US-India Trade Relations at a Crossroads

For nearly 18 months, the United States and India have been engaged in negotiations to resolve a number of outstanding bilateral trade issues. However, despite making public proclamations that a limited trade deal was nearly finalized, both countries have been unable to make progress. Rather, new issues on the trade front have continued to come up and become part of the negotiations. With renewed activity in November as India’s minister of commerce visited Washington, D.C., and a team from the U.S. Trade Representative’s office headed to New Delhi, U.S.-India trade relations stand at a crossroads.

U.S. Trade Demands Under Trump

Since President Donald J. Trump took office in the United States in 2017, trade has been a central part of bilateral relations with key partners of the United States. As my colleague and former Assistant Secretary of Commerce Raymond Vickery has written, Trump sees “trade deficits as if the deficits were akin to losses on a profit and loss statement.” With the United States currently running a total deficit of $20.8 billion with India in 2018, this means that India has attracted the ire of the administration as a country that has “taken advantage of the United States.”

To be clear, there are some real issues pertaining to trade, emanating largely from Indian protectionist actions. The first key issue has been U.S. concerns over unfavorable market access for agricultural products, particularly dairy. The U.S. government’s “Country Commercial Guide” for India notes that “Since 2003, India has imposed trade-restrictive sanitary certification requirements on global dairy imports, which block the majority of U.S. dairy products from access to India’s market.” Specifically, India has demanded that dairy importers certify that their milk was “derived from animals that have not consumed feed containing internal organs, blood meal or tissues of ruminant origin.” Given that the U.S. dairy industry does not follow these practices, it has been unable to export to India, which it sees as a major potential market. Industry officials have stated that “if India provides market access, exports would increase by up to $100 million.”

Another key issue for the United States vis-à-vis India on trade relates to medical devices, specifically coronary stents and knee implants. U.S. medical technology companies have argued that India’s implementation of price caps on such devices means it is distorting the market and making U.S. products less competitive. India has responded saying that the moves are aimed at providing “citizens with equitable and affordable access” to “life-saving and life-improving medical devices.” Imports of U.S. medical devices to India stood at over $100 million in fiscal year 2017-2018, and Indian data show that 25 percent of India’s medical device imports come from the United States.

The final major area of tension in the trade relationship is the increase in Indian tariffs on internet communications (ICT) devices. During the 2018 Budget, India’s financial minister announced that India would be doubling its tariff rates on ICT devices including mobile phones, televisions, and electronic components. ICT devices make up nearly $52 billion of India’s total import order, and while this was largely aimed at reducing India’s large deficit with China, the United States saw this move as negatively impacting its exports of high-end mobile devices and smartwatches, an area of high potential growth in the future. A reduction in tariffs has become a key demand for the United States.

Beyond these issues, other topics such as Indian local content rules for retail and manufacturing, rules mandating data localization, and changes to FDI rules regarding e-commerce have been discussed by both sides. However, the three market access issues noted above remain at the heart of the problem and were directly behind the U.S. decision to suspend India’s benefits under the Generalized System of Preferences (GSP), a program created “to promote economic growth and development in the developing world.” U.S. demands on trade not only span the gamut across industries but have also led to the Trump administration taking punitive action against India.

Indian Interests and Issues

Like the United States, India also has a series of demands. As noted above, while India did take a series of protectionist actions, it has also pointed out that the United States has raised tariffs against India. Indeed, in March 2018, Trump announced he was raising tariffs on steel and aluminum under Section 232 of the Trade Expansion Acton. The action, while seen as a part of the trade dispute with China, was implemented against a host of countries, including India despite its request for a waiver. In this context, the application of these tariffs was seen as key irritant for India. India, therefore, has demanded that the United States withdraw these tariffs.

India has also argued that while it does run a trade surplus with the United States, exports from the U.S. are growing at a rapid pace, underscoring how the deficit is being bridged. Indeed, exports from the United States to India in 2018 totaled $33.5 billion, registering over 30 percent growth compared to 2017. This level of growth was the fastest among the United States’ 12 largest trading partners. India also argues that a large part of this export growth is driven by the Indian government itself purchasing more oil and natural gas from the United States. Therefore, it is unfair, India argues, to use the absolute deficit numbers to gauge bilateral trade, and the high level of growth in exports should assuage any concerns the Trump administration has on market access concerns.

India has also demanded that the U.S. reinstate its GSP benefits. They noted that the benefits under this program are not meant to be based in reciprocity and tying the program to other bilateral trade issues is improper. Moreover, as I have argued previously, the removal of these benefits gives China an opportunity to export more to the United States, rather than supporting U.S. manufacturers, and would thereby make little to no dent to the overall U.S. trade deficit.

The Need for an Agreement

Twice before, the United States and India came close to a deal, but failed to reach an agreement. There was a push in late February and early March to get the issues resolved in advance of the 2019 general elections in India. The second opportunity was during the high-level week at the United Nations General Assembly, when Trump joined Indian Prime Minister Narendra Modi at his “Howdy Modi” event in Texas and the two met again that week on the sidelines of the United Nations. However, both times, no deal was announced. This continued inability to resolve the issues presents two key risks. The first is that, while trade between both countries is growing year-on-year, not resolving key issues risks at the earliest opportunity means there is a greater chance for intervening developments to affect real trade, threatening the growth of bilateral trade. Second, growing tensions in trade could also affect other aspects of the U.S.-India bilateral relationship, such as defense, people-to-people ties, and joint engagement with third countries.

The renewed activity between India’s minister of commerce and the U.S. Trade Representative’s office is a good sign. However, both countries need to move the ball forward and come to an agreement on these issues. Otherwise, other issues will keep coming up, the risks will continue to increase, and the strategic partnership emerging between the two countries could face headwinds. After 18 months, U.S.-India trade relations stand a crossroads. It is up to both countries to find the way forward as soon as possible.