India-united States trade relations need a reset. Strike a new deal

The resurgence of tariffs as a critical foreign policy tool for the United States (US) is a departure from one of its long-upheld commitments towards free trade. The United States Trade Representative (USTR)’S June 7 announcement regarding a trade action, following its Section 301 investigation of Digital Services Tax (adopted by India, Austria, Italy, Spain, Turkey, and the United Kingdom), is a step in this direction.

However, the tariff escalation will only be effective after 180 days to allow negotiations on the proposed global tax framework. India has tentatively backed the framework, but its final decision will depend on the availability of sustainable tax revenue for developing countries as part of the final deal.

An analysis of the 26 products identified by USTR for the 25% tariff hike indicates that these products constituted only 0.2% of merchandise imports by the US from India in 2019. Notwithstanding the low share of these products in the US imports from India, the potential tariff hike could influence India’s price competitiveness across several products where the country holds a significant share in the US market, such as basmati rice, gems and jewellery, marine and wood products.

Since 2016, the US administration has been increasingly undertaking trade actions against India, including tariff and non-tariff barriers and anti-dumping duties. Earlier, in June 2019, the US announced the termination of the Generalised System of Preferences (GSP) benefits for India, which impacted nearly 10% of India’s exports to the US that year.

Amid these bilateral trade tensions, India’s negotiations to strike a win-win trade deal with the US have been stalled for years. Likewise, negotiations on a bilateral investment treaty have also been unsuccessful due to differences in approaches to investor protection.

Currently, India has an untapped merchandise export potential of nearly $25.7 billion in the US market, across a wide array of products, such as jewellery and precious metals (untapped potential worth $6.9 billion), marine products ($354.3 million), processed food ($298.6 million), and furniture ($67.6 million), according to data from the International Trade Centre. Given the significant trade potential and the importance of the US as a strategic partner, there is a need to hold concerted discussions for a trade deal.

The change at the helm in the US has brought prospects for a revival of renewed globalisation. There have been some positives, such as the end of the order that suspended entry to the US across several temporary or “non-immigrant” visa categories, including H-1B. The time is ripe for India to follow through on discussions for the mini-trade deal with the US and bolster its position in the US market. India could consider focusing on negotiations for tariff relaxations and partial restoration of GSP benefits, in exchange for specific market access commitments, with due consideration to the impact on sensitive sectors such as agriculture.

India also needs to dispel its image of being a country with high trade barriers. Market access issues have been vociferously raised by the US against India several times. During the 7th Trade Policy Review at the World Trade Organization, the US urged India to reduce tariffs and remove non-tariff barriers. However, according to an India Exim Bank study, India’s tariffs on imports are much lower than what they appear to be due to preferential tariffs, and various concessions and rebates under the different schemes. In 2018, India’s weighted average effectively applied tariff was only 4.9%, much lower than the simple average Most Favoured Nation tariff of 13.5%. Data from the Global Trade Alerts database further indicates that India has implemented fewer non-tariff barriers than the US. While the US implemented 1,072 harmful trade interventions affecting India since 2009, India imposed only 381 such measures affecting the US. There is also an urgent need to challenge the narrative for market access concerns raised by the US.