TRAD­ING PUNCHES

Indo-US re­la­tions have seen some tur­bu­lence of late on trade and strate­gic is­sues. But as the two sides pre­pare to ne­go­ti­ate, top diplo­mats sig­nal a new phase of give and take

India Today - - FRONT PAGE - Ex­clu­sive interview with US sec­re­tary of state, MIKE POM­PEO

AS FRIC­TION BUILDS OVER TRADE, DE­FENCE, VISAS AND E-COM­MERCE, CAN MODI AND TRUMP HUG AND MAKE UP?

WWhat happens when es­tranged partners want to sig­nal where their re­la­tion­ship is fi­nally headed? Ei­ther they send choco­lates and ap­pro­pri­ate WhatApp emo­jis to each other to in­di­cate they want to kiss and make up. Or they har­den their stand over dif­fer­ences and head to the courts to for­malise the sep­a­ra­tion.

Till a week ago, re­la­tions be­tween In­dia and the US re­sem­bled those of a cou­ple head­ing for a messy divorce. On May 31, a day af­ter Naren­dra Modi was sworn in as prime min­is­ter for a sec­ond term, United States pres­i­dent Don­ald Trump chose to play spoil­sport. He an­nounced he was go­ing ahead with his order to with­draw the pref­er­en­tial tar­iffs that In­dia had en­joyed un­der the US’s Gen­er­al­ized Sys­tem of Pref­er­ences (GSP). His rea­son? The Modi gov­ern­ment had not “as­sured the United States that In­dia will pro­vide eq­ui­table and rea­son­able ac­cess to its mar­kets”. In­dia had been a ben­e­fi­ciary of the GSP pro­gramme from 1976; in

2018, it cov­ered $6.3 bil­lion, or 12 per cent of the goods ex­ported to the US. Though the duty con­ces­sions availed un­der it amounted to only $240 mil­lion last year, the with­drawal of GSP priv­i­leges, which came into ef­fect on June 5, will affect the com­pet­i­tive­ness of some 1,900 prod­ucts In­dia ex­ports un­der the sys­tem.

On June 15, a fortnight af­ter the Trump ac­tion, In­dia re­tal­i­ated by im­pos­ing higher tar­iffs on 29 goods it im­ports from the US, in­clud­ing apples, al­monds, wal­nuts, chick­peas, lentils and boric acid. Du­ties for al­monds, for in­stance, were hiked by 20 per cent. Last year, In­dia bought $543 mil­lion worth of al­monds, or half the to­tal value of al­monds the US ex­ported—and the duty hike will hurt US grow­ers. In­dia had, in fact, an­nounced higher du­ties on these prod­ucts in June 2018, af­ter the US raised tar­iffs by 25 per cent for steel and 10 per cent for alu­minum im­ports from In­dia. But In­dia de­ferred the im­po­si­tion, as it had hoped to sort out the dif­fer­ences through a di­a­logue. Mean­while, it took the US to the Dis­pute Set­tle­ment Body of the World Trade Or­ga­ni­za­tion (WTO) for vi­o­lat­ing tar­iff norms.

It was not only on the eco­nomic front that the two coun­tries were trad­ing punches. In the past two years, a raft of dif­fer­ences have arisen over con­tentious is­sues per­tain­ing to In­dia’s oil im­ports from Iran, de­fence purchases from Russia, is­suance of US work visas for In­di­ans and the Modi gov­ern­ment’s pro­posed new e-com­merce pol­icy, which, the US ar­gues, puts American gi­ants like Ama­zon, Wal­mart and Google at a great dis­ad­van­tage (see Fric­tion

Points). There are other nig­gling is­sues to ad­dress, like the sale of Lin­coln House in Mum­bai which had been given on lease to the US em­bassy to house its con­sulate decades ago. When the em­bassy in 2015 wanted to sell it to a prom­i­nent In­dian in­dus­tri­al­ist for Rs 750 crore, the In­dian gov­ern­ment ob­jected, and has so far not cleared the sale. Iron­i­cally, all this hap­pened even as the two coun­tries moved to­wards greater con­ver­gence on strate­gic is­sues such as de­fence, ter­ror­ism, maritime reg­u­la­tions and the US en­gage­ment with the South Asian re­gion.

That the two na­tions were keen on fur­ther­ing their re­la­tion­ship rather than turn­ing hos­tile was ev­i­dent af­ter the meet­ing US Sec­re­tary of State Mike Pom­peo had with his coun­ter­part S. Jais­hankar, the new ex­ter­nal af­fairs min­is­ter, and Modi on June 26. As Pom­peo said in an ex­clu­sive interview to in­dia to­day, “We spoke about how we can make this a different age, a different time. We can be more am­bi­tious in our re­la­tion­ship. We can make pos­i­tives out of trade, mil­i­tary, de­fence co­op­er­a­tion is­sues. There is a real com­mit­ment. There is a deep un­der­stand­ing of how our coun­tries can work to­gether. In all my in­ter­ac­tions with the lead­er­ship to­day, there was an un­der­stand­ing that for the sake of our two peoples, the re­gion and the world as well, Amer­ica and In­dia need to be good partners. We ben­e­fit from In­dia, and In­dia ben­e­fits from us.” (See interview, ‘Nei­ther coun­try will get ev­ery­thing it wants...’)

