In the time when the whole world is engulfed by trade war, it takes many in surprise when India contemplates to retaliate against the USA’s challenges to India’s export subsidies and the USA’s high tariffs on steel and aluminum. On June 20, Ministry of Finance listed 29 items of imports from the USA through custom notifications, which would attract higher import duties, if the negotiations between the two countries fail. A high level US delegation will be visiting end-July for the negotiation. Duties will be applicable from August 4.
India is far behind the USA in terms of power game. In trade and investment, the USA is more significant to India than vice–versa. The USA is the biggest export destination of India and a major foreign investor and not vice versa. The USA is the major turf for employment generation, since the USA is the biggest importer of labour intensive products from India. To this end, any retaliation by India warrants a major dent to its exports and economy .
On March 14, USTR (United State Trade Representative) made a move under WTO for consultation with regard to India’s entitlement for export subsidies. The USA alleged that India lost the paradise of granting export subsidies to its exporters after it crossed the benchmark of US$1000 per capita. Under Article of VII of Agreement of Safeguard and Countervailing, a country, having its per capita income more than US$1000 consecutively for three years, will be stripped of the facility for providing export subsidy. India has crossed the threshold limit since 2013.
Further, under Article IV of the agreement, if the export of certain sector of a country exceeds 3.25 percent of global exports – a benchmark mandated by WTO – the country will loose the power to provide export subsidy for this sector. India’s export of textiles is a case in point. India’s export of textile crossed the threshold limit in 2010. If the rule for 8 years’ phase out period is levied, which India claimed, the year 2018 is the end year for subsidy on textile.
Given these caps under rule base multilateral trade , India has less chances to safeguard itself from the USA’s challenges for violating WTO rules. Paranoia looms large whether India will be able to secure a further gestation period for phasing out its subsidies in the negotiation. Will India be able to place convincible arguments to seize its entitlement for subsidy?
From the angle of national spirit, retaliation is a good challenge. But, national spirit cannot play pivotal role in cross-border trade , when the challengers are not on equal foot in terms of trade muscles.
USA accounts for 16 percent of India’s merchandise exports and 50 percent of IT software and BPO service exports. In contrast, India accounts for merely 2 percent of USA exports. Despite this, USA incurred trade deficit with India.
The trade deficit, small or large, provoked Mr Trump to accuse the countries for indulging in unfair trade practices. He alleged that while the exporting nations treated the USA unfairly and reaped the benefits of American open and large market, these countries were reluctant to reciprocate by opening their own market on equal terms. Even though India is not a major player in the USA trade deficit, India was looped in trade war spree.
In retaliation, India will be at disadvantage position if it weighs on the same degree. Exports of ready-made garments and gems and jewelry (particularly diamond and precious stones) are the cases in point. 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 of India’s exports. Further, a huge labour force is employed in these two export oriented industries. If India retaliates against the USA’s challenges on export subsidies on exports, USA’s enforcement of prohibition of imports of these items will send the industries in tailspin, causing huge export loss and unemployment.
In this spate of trade war, tough competition will be posed to India’s garment sectors by Bangladesh and Vietnam. In 2017-18, the USA accounted for 23 percent of India’s export of garment. Bangladesh will pitch for a tough challenge to India’s garment exports to USA market after availing the benefits of export subsidy. Under WTO rules, Bangladesh can provide export subsidies as its per capita income is under US$1000 per year.
So will Vietnam, a major competitor to Indian garment industry, pose a big challenge to India in the USA garment market. Vietnam has already adopted subsidy banned export policy to be WTO compliant.
Hence, instead of waging trade war, India should go for alternatives as a recourse to mitigate the American ire. One of these, as suggested, is to provide subsidy on logistic. It is not under the purview of WTO rules.
High cost logistic has been riding on India’s export competitiveness. The World Bank ranked India 35th out 160 countries in Logistic Performance Index. A comparative study under the Sagarmala programme shows that for exporting a container from Delhi , the total transit time till loading , on to vessel can vary between 7- 15 days, while the inland transit time for similar route in China is 5-6 days. Poor railroad and unworthy warehousing facilities cast shadow over logistic costs.
Despite cheap labour and low cost of inputs, India’s garment exports are hamstrung by high logistic cost. According to analysis, logistic cost for garment export in India is three times more than China and two times more than Sri Lanka.
However, challenges to export of gems and jewelry to USA, after withdrawal of subsidy, is unlikely to pose a major threat to India. This is because over 80 percent of the exports are diamond and withdrawal of subsidy is unlikely to make any major dent to India’s exports. Diamond is a high valued item and the buyers of diamond in USA belong to higher income groups. This suggests that export without subsidy will not mark any major impact on India’s export of diamonds to the USA.
There are few competitors to India in the world in exporting diamond to the USA market. India is the biggest exporter of diamond to the USA. A third of the USA’s import of diamond comes from India. To this end, given the less power to pitch its claim for waving of export subsidies as non–violative, if dragged into WTO and the significance of the USA to India, it is worth to reinvent alternative recourses and avoid trade war with USA.
Views expressed are personal