India’s tit-for-tat policy in its trade war with the United States: A master stroke or miscalculation?

India has long had a field day putting tariffs on American products. No longer acceptable!

Because the G-20 failed to restore the international trade order, on 9 July 2019 American President Donald Trump fired off yet another Twitter attack. This tweet from the US President was posted after a few days of the G-20 Summit, when he met Indian Prime Minister Narendra Modi at the sidelines of the G-20 Summit late last month, where the two leaders agreed upon further meetings to resolve the escalating matter of trade disputes which included import quotas on agricultural goods and to put price caps on medical devices. The other hindering topics included:  outsourcing of intellectual property protections on generic drugs. Moreover, ever since taking office, President Trump has focused on reducing bilateral trade deficits to reduce national security impact of steel and aluminum imports, however, a deadlock was avoided up until the recent but significant change in Prime Minister Modi’s approach after getting elected for a second term.

The decision to revoke India’s status for special trade treatment and the slap back tariffs by India on US goods and services has quickly led Washington and New Delhi towards an impasse. The desire 0f the Modi  government to please domestic constituencies has further aggravated the situation to a tit-for-tat stand-off and India has escalated a trade battle by slapping new tariffs on American goods, a battle that was never worth fighting and may now indeed backfire. Furthermore, India had announced retaliatory tariffs back in June last year, but they were recently implemented. The 120% tariffs on US goods and services are limited in nature and largely symbolic but show a shift from restrain to a tit-for-tat policy by India. Modi government’s shift backward on market openness, with increasing tariffs on a few dozen goods, new regulations on e-commerce and a push for data localization in its growing digital economy is what has upset the Trump administration.

This shift in policy has further frustrated the Trump administration as they view this as an increasing hurdle to access Indian markets. However, these tariffs do seem to have brought Washington back to the negotiating table after all.

Like China, India sells a lot more to the US than it buys from it and its decision to retaliate with higher tariffs is a strategic miscalculation. This does send a message to the world, especially Washington, that India is no pushover. This hardline stance with the US will do India more harm than good. Trade in goods and services are skewed in India’s favour and give Washington a much bigger target, if it chooses to hit New Delhi back. 

India still has some cards at play as Trump still wants easier access to India’s vast market and would love a bigger slice of the Indian market. The biggest concern of Indian policymakers is that Washington may push for a free trade agreement with New Delhi that could put a dent in India’s competitiveness on a global level, leading to a flurry of imports, and could hurt Modi’s “Make in India” plan, a plan on which his election campaign was based and helped him get re-elected to the office. “Make in India” plan is all about pushing nationalist policies with higher tariffs on everything from electronic goods to tighter controls on foreign firms in the fast-growing e-commerce market to help foster domestic companies and create jobs for millions of Indian youth. However, India does not have the same economic leverage as China, which targeted US goods worth $110 billion and threatened to blacklist foreign companies within its borders. 

If the situation escalates, India does not have the negotiating position or power that China currently enjoys and will have to backtrack if the trade war will affect Indian interests in the long run. Whether Modi is calling Trump’s bluff remains to be seen. 

Indian economy cannot afford a damaging trade fight, with GDP growth slumped to 5.8% in the quarter ended March (the slowest rate in two years). Thus, this seems a desperate attempt on India’s part to attempt to remind Trump administration of how India matters to larger U.S. interests and the trade grievances do not escalate into an all-out trade war. They will remind Washington how they are the world’s largest democracy, have just become the world’s fifth largest economy, per recent International Monetary Fund data. How India acts as a counterweight to China for US in the Indo-Pacific region and is an important player in the geo-politics of the region. They will also further push their point by displaying India’s status as an emerging open Internet economy. 

The Trump administration is alarmed by India’s increasingly protectionist stance, especially in technology, where it recently changed the rules to favour local e-commerce companies over Amazon and Flipkart, a major e-commerce site controlled by Walmart. India is reluctant to commit to any changes to foreign investment rules for foreign e-commerce firms such as Walmart’s Flipkart and Amazon, thus forcing the two American companies to rework their business strategies for India. The matter is expected to be further complicated as conversations are also expected to address more substantive disputes between US and India, India’s planned purchase of Russian-made S-400 air defence systems and American embargo on Iranian oil. President Trump’s desire to impose sanctions if India purchases oil from Iran and if it goes ahead with plans to buy Russian S-400 anti-aircraft missiles would be interesting to see in the coming months.

So far, the two governments have shown little sign of compromise on a series of protectionist measures and have strained ties between them in recent months. Avoiding a trade war will require Washington and New Delhi to address the populist pressures weighing on Trump’s 2020 bid. What also remains to be seen is if New Delhi imbibe a bit of transnationalism in its approach. International trade is not a zero-sum game and the trade war is becoming a thorny issue that needs to be addressed keeping the complex dynamics at play and only time will tell if India’s tit-for-tat response will be a master stroke or a miscalculation. 

The author Mohammed Abrar Khan has a Bachelor’s degree in Social Sciences with a major in Political Science from IBA, Karachi. He is currently working at the Pakistan Business Council as a Policy and Development Trainee. 

Sources:

//economictimes.indiatimes.com/articleshow/69897167.cms?from=mdr&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

https://www.nytimes.com/2019/05/31/business/trump-india-trade.html

https://edition.cnn.com/2019/06/17/business/india-tariffs-us-economy/index.html

https://www.bbc.com/news/world-asia-india-48482988 

https://www.bbc.com/news/world-asia-india-48650505

https://www.aljazeera.com/ajimpact/india-officials-meet-resolve-trade-issues-190712050159768.html

https://ustr.gov/countries-regions/south-central-asia/india

Leave a comment

Filed under Discussion, Economy, India, Pakistan, Politics, Trump, United States

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s