Tags: Financial Markets | Trump Administration | gsp | new delhi | ireland | vietnam

Is an Indo-US Trade War in the Making?

current us commerce secretary wilbur ross

Commerce Secretary Wilbur Ross in the Diplomatic Room of the Eisenhower Executive Office Building on the White House Complex, late last month in Washington, D.C. (Andrew Harnik/AP)

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Thursday, 14 February 2019 03:40 PM Current | Bio | Archive

Once thought to be impervious to shock waves that the Trump administration’s transactional diplomacy sent to other major countries, the bilateral relationship between the U.S. and India is testing its limits. Reports suggest that the United States might revoke a tariff concession, otherwise known as the Generalized System of Preferences (GSP), which successive U.S. administrations had extended to India since 1976.

While large exporters would remain unaffected, small businesses would bear the brunt of the potential U.S. decision, making the situations complicated for Narendra Modi who is already in hot waters for failing to create enough jobs for Indians.

Some observers are wondering whether the Trump administration has chosen to up the ante at a time when Modi is seeking reelection in the upcoming general elections and therefore would be sensitive to external pressure. Others are a little pessimistic, speculating if a trade war between the two friendly countries is in the offing.

However, given the trajectory of this development, it is unlikely for the latter scenario to unfold. It is, in fact, yet another example that shows how President Trump channels his business instincts into diplomacy—exploiting an opportunity when the opponents are not in their best form.

One of the chief reasons why a trade war between India and the United States is unlikely is that going hard on India would meet with more pushbacks than cheers. It is true that Trump ran on a campaign promise that he would reduce trade deficits.

But trade with India did not come up in Trump’s campaign and post-election speeches as prominently as it did with America’s southern and northern neighbors, Germany, and Asian juggernauts like China and Japan. Even while lamenting America’s trade deficits with those countries, Trump primarily leveled his criticisms at deficits in automobiles, electronics, and other manufactured products perhaps in an attempt to energize his core supporters that he could bring those offshore jobs back to America.

Given this context, Indian exports which mainly include precious metals, pharmaceuticals, and textile products should not worry Trump much. Moreover, the merchandise trade deficits with India saw a 6.1 percent decrease that is roughly equivalent to $1.5 billion in 2017.

It is not to suggest that the U.S. president should not focus on narrowing the trade deficit. However, it begs the question as to why India is being singled out when the United States runs greater deficits with Vietnam ($32 billion) or Ireland ($42 billion).

Those sympathetic to India can also point to the fact that when calculated in other ways, such as on a per capita basis or as a function of the trading country’s economy, India’s trade surplus with the U.S. seems less concerning. India had a $17 per capita trade advantage in 2017.

This dollar amount is calculated by dividing the U.S. deficit with the trading country by its population. For perspective, U.S. trade deficits per capita with Germany and Vietnam’s was $777 and $409, respectively.

Even when the U.S. trade balance is compared with the trading country’s economy, India does not enjoy that big of an edge. Let’s do some math. For every billion dollars of their respective economy in 2017, Germany and Vietnam enjoyed a $17 million and a $174 million trade advantage with the United States.

India’s trade advantage, on the other hand, stood at $9 million—one more reason why it would not be easy for Trump to sell his plan, if there is any, to wage a trade war with India.

But perhaps it is India that would not let disagreements over GSP blow out of proportion. The GSP is a Cold War-era program which was introduced to help support the developing economies. While India is beset with problems, its economy has come such a long way that it can withstand the potential loss of duty-free access for products that are only a fraction of its total exports.

In other words, it would be nothing short of irony if a country with a $2.6 trillion economy goes to great lengths to obtain no tariffs on exports valued at $5.6 billion.

While India might as well overlook the fact the Trump administration is eliminating the provision afforded by the GSP, it should be able to look at the larger picture here. White House officials are playing the GSP card because they know that withdrawing the tariff concessions would cause, if anything, only mild discomfort to Narendra Modi.

They want their Indian counterparts to know that Trump is seeking compromise on other trade policy areas, including the newly-introduced e-commerce policy which curtails the typical way American companies, such as Amazon, run their businesses.

Also, the U.S. administration wants India to relax its requirements for credit card companies to store their data in India and lower tariffs for American exports.

Thus far, India has taken a policy what can be tantamount to strategic restraint. India announced hiking tariffs on American products last year in response to the Trump administration’s increased tariffs on Indian steel and aluminum. But New Delhi’s tariff hike has yet to go into effect, meaning India is apathetic to escalating the trade disagreement with the United States.

Instead of tit-for-tat tariffs, New Delhi wants to resolve the differences at the negotiation table, and Washington should welcome talks.

U.S. Commerce Secretary Wilbur Ross was scheduled to visit India this week, which has been canceled today due to inclement weather. His trip was significant in that it would allow top officials to hear each other out and potentially hammer out plans to tackle the trade issues.

Now that it is not happening, the two countries should work out another high-profile visit. Direct contacts at the top level can often help defuse tensions, which is not unbeknownst to both India and the United States.

Arafat Kabir is a graduate student of political science at the University of Utah. He writes about South Asian politics, defense, and business with a special focus on Bangladesh. He is a contributor to Forbes Asia. His articles have also published in media outlets, including The Washington Post, The Wall Street Journal, The Diplomat, and The National Interest. He can be reached on Twitter at @ArafatKabirUpol. To read more of his reports — Click Here Now.

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Commerce Secretary Wilbur Ross was scheduled to visit India this week, which has been canceled today due to inclement weather. His trip was significant in that it would allow top officials to hear each other out and potentially hammer out plans to tackle trade issues.
gsp, new delhi, ireland, vietnam
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Thursday, 14 February 2019 03:40 PM
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