Negotiation is the only way out of the trade war

If India retaliates, there is little doubt that the Trump administration will respond in return and up the ante

Commentators in the United States and India are beginning to call the current trade standoff between the two countries a full-blown trade war. “It’s official: India is Trump’s next target in the trade wars,” The Washington Post recently declared. What prompted the Post and other newspapers and analysts to come to that conclusion was the US announcement that it will end preferential trade treatment for thousands of Indian products guaranteed under the Generalised System of Preferences (GSP), a trade programme that has been in existence for more than 43 years now. The idea behind the US GSP is to promote trade with more than a hundred developing countries by giving duty-free entry for their goods. India is the largest beneficiary of the programme.

Now, unless the White House has second thoughts about the termination of the GSP — or a deal can be struck — the US will start levying tariffs beginning May on Indian goods worth approximately $5.6 billion. India has signalled that, in retaliation, it will impose tariffs on US products worth more than $10 billion. Retaliation is not a good approach in this instance. Negotiation is. That negotiation should be structured to reach a rapprochement in the near-term and a partnership in the long-term. There are several compelling reasons for taking this approach.

One, the latest US move in itself doesn’t constitute a significant threat to bilateral trade. In dollar terms, only about 10% of the products ($5.6 billion) the US imported from India last year received preferential treatment and generated only $190 million in duty benefits. To put that in context, Indian exports to the US amounted to more than $54 billion in that same period.

Two, this is part of Trump’s negotiation strategy. Ratchet up the pressure until India gives it some concessions that he can tout as a “big win”. That’s the modus operandi Trump has followed during his 26-month tenure, while he tried to rewrite The North American Free Trade Agreement (NAFTA) and renegotiate trade deals with China. That he hasn’t been able to come up with qualitatively better deals on either front than the existing ones is a different matter.

Three, the impetus for this withdrawal of the GSP looks like a tit for tat measure. It is driven by complaints regarding lack of access to the Indian market from US businesses and industries such as medical devices, dairy, and information and communication devices. In bilateral talks, the US asked for greater access. But according to the India Department of Commerce and Industry, India was able to offer a meaningful way forward on almost all US requests but a few US requests were not found reasonable and doable in the light of India’s national interests. So, it seems there may be a basis for renewing and continuing negotiation.

Four, if the US tariffs kicked in and India retaliated, there is little doubt that the Trump administration would retaliate in return and up the ante.

Five, Trump’s trade policies are not working internationally. In contrast, the trade relationship with India looks quite good. The US Department of Commerce has just revealed that the US trade deficit has ballooned to $900 billion, the highest ever. Two years of trade wars and incessant bluster had no positive effect on the US trade deficit. The deficit increased by $68.8 billion, or 12.5%, from 2017.

Despite the tension on the trade front, India-us bilateral trade topped $87 billion last year, up from $73 billion in 2017, a recently released report from the US department of commerce says. Indian exports to the United States grew from $48.6 billion to $54.4 last year, while the country’s imports from America increased from $ 25.7 billion to $33.1 billion.

Six, India should keep its eye on the big picture. Since the country began liberalising its economy in 1991, its bilateral trade with the US has increased dramatically and India is the ninth largest trading partner of the US today. The growing bilateral trade has made businesses in both the countries stakeholders in the broader strategic relations. There is no question that these businesses have played a crucial role in advancing the ties to the current level.

Even while the two nations are engaged in an unprecedented level of commercial activities, bilateral trade is still well below its potential. US trade with India constituted only a little over 2% of overall US foreign trade. CUTS (Consumer Unity and Trust Society) firmly believes that the US and India could achieve $500 billion in bilateral trade by 2030. One study indicates that it could be $1 trillion by 2030.

Seven, India should think of the longterm and envision its relationship with the US beyond the Trump regime. India’s persistence in working with the current regime will not pay off in a major way over the next two years. The best that can be hoped for, because of the recalcitrance of Trump and his administration, is rapprochement. I firmly believe that 2021 onwards, the India-us relationship will become a meaningful and memorable partnership.

India must negotiate, and the negotiation must work towards achieving rapprochement in the short-term, and a partnership in the long-term. Or, as I wrote in an earlier in the Hindustan Times, India should keep cool, keep calm, and carry on.

DESPITE THE TENSION ON THE TRADE FRONT, INDIA-US TRADE TOPPED $87 BILLION LAST YEAR, UP FROM $73 BILLION IN 2017. INDIAN EXPORTS TO THE UNITED STATES GREW FROM $48.6 BILLION TO $54.4 AS WELL