Trumps Next target in Trade Wars – India

10 March, 2019

Since the beginning of this last decade or so, the trajectory of the Indian economy seems to have risen multi-fold. For a big trading power like India, delicately navigating between the recent US-china trade war was unprecedented and unsettling. But this battle got even more intensified with the recent announcement by US president his intentions to end preferential treatment for India. This would indeed cause ripples in this glorious growth story India has witnessed in the recent past. India has been the biggest beneficiary of the Generalised System of Preferences, with around $5.6 Billion worth of Indian exports entering the US duty-free. This step would have a definite impact on sectors such as motor vehicle parts, ferroalloys, precious metal jewellery, building stone, insulated cables and wires, but export-oriented industries such as pharmaceuticals and textiles are also likely to be affected.

The initial seed of the war started in April 2018 when the United States announced that it was reviewing India’s status under the GSP program. Trump had time and again taken India to task for its tariff to US import. Both countries made a lot of attempts to resolve the long-running trade issues but all attempts seem to have flattered with this news a year later. During a speech at the Conservative Political Action Conference, he raised the tariff question by quoting his motorcycle example which he has multiple times in the past. Trump said: “When we send a motorcycle to India, they charge 100 per cent tariff…When India sends a motorcycle to us, we charge nothing.” This allegation even though is true but what is noteworthy is the fact that how Harley-Davidson skirts this tariff by largely assembling its bikes in India. Another interesting fact is that the Modi government had anyway reduced the import tariff on motorcycles in the past few years.

Another reason for this avenge by the US is because of India’s localist attitude against American E-commerce companies like Amazon and Walmart. The array of policies issued by the Indian government including the FDI policy and the draft E-commerce policy hints India’s tilt towards local retail manufacturers by restricting the ability of American Internet giants to do business in India and in-turn souring the relationship with the US. Walmart last year spent $16 billion to acquire Indian e-commerce platform Flipkart that too after clearing a lot of regulatory hurdles and objections by several stakeholders.

Reaction to this step once the tariff kicks in would be a tough nut to crack for the Indian government who faces its biggest test in April/May when 1.3 billion Indians vote for the world’s largest democratic elections. Most statements made so far by Indian government officials seem to be defensive. Commerce secretary Anup Wadhwan in an interview stated “We do not agree with that at all. Our tariffs (import duties) are very consistent with the bound rates that we are entitled to in the WTO”. India’s trade-weighted average tariff is 7.6 per cent, which is comparable with the most open developing economies, and some developed economies. Withdrawal of GSP entitles India to raise a claim before the WTO for breach of principles of non-discrimination.

Alternatively, experts have also commented that GSP withdrawal will not have a significant impact on India’s exports to the US. The benefits in the absolute sense and a percentage of trade involved are very minimal and moderate. In fact, they have gone on to say that US tariff will end up hurting US’s own domestic industry that relies on cheaper material and goods from India, as duty-free access is cut off for Indian products.

Would India come up with a retaliatory tariff, raise this issue with the WTO or continue with its policy decisions as it has in the past would be a space worth looking at.

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