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Trump’s Trade Mantra: Heads We Win, Tails You Lose – Analysis

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By Seema Sirohi*

By threatening to withdraw preferential treatment enjoyed largely by small and medium-sized Indian companies just before the Indian elections, Donald Trump seems to be pushing a weaker partner on trade while succumbing to a strong adversary like China.

With India, his negotiators have taken a my-way-or-the-highway approach, which doesn’t allow compromise or meeting the other side in the middle.

Even allowing for India’s traditional cussedness on trade issues, Trump’s political and psychological need to dictate a “win” without giving an inch in return has hung over the negotiations.

On Monday, Trump sent a letter to the US Congress, saying the Indian government had failed to provide the United States “equitable and reasonable access to the markets of India.” He signaled his plans to take away duty-free access to the US market under the Generalised System of Preferences (GSP) — a move that could affect Indian exports worth $5.6 billion.

His decision was inevitable — he has repeatedly slammed India and Narendra Modi in public on the tariff issue, often in the most undiplomatic fashion.

India tried to minimise the impact given the awful timing. Commerce Secretary Anup Wadhawan said the impact of removing GSP concessions on Indian products would only amount to $190 million — not a huge figure, but important enough for small companies that benefit from duty-free entry into the US market.

Will India retaliate and make this an economic Pulwama? It has the option of finally imposing retaliatory tariffs first announced last June in response to US raising custom duties on steel and aluminium products but deferred several times because negotiations were ongoing. The next date for them to kick in is 1 April.

It is likely India would defer again and absorb the GSP blow, especially because the strategic situation post-Pulwama is complicated. The US support for India has been crucial and New Delhi would clearly like that to continue.

The firewall between strategic issues and trade disputes is best kept strong given the volatility of a certain leader. Compartmentalisation could be key at this time.

There is a 60-day period before the Trump Administration will take punitive action, a window in which negotiators could still try for an agreement although the prospects appear slim.

But the US Trade Representative Robert Lighthizer has left no room because the US announcement covers the entire gamut of products under GSP, not some, which would have left the door open somewhat.

Trump’s timing, both from a political and economic perspective, makes little sense. To land a blow on a friendly, democratic partner just before an already fierce and heated national election is insensitive and provocative.

From an economic point of view, the GSP decision makes even less sense. The US trade deficit with India has actually come down because of Indian imports of US oil and gas — the only country to register this trend — while US deficit with China is going up despite marathon talks, multiple summits and public cajoling of Xi Jinping by Trump.

Figures can better tell the story. The US trade deficit with India decreased from $22.9 billion in 2017 to $21.2 billion last year, according to US government figures. This happened as overall India-US trade grew to $126 billion, a 10% rise. US exports to India registered a 28% increase last year.

Both trends — reduction in the trade deficit and rise in trade — are expected to continue. But that didn’t seem to satisfy US negotiators who adamantly focused on the trees instead of the forest.

On the other hand, US trade deficit with China increased in 2018 to a record $419 billion. Despite reports that a US-China trade deal is nigh to be celebrated with yet another Trump-Xi summit at Mar-a-Lago at the end of March, there are no signs that the Chinese have taken any serious measures on two main demands — to stop stealing US intellectual property and reduce the trade deficit.

Thus far, no enforceable mechanisms to change the distorted US-China trade picture are in sight. All China seems to be promising is to remove retaliatory tariffs and buy some more US agricultural products.

The blowback from China’s retaliatory tariffs was real in the American heartland and Trump couldn’t face the music at home. US companies and voters have given him conflicting messages — they want to punish China but at someone else’s expense.

And Trump doesn’t have a real answer. He too will face an election in 2020 and he is doing the easy thing — being a strong man vis-à-vis India at little political cost.

During the negotiations, US negotiators kept adding to their demands, making it impossible for their Indian counterparts to keep delivering.

According to a detailed statement from India’s Ministry of Commerce and Industry, New Delhi offered “a very meaningful way forward on almost all the US requests,” including on medical devices and the issue of price caps.

American demands on market access for cherries, pork, and alfalfa hay were accepted. On dairy products, US was asked to certify that the cows were not fed “blood meal,” something the Europeans have done but US negotiators seem unwilling to. This is a religious issue and even Trump can’t change what Hindus believe.

On Indian tariffs on IT products, the Americans failed to grasp that any reduction on duties would ultimately benefit China, not the US. Even there, the India side was ready to reduce tariffs on specific items where the US would benefit.

If the Trump Administration wants to restrict Chinese giant Huawei on the one hand, it can’t be arguing for free access for Chinese phones on the other. One assumes that was not USTR’s real aim.

In the end, if you count all the market access complaints by Lighthizer, the figure comes to about $500 million. He chose to go down the path of confrontation for $500 million when the US is poised to gain an extra $4 to $5 billion a year in sales of oil and natural gas to India.

If you add the sale of an estimated 300 Boeing planes to various Indian airlines over the next few years, that’s another $30 billion. The first delivery is expected at the end of 2019. Not forgetting US defence sales to India, currently at $18 billion, are also expected to grow.

The big picture is bright even if the small picture for dairy farmers might be dim.

Observer Research Foundation

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

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