Trump refuses to give India an easy ride on tariffs
But back-channels are open and with elections looming in both countries the trade war could be short-lived, reports Helen Chandler-wilde
Harley-davidson, that symbol of rebel spirit and independence, has in recent months found itself reduced to cannon fodder in global trade conflicts. It has been caught in the crossfire between the Trump administration and the EU. Now the American icon is again on the frontline as the president turns his guns on India.
Trump last week criticised the Indian tariff on motorcycles, which earlier this year stood at 100pc. He told supporters this level was “so high it’s like a barrier, in other words, who’s going to buy it when it costs you so much?”.
He attacked India, calling it the “tariff king”, and claimed its import taxes are “tremendously high”.
However, Trump said that after talking to prime minister Narendra Modi, Indian tariffs on the bikes would be slashed to 50pc. Could an export boost for Harley signal back-channel progress towards a broader entente?
Tensions have been simmering between the two countries for some time. In March, US trade representative Robert Lighthizer complained to the World Trade Organisation about subsidy programmes run by the Indian government to encourage exports.
The same month, Trump put tariffs of 25pc on steel and 10pc on aluminium on all imports into the US. India drew up a list of American goods on which it would hit back and apply tariffs in June, but has left the door open to negotiating by delaying the date they become effective a few times from its original Aug 4 deadline. It is now scheduled for Nov 2.
“I think they want to fly under the radar as much as possible,” says Jan Dehn, head of research at emergingmarkets investor Ashmore Group.
“I think they will continue to use back-channels to stay as low-profile as possible. We have an election in India next year. Modi is a nationalist and it would put him in an awkward situation if he appeared weak or vulnerable in the context of an attack from Trump. So they will try to defuse this as soon as possible.”
Some believe the high tariffs may help bring the trade war to a swift conclusion, as there is plenty of room for manoeuvre. India’s average tariff level was 13pc, among the highest in the world.
“I think there is more scope for negotiation with India than China, as tariffs are high there is scope for them to come down,” says Douglas Reed, an emerging-equities economist at Newton Investment Management.
“We expect an agreement of some type to be negotiated, within the next few months I imagine.” However, elections in both India and the US could put strain on India’s ability to end trade tensions quickly and quietly.
“We have about five or six months before our general election – so it’s very important for Modi not to be seen as naive,” says Dr Sreeram Chaulia, dean of the Jindal School of International Affairs. He says if the US continues to find fault with India’s policies, the opposition could use it as a stick with which to beat Modi in the polls, due in April or May next year.
Trump too is about to face an election at home in the midterms in November.
“We’re going to wait to see what happens after November,” says Chaulia. “Is he going to continue to be a trade hawk after the midterms? Lots of people think that this is just to get voters on side. Once the elections are over there are still two years before the presidential election.”
If tariff conflict is resolved peacefully, other aspects of the trading relationship between the US and India could cause problems.
US sanctions on Iran are a potential flashpoint. India is the second-largest importer of Iranian oil after China.
“Iranian oil is a lot cheaper – and India is dependent on importing oil,” says David Cornell, fund manager at India Capital Growth.
“India is very negatively affected by the pressure Trump is putting on Iran. India has been negotiating with the Iranians to try to bypass the sanctions the US is putting on Iranian oil,” he adds.
The price of oil is a sensitive issue in India. “It’s a political issue – if the oil price goes up a lot … it hurts the transport sector, it hurts farmers who use tractors, it hurts households cooking at home,” says Chaulia.
“And in an election year there may be political ramifications.”
Trump is also unhappy about India’s $5bn (£3.8bn) deal to purchase Russian defence systems over an American alternative.
“There is lots of fear about what Trump might do about the Russian anti-missile S-400 system,” explains Chaulia. “Trump has been saying for months that he would impose sanctions if we bought the S-400. We’re on the chopping block; it’s a sanctions Damocles’ sword hanging over our necks.”
Another issue could be changes to US immigration rules recently advanced by Trump. “India has been sending a lot of its brightest people to study and work in the US,” says Dehn.
“So the Trump immigration policies will harm the ability of Indian citizens to live and work there.”
Cornell said visa restrictions could create issues for Indian businesses operating in the US. “It makes it harder for Indians to put their people on the ground in the US,” he says.
Ultimately, there are significant geopolitical concerns that may discourage the US from battling India on trade.
China’s “Belt and Road” initiative to spread its influence throughout Asia, Africa and eastern Europe may be challenging America to make its own friends in the region.
Dehn explains that although Japan, like China, has a large trade surplus with the US, it is unlikely to be a target of Trump’s tariffs. Japan had a surplus of $63bn in 2017, the fifth-largest with the US and far less than China’s $350bn figure. “Is Trump going to sacrifice the US’S last ally in the pacific for a bit of protectionism?” he says. Cornell says this reasoning would make the US seek to keep India on side. “It will help India negotiate with the US,” he says. Trump’s focus on China may also help to take the heat off India, whose trade surplus with the US stood at $24bn in 2017.
So far, Trump has put tariffs on $250bn of Chinese imports.
“Trump’s main focus is on China right now. Even with the Mexico and Canada agreement he has a clause that says if anyone has a trade agreement with China then you have to retaliate within the new Nafta agreement,” says Devashish Mitra, an economics professor and global affairs specialist at the Maxwell School of Citizenship and Public Affairs at Syrcacuse University, New York.
Mitra says Trump’s political desire to demonstrate wins may lead him to hold off from attacking India until the trade war with China is “won”.
“If Trump just wants a tiny win to show his electoral base that’s different – as an economist I can’t understand it but I get the politics,” he says.
If an escalation of hostilities cannot be avoided, it is likely to shake markets less than the Us-china battle has done, due to the relatively low value of trade between India and the US.
“India is similar to the US in that it’s navel-gazing. You go to the Midwest and you show them a map of the world and they can’t point out Germany.
“India is more informed about the rest of the world – but it’s an enormous country with a long history of inwardlooking, state-led, self-reliant policies that were brought in by Nehru after independence. Modi is only just starting to dismantle that. It’s basically a domestic economy with a bit of trading on the edge.”
However, even if there are ways out of a trade war, investors are still keeping an eye on what Trump says.
“People are worried – who isn’t worried about Trump’s rhetoric? India is no different,” says Cornell.
‘If tariff conflict is resolved peacefully, other aspects of the trading relationship between the US and India could cause problems’
Harley-davidson motorcycle owners take part in a bike rally in Bangalore; Donald Trump and prime minister Modi, below