Trade War Is Back: Time For India To Go For FTA With USA, Instead Of Retaliation – Analysis

The US-China truce is broken, and the threat of a trade war has returned. The USA alleges that China has backtracked from its previous offers. USA activated a new 25 percent duty on US$200 billion worth of exports from China , effective from 1st June. China upped the retaliation ante. Can India afford to retaliate?

India is not far from the pounce of a USA high tariff trade war. President Trump slammed India for high tariffs, tweeting that it is a “tariff king” and accused the country for trade deficit with USA. During the recent bilateral trade meeting, the visiting US Commerce Minister Willbor Ross blamed India for “overly restrictive” tariffs, which brought a jolt to USA’s exports to India, and eventually caused a trade deficit with India. He said that India ranked 13 of USA’s exports because of high tariff. Whereas, USA is the biggest export destination for India.

India hogged a blemish for “ unjust trade” and fell in the warrant list of the USA’s high tariff cudgel. The USA fixed India in watch list of 301 and threatened to withdraw GSP benefits as a counter attack on India’s price cap on medical devices, such as cardiovascular stent and knee implants. It also threatened to drag India in WTO Dispute Settlement Body on export subsidies. India lost the entitlement for subsidies after crossing the cap of US$ 1000 per capita income level. In retaliation , India threatened to impose high tariff on 29 items from USA.

The slugfest between India and USA will linger as no side bows for adjustment. Against this backdrop, the FTA ( Free Trade Agreement) could be a recourse to resolve the trade dispute. US Ambassador to India Kennth Juster mulled for FTA between USA and India . A top American business advocacy group , US-India Strategic Partnership Forum ( USISPF) , asserted for FTA. It believed that FTA would be key to resolve the trade irritants. The President of USISPF believed that “ Once you have FTA, all the issues of tariff will go away”.

The USA is the second biggest trade partner of India, after China. In 2017-18, USA accounted for 9.7 percent of India’s total trade. Incidentally, India’s trade relation with China and USA countries are diagonally opposite to each other. While China is the trigger for trade deficit, USA is a pivotal for export growth , yielding trade surplus. It helped in offsetting a chunk of trade deficit, triggered by China.

In 2017-18, USA’s trade surplus offset 13 percent of India’s total trade deficit. Against this backdrop, a lesson can be drawn for India before vying for retaliation against USA .

In trade and investment relation, USA is more significant to India than vice–versa. USA is the biggest export destination for India and a major foreign investor. To this end, any retaliation by India means opening a Pandora Box.

The USA is the backbone for India’s export growth. In 2017 – 2018, it shared one sixth of India’s export , accounting for 15.8 percent. It is a gear to India’s export growth. For example, in 2017-18 India’s a total export surged by 10 percent and USA was the main gear to this growth. It shared 13.4 percent of India’s export.

In the basket of exports also, USA has been playing an important role. It is the biggest importer of ready made garments, marine products, diamonds and pharmaceutical , which are the major components s of India’s exports. Incidentally, besides earning foreign exchange and reducing trade deficit , exports to USA paves the way for generating employment opportunities in the India. This is because garments and diamonds are labour intensive industries.

Both World Bank and Peterson Institutes studies have predicted significant gains for both USA and India, if a free trade agreement is concluded. Before Trump, USA was believer in low tariff and opposer to protectionism. With an overturn d in trade policy under Trump regime, USA and India are in the same boat of protectionism with their aim for America First and Make in India respectively.

Given this, ethical wisdom suggests that India should advocate FTA with USA , which will not only bring two countries closer to each other, but will also quell Trump’s ire on India’s high tariff.

With tariffs done away under FTA, trade potential between the two countries will increase through trade related investment. USA has the advantages of technology and financial muscles and India has an edge in providing low cost of production base and big domestic demand. FTA will encourage US investors to invest in India in lure of low cost production, while importing high tech products duty free as inputs. Eventually, it will help in reducing trade deficit.

Manufacturing of mobile phone by USA investors can be a case in point. Currently more than 85 percent of component and material costs for making a mobile phone is imported. India produces only 5 – 10 percent of the billing cost ,which include casing, plastic and box packaging. Most of these components and materials are imported from China because of low price advantages. With basic duties on components and materials waived off under FTA, which are around 10 -12 percent, USA manufacturers will have an edge over the manufacturers, who are dependent on imports from China.

India is on the trend for heading towards a new manufacturing dynamism after digitization and automation , which embraces component base industries. These industries require technology and skilled manpower. FTA with USA will leverage a benefit of technology transfer through import of components and materials at low cost.

This will have a dual impact. On the one hand, on the behest of FTA, USA’s exports of inputs and capital goods will increase and will gear up US investment in India. On the other hand, USA’s exports will pose a big challenge to China’s low coat dumping of goods in India. FTA will bring win-win situation for both countries.

Views expressed are personal