Context: India-US trade relations.
More in news:
- President Donald Trump is set to make his maiden visit to India on February 24-25, 2020.
India – US Trade Relations:
- The US is now India’s second largest trading partner and largest export destination, with India having a small trade surplus of around $20 billion.
- The US is also the largest provider of foreign direct investment (FDI) around $45 billion to India, with India investing close to $10 billion in the US.
- Bilateral trade has been steadily increasing. In 1995, total two-way trade, including goods and services, between India and the US was $11 billion while in 2018, it reached $142.1bn, with India having a surplus of $24.2bn, according to official US data.
- India mostly exports gems, pharmaceuticals, machinery, mineral fuels and vehicles to the US.
- Apart from agricultural produce, the US exports to India precious metals and stones, mineral fuels, aircraft, machinery, and optical and medical instruments.
Why trade with the US matters to India?
- India recently backed out of Regional Comprehensive Economic Partnership (RCEP), the world’s “largest” regional trade pact. Shuting the door on the large “integrated market” that the RCEP deal was offering, it is important for India to look for other sizeable market.
- Also, in the backdrop of the global economic slowdown, where India’s global exports have fallen consistently, it is important for the country to diversify and strengthen bilateral relations with other markets.
- Thus, India has set its sights on “large developed markets”, improved access to which would help its industry and services sectors, which includes the US. US over the last two decades has become a crucial trading partner in terms of both goods and services.
Key sticking points of the trade deal between India and US:
Negotiations on an India-US trade deal have been ongoing since 2018, but have been slowed by “fundamental” disagreements over tariffs (taxes or duties on imports), subsidies, intellectual property, data protection, and access for agricultural and dairy produce.
- India is described as the “king” of tariffs:
- Despite growing political and strategic ties, there’s been tension over trade issues. President Trump says India’s tariffs – taxes on imports – are “unacceptable,” and has described India as the “king” of tariffs.
- India’s average tariff rate in 2018 was 17.1% – that is significantly higher than the US, Japan and the EU, all of whom had rates of between 3.4% and 5.2%.
- However India comes out better on trade-weighted average tariff. In 2017, India’s trade-weighted average tariff was 11.7%, Brazil’s was 10% and South Korea’s was 8.1%.
- India is not alone in charging high duties – for example, Japan, South Korea and Australia all have high tariffs on specific imports. The US imposes a 350% tariff on certain types of tobacco
- Steel and Aluminium tariff issue: In 2018, the US imposed additional tariffs of 25% on steel and 10% on aluminum imports from various countries, including India. Government approached the WTO’s Dispute Settlement Body against the US move. Simultaneously, trade officials are taking the issue to the US Trade Representative and other higher platforms.
- GSP Withdrawal citing market access issues:
- The Generalized System of Preference (GSP) is the largest and oldest US trade preference programme and is designed to promote economic development by allowing duty-free entry for thousands of products from designated beneficiary countries.
- In June, President Trump terminated India’s designation as a beneficiary developing nation under the key GSP trade programme after determining that New Delhi has not assured the US that it will provide “equitable and reasonable access” to its markets.
- Also, US accused India of slashing maximum retail prices of life-saving cardiac stents and essential knee implants by 65%-80%, put tariffs on information and communication technology products, and demand that exporters of dairy products certify their produce was derived from animals not fed food containing internal organs.
- Use of commercial policy by India: as a response to the US tariff on Steel and Aluminium, Commerce Ministry on June 20th notified tariff hike on 29 US products, including almonds, apples and phosphoric acid etc. (worth $10 bn) in retaliation to the steel and aluminium tariff hikes by the US. At the same time, India reduced tariff on selected imports from India including that on few categories of bikes to defuse the trade tension.
- Agriculture: The US has long demanded greater access for American agriculture and dairy products. For India, protecting its domestic agriculture and dairy interests was a major reason to walk out of the RCEP agreement.
- Medical devices:
- Trade negotiations over the last one year have grappled with the issue of improved access for American medical devices firms to India.
- India is working to finalise a proposal to move from caps on prices of medical devices to limiting the margins of those involved in the supply of the products. However, it is unclear whether this would mean the government might be willing to reconsider its earlier, widely publicised decision to slash, in the public interest, prices of stents and knee implants.
- The health cess on imported medical devices announced in the Budget for 2020-21 too, may be seen as a negative for the American side, as the US is among the top three exporters of these categories of products to India.
A new trade agreement must be about preparing India for profound changes in the global economic order, buffeted by Trump’s politics as well as the unfolding technological disruption. Getting India’s most important trade relationship right in the near term and charting a bold course for a mutually beneficial commercial partnership with the US over the long term are urgent and worthy goals in themselves.
India’s trade surplus with the US came down to $16.9 billion in 2018-19. the surplus could be reduced further through imports of products such as aircraft from American firms. Experts feel that India and the US could begin with some “low-hanging fruit” to indicate their willingness for a deeper economic commitment. This includes the US reinstating India’s benefits under the GSP programme, and India doing away with duties on motorcycles.