Jais­hankar con­firmed the con­ge­nial at­mos­phere at the meet­ing, say­ing, “On some out­stand­ing is­sues, par­tic­u­larly re­lat­ing to trade, my urg­ing was that we take a con­struc­tive and prag­matic view. It is nat­u­ral when you have trade that there will be dis­putes and I think the real test of our in­ten­tions is our abil­ity to ad­dress them ef­fec­tively.” The same night, Modi left for Osaka, Ja­pan, for the G-20 sum­mit where he is sched­uled to have a bi­lat­eral meet­ing with Trump and chalk out ways of mend­ing fences. But, given the range of is­sues, it will re­quire more than a hug be­tween the two lead­ers to make up.

So why, de­spite the ini­tial prom­ise, did the re­la­tions be­tween the world’s largest democ­racy and the globe’s most pow­er­ful one, come to such a sorry pass? And what will it take to bring re­la­tions back on an even keel?

DECELERATI­NG TIES

Let’s first deal with how the mess has come to be. When Trump took over as pres­i­dent in Jan­uary 2017, Indo-US re­la­tions were on a decade-long up­swing and the two had be­come ‘strate­gic partners’. The turn­ing point in the hith­erto roller­coaster re­la­tions be­tween the two coun­tries had come when Pres­i­dent Ge­orge W. Bush and Prime Min­is­ter Man­mo­han Singh signed the Indo-US civil­ian nuclear deal which came into ef­fect in Oc­to­ber 2008. That paved the way for lift­ing

sanc­tions against the supply of nuclear fuel and tech­nol­ogy to In­dia that the ma­jor western pow­ers had im­posed af­ter Delhi’s nuclear tests in 1974 and 1998. It also lifted the huge boulder that had come in the way of fos­ter­ing re­la­tions be­tween In­dia and the US.

Since then, the trade graph be­tween the two, which had been “as flat as a cha­p­ati”, as a for­mer US am­bas­sador to In­dia put it, be­gan to blos­som. Last year, it touched $142 bil­lion. This year, the US over­took China as In­dia’s largest trad­ing part­ner again. The nuclear deal also saw the sale of hi-tech US de­fence equip­ment to In­dia—purchases since 2008 now to­tal $20 bil­lion. When Modi came to power in 2014, he was soon on first-name terms with Barack Obama, and worked to­wards fur­ther boost­ing re­la­tions be­tween the two coun­tries. In his ad­dress to a joint ses­sion of the US Congress on June 8, 2016, he fa­mously pro­claimed that the two coun­tries had fi­nally “over­come the hes­i­ta­tions of his­tory”.

On the cam­paign trail, Trump sounded pos­i­tive to­wards In­dia, say­ing he was “a big fan” of the coun­try and that “we are go­ing to be the best of friends”. He then went on de­scribe Modi as “a great

WASH­ING­TON IS MIFFED THAT IN­DIA HAS NOT BEEN ABLE TO SORT OUT THE SMALL PROBLEMS, WHICH COULD EN­GULF THE RE­LA­TION­SHIP

prime min­is­ter and a pro-growth leader for In­dia”. In­dia, though, re­mained wary of Trump as he had vowed to put Amer­ica’s in­ter­ests first and over­turn the ex­ist­ing world order to achieve it. An In­dian ex­pert summed up the Trump doc­trine as the three Ds: dis­en­gage, de­glob­alise and dis­rupt. While en­gag­ing with Trump, In­dia ini­tially fol­lowed a wait-and-watch pol­icy and de­cided that it would re­main un­der the radar till it fig­ured his ad­min­is­tra­tion out.

From the day he as­sumed of­fice, Trump in­di­cated he would walk his cam­paign talk. He pulled the US out of the Trans-Pa­cific Partnershi­p, a pro­posed trade agree­ment be­tween 12 coun­tries, which he de­scribed as “a bad deal”. He then can­celled the Iran nuclear deal that Obama had ne­go­ti­ated un­der the Joint Com­pre­hen­sive Plan of Ac­tion (JCPOA), signed be­tween Iran and the P5+1 (the five per­ma­nent mem­bers of the United na­tions Se­cu­rity Coun­cil—US, China, France, Bri­tain and Russia—plus Ger­many). He trashed the Paris climate change treaty and de­clared that the US would not hon­our its com­mit­ments un­der it. He then launched a full-scale trade war with China, which had a favourable trade bal­ance of $419 bil­lion with the US in 2018. Trump even got af­ter his allies in the North At­lantic Treaty Or­ga­ni­za­tion (NATO), ask­ing them to share the bur­den of main­tain­ing the or­gan­i­sa­tion more eq­ui­tably.

