on market access issues with India.”

The US government says the decision followed India’s failure “to provide the United States with assurances that it will provide equitable and reasonable access to its markets in numerous sectors”. It also says India had “implemented a wide array of trade barriers that create serious negative effects on United States commerce”.

Mr Trump, who has an “America first” stance, has previously referred to India as “the tariff king”, with trade relations between the two countries strained for some time. A number of countries, including China, have been targeted by his protectionist measures.

Mr Trump says India charges the US high tariffs, as much as 100 per cent, while it enjoys duty-free benefits sending its own products to the US. The president’s preferred example to illustrate his criticism is Harley-Davidson motorcycles, as the company pays duties of 50 per cent on all motorbikes imported into India.

Such scenarios fuel the imbalance in trade. Goods and services trade between India and the US reached $126.2bn in 2017, according to US government figures.

But with imports to the US from India outweighing its exports flowing into India, the deficit with India in that year was $27.3bn, the data reveals.

A number of other factors have sparked disagreements between the two countries in the lead up to Mr Trump’s plans to scrap India’s preferential trade status.

Last year, the US hiked steel and aluminium duties for countries including India. India announced retaliatory tariffs on 29 goodsimported from the US, including apples and chickpeas. India has repeatedly delayed imposing these tariffs, however.

Resentment in the US also arose when, in February, India introduced a new foreign direct investment policy for its e-commerce sector at short notice. This targets US companies Amazon and Walmart, which are both investing heavily in India's e-commerce sector. Sweden's Spotify launched in the country recently. Walmart last year forked out $16bn for a majority stake in online shopping company Flipkart. The new rules have placed restrictions on deep discounts and ownership stakes in companies selling on their websites. Walmart described the sudden change in rules as “disappointing”.

Abhishek Bansal, the chairman of Abans Group of Companies, an Indian financial services group, says “the US might use [the latest move] as a pressure building tactic on India”, but given that the countries have a “long-term relationship”, he says it is unlikely there will be a lasting effect.

Analysts say the concerns for India go beyond the economic impact of the end to duty-free tariff benefits and trade relations with the US.

“The direct impact will be small,” writes Shilan Shah, the India economist at Capital Economics, in a research note.

“Even in the unlikely event that all affected exports dried up, the macro impact on India would be negligible.”

But he says the step “should nevertheless give Indian policymakers some food for thought”.

India has also gone down the path of protectionism, as Prime Minister Narendra Modi’s government strives to get companies to manufacture more goods within the country rather than depending on imports, in an effort to boost the economy and create jobs.

“Several protectionist policies including higher import duties have been implemented by India over the past year,” says Mr Shah.

“If other countries chose to retaliate that would have a much more notable impact on the economy.”

A statement from the Indian government indicates that it believes its tariffs are reasonable, given it is a developing economy. It also highlights that the US trade deficit with India is only set to decrease over the coming years as the country’s demands for energy and plane imports from America rises.

Analysts widely speculate that the Indian government may be downplaying its concerns over Mr Trump’s threats because general elections are set to begin in April.

Some experts say because of elections, India could hold back from launching the retaliatory tariffs it has been threatening since last year.

“India shares a strong bilateral relationship with the US and negotiations between the two countries are ongoing,” says Ms Varma.

“Given the advanced stage of trade talks, India is likely to continue postponing retaliatory tariffs until an agreement is reached.”

There are others, however, who believe Mr Modi might want to impose the retaliatory tariffs as a show of strength.

SK Sarkar, the president of the Indo-American Chamber of Commerce, says Mr Trump’s announcement will not result “in any kind of a trade war or any kind of breakage of economic relations between the two”.

He says that India needs to develop its trade relations with the US further, “and more broadly, ties with the country are excellent”.

It’s high time we push for a free-trade agreement with the United States, which would help expose India to global standards,” says Mr Sarkar.

“The long-term benefits would be significant.”

Meanwhile, Mr Jha has more immediate concerns, as he tries to make his case for the textiles industry.

He is hopeful that Mr Trump’s decision could still be rolled back.

Updated: March 16, 2019 07:05 PM

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