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Deepening India-US Defense Ties Sways India From Trade Retaliation Against US – Analysis

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India went one step forward and two steps back in retaliation against high tariffs on steel and aluminum by USA. Twice, it suspended its decision to impose high tariff on 29 items imports from the USA. By the original schedule, high tariff was to be imposed on 4th August. It was deferred to September 18 and further to November 2.

Skepticism rises over India’s real intention behind the trade retaliation against USA. A close study between the lines reveals India’s burgeoning dependence on defence ties with USA. Even though USA is the second biggest trade partner and a major foreign investor in India, its significance sparked with new dynamism in the relation, propelled by recent 2+2 Dialogue, which represented strengthening military ties with USA. What led India to revitalize the defence ties with USA, while it is still guide by Indo-Soviet Treaty, now with Russia.

Ever since the USA declared India a “Major Defence Partner” in 2016, focus on defence ties outweigh the economic relation. In this context, the recent 2+2 dialogue in between the two countries is significant. It resulted signing of Communication Compatibility and Security Agreement ( COMCASA). By this, it is considered that a journey has begun for consolidation of military ties between the two countries in the context of technology transfer and defence procurement.

Hitherto, Russia has been dominant player in defence ties with India. According to analysts , Russia has 67 percent stake in defence procurement. The existing system of procurement debars USA to supply defence equipment with transfer of technology. It is believed that COMCASA will pave the way to supply the equipment with transfer of high technology, which is mandated in the US law of Foreign Military Sales ( FMS).

FMS systems of sales, which include transfer of technology, mandate that the sales must be approved under Arms Export Control Act ( AECA) of USA and it will be authorized by President of USA. Under such stringent regulation, the important hurdle was US reluctance to share the technology in the context of India’s long binding relation with Russia.

Another important outcome of 2+2 dialogue was the readiness to begin negotiations on Industrial Security Annex (ISA). This will further open the window for greater scope for Indian companies to get latest technology.

The agreement on COMCASA and the launching of the negotiation on ISA will act a pivot to India’s Make in India initiative for development of its defence industries. Under this initiative, greater focus was made to open the defence industry to the private sector through policy parameters, such as broadening FDI participation in the industry.

The decision to start exchanges between US Naval Forces Central Command ( NAVCENT) and Indian navy will be another milestone for strengthening maritime cooperation in the Western Indian Ocean.

Besides defence ties, US sanction on Iran is another factor which hinges on India’s retaliation against USA. The sanction will be effective from 5th November, 2018. Iran is the third biggest destination of India’s crude oil import. It accounts for 10 percent of the total crude oil import. Amidst the global oil price volatility , which deepened energy crisis and is unlikely to impact on inflation, India needs earnest cooperation of USA for wavering the sanction. Against this backdrop, India seemed to have been drawn into dilemma to exercise retaliation against the USA.

Nevertheless, the retaliation has little significance in terms amount of impact on trade. The 29 items, which were identified for high tariffs, account for less than one percent in India’s total import from the USA. It was US $ 240 million out of total import of US$ 26, 611 million in 2017-18. Neither import of these items by India accounts for a big share in USA’s world export. Hence, this cannot be treated as “tit for tat” action against USA. . India’s major items of imports from USA are aircrafts, electronic goods, automobile components and non-electrical goods.

Contrarily, if India’s retaliation heightens US anger and bring more items under high tariff, other than steel and aluminum, India will be at more disadvantage position. Exports of ready-made garments and gems and jewelry ( particularly diamond and precious stones) are the cases , if brought under high tariff, will loose heyday. Both these items account for one-sixth of India’s total exports – garments with 5.5 percent and gems and jewelry with 9 percent shares in 2017-18. And, USA is the biggest importer of these two items from India. Both these items are under close lenses of USA , since India has violated WTO rules by continuing subsidy even after crossing the cap of $ 1000 per capita income a year. USA has already threatened to drag India into WTO dispute settlement body.

Against this backdrop, that is, precedence of defence ties to economic relation and basket of trade, the conventional wisdom suggests that India should refrain for escalation of retaliatory action against USA, just for tit-for-tit.

Trump’s high tariff trade war is against China, and India. His high tariff is a punitive action against China, which devastated USA’s domestic industry. China accounted for 47 percent of USA’ world trade deficit. It accused China and other emerging nations, who are export based economies, for reaping the benefits from liberal markets in USA by unfair means and not reciprocating by opening their markets.

India is far behind the USA in terms of a power game. In trade and investment, the USA is more significant to India and not vice –versa. USA is the biggest export destination for India and a major foreign investor in the country. It is the major turf for employment generation in India, since USA is the biggest importer of labour intensive products from India, such as ready-made garment and other textile products. To this end, India’s retaliation on tit-for tit may open a Pandora Box.

Views expressed are personal


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Subrata Majumder

Subrata Majumder

Subrata Majumder is an adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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