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USA Turned Strongest Trade Ally, Despite India’s Retaliation – Analysis

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It is perplexing. Notwithstanding India’s staunch protest and retaliation against USA’s protectionism, the USA became the biggest trading partner of India in 2018-19, toppling China. Till then, China was holding the top position since 2013-14. Interestingly, and rather sarcastic, the difference between USA and China to become India’s large trading partner are diagonally opposite to each other.

The gear for USA’s leapfrog was its bulging imports from India against feisty Trump’s hell bent for protectionism under America First policy, China’s leadership in trade buoyance with India was its exports to India. In terms of propitious trade relation, USA’s linchpin augers well, since this will help India to dwarf trade deficit, against China , which had been the cause of widening trade deficit.

Trade confrontation spurred with USA abrogating GSP benefits and imposing high tariffs on imports of steel and aluminum vis-à-vis India retaliating the move by raising tariffs on 28 items of imports from USA.

In 2018-19, India’s exports to USA posted a higher growth rate than its average growth of exports to world. Exports to USA increased by 9.5 against India’s overall growth of exports by 8.7 percent. Against this paradigm shift, India’s retaliation by high tariff , as a counter challenge to USA’s withdrawal of GSP benefits and high tariffs on steel and aluminum, is likely to dent the heyday of India-US trade relation. It connotes imprudent and untimely, when export has become the need of the day to reboot the sagging economy and employment generation.

The insightful analysis reveals that USA’s protectionism will have marginal impact on India’s exports. According to one estimation, Indian exporters have been deriving nominal benefits from GSP. It was US $ 190 million a year out of worth US $ 5.6 billion. Hence, withdrawal of GSP by USA will have slender impact on India’s exports.

So is the case with USA’s high tariff on steel and aluminum. USA accounts for only 4 percent of India’s export of steel and 6-7 percent of aluminum exports. Both these are not the principle items of India’s exports. Eventually, USA’s high tariff on the these items will have thin impact on India’s overall exports.

Given this impact of trade confrontation between USA and India, it will not be unrealistic to arrive at the conclusion that India will be more loser than USA in retaliation. It is not only the merchandise exports for which India depends on USA substantially. Service exports and foreign investment are the areas, where India depends on USA substantially. Both are important parameters for its external economic health.

IT and BPO services are the major component of India’s service exports. Here also, USA is the major destination of India’s exports. Over half of its IT and BPO exports go to USA. Besides, USA is the potential hub for job opportunities for IT services.

Major items of India’s exports to USA are petro products, drugs and pharmaceuticals, textiles, readymade garments and precious stones including diamonds. They account for more than half of India’s exports to USA. The trade figures of India’s exports to USA decipher that high growth in India’s exports to USA in 2018-19 was driven by textiles, precious stones including diamond and small machinery.

Besides trade, the significance of these exports is that they are labour intensive products. These industries are the potential hub for job creation. Given these, trade expansion with USA has multifaced implications on Indian economy, besides trade.

In fact, Indian Prime Minister Narendra Modi also upped the ante of protectionism at home. In December 2017, import duties were raised on various electronic items, including mobile phones, microwave ovens, cameras and others. The move was viewed as a step to bolster employment through incentivizing domestic industries. It did not end here. The move was further accelerated by imposing high tariff barriers on auto components, CBU motor vehicles, bus and truck and electronic goods in the budget for 2019-20.

India reverted to import substitution program to inject a new lease of life in the Make in India initiative. In 2016, Ministry of Urban Development made it mandatory to procure railway equipment for metro projects from domestic sources. According to the policy, a minimum of 75 percent of metro coaches and critical signaling equipment are to be procured from domestic sources by the Central and State level metro project authorities.

India is far behind of USA’s trade muscle. It accounts for one-sixth of India’s exports. As compared to this, India accounts for merely 2 percent of USA exports. Given this, the situation advocates for a patch up of the disputes, instead of fueling the confrontation by retaliation method. India needs USA more than vice-versa. According to an estimation, a 10 percent shift in US imports due to US-China trade war would give an annual boost of 20 percent India’s exports.

Some analysts were irked by India’s tariff retaliation. They portend that the action will open Pandora Box. Evidently, Trump’s post G-20 tweeting on high tariff “unacceptable” raised concern among the Indian trade negotiators.

Views expressed are personal

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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