When Trump first met Modi at the White House in June 2017, the two seemed to have hit it off, with the US pres­i­dent

say­ing he con­sid­ers In­dia “a true friend”, and Modi giv­ing him a warm hug. While the two talked of ex­pand­ing re­la­tions on all key fronts—de­fence, trade, se­cu­rity and mul­ti­lat­eral is­sues—Trump made it a point to men­tion, “It is im­por­tant that bar­ri­ers be re­moved to the ex­port of US goods into your mar­kets, and that we re­duce the trade deficit with your coun­try.” These were not words that were said lightly. But New Delhi mis­tak­enly be­lieved that, with the US trade deficit with In­dia around $24 bil­lion as com­pared to its $400 bil­lion deficit with China, Trump would not fo­cus his sights on Delhi. As an ex­pert on Indo-US re­la­tions puts it, “For Trump, trade was his No. 1 to 5 pri­or­ity and he was not willing to yield on it. In­dian of­fi­cials were not ad­just­ing to this re­al­ity and didn’t re­alise they can’t bull **** their way past Trump the way they did with his pre­de­ces­sors.”

A STRANGE DU­AL­ITY

It was not en­tirely In­dia’s fault. The Trump ad­min­is­tra­tion ran its re­la­tions with In­dia with a strange du­al­ity that lulled In­dian pol­icy-mak­ers into believ­ing that they could man­age the US pres­i­dent much the same way as they did Obama. While Trump talked tough on trade with In­dia, when it came to de­fence purchases, he granted In­dia Strate­gic Trade Autho­riza­tion, Tier One, or STA-1 sta­tus. It per­mit­ted US arms man­u­fac­tur­ers to sell In­dia tech­nol­ogy Amer­ica didn’t of­fer to some of its clos­est allies. “The Trump ad­min­is­tra­tion has a schiz­o­phrenic ap­proach to re­la­tions with In­dia,” says

Ash­ley Tel­lis, se­nior fel­low, Carnegie En­dow­ment for In­ter­na­tional Peace. “It wants to work with In­dia on the strate­gic di­men­sions as Bush and Obama did. But on the other hand, it treats In­dia as a trade com­peti­tor. Previous ad­min­is­tra­tions found a way to bal­ance their strate­gic in­ter­ests in In­dia vis-a-vis their eco­nomic in­ter­ests. What the Trump ad­min­is­tra­tion wants are the ben­e­fits of the strate­gic re­la­tion­ship while con­tin­u­ing to treat In­dia as an eco­nomic prob­lem.”

With In­dia un­will­ing to move swiftly on pro­vid­ing the con­ces­sions that Trump was de­mand­ing, the US pres­i­dent went pub­lic with his anger in Fe­bru­ary 2018. “You look at In­dia, a very good friend of mine, Prime Min­is­ter Modi, you take a look at what they have done, 100 per cent tax on a mo­tor­cy­cle (im­ports),” he said. “We charge them noth­ing. So, when Har­ley (David­son) sends it over there, they have 100 per cent tax. When they send it here, they make a tremen­dous num­ber of mo­tor­cy­cles, there is no tax. I called him (Modi). I said, it’s un­ac­cept­able. He re­duced it by 50 per cent with one phone call. I said, it’s still un­ac­cept­able be­cause it is 50 per cent versus noth­ing.”

Later, Trump termed In­dia as “a tar­iff king” af­ter an in­ter­nal White House re­port re­vealed that it topped the list of coun­tries which levied high du­ties.

In­dia an­gered the US even more when the Modi gov­ern­ment, in its first term, de­cided to con­trol the prices of im­ported med­i­cal de­vices, par­tic­u­larly stents. While it went down well with the In­dian pub­lic, US man­u­fac­tur­ers were most un­happy. They pointed out the un­rea­son­able­ness of the price con­trol mech­a­nism and their in­abil­ity to do business. They said it was lead­ing to the steep de­cline of for­eign di­rect in­vest­ment from the US into In­dia be­cause of the un­pre­dictable po­lices the gov­ern­ment was fol­low­ing. But In­dia wouldn’t agree even af­ter in­tense ne­go­ti­a­tions to re­move such price con­trols. There was more heart­burn when In­dia slapped a 30 per cent cus­toms duty on IVD (in-vitro di­ag­nos­tics) reagents. In­dia im­ports as much as Rs 6,000 crore worth of these reagents an­nu­ally, with US com­pa­nies ac­count­ing for 36 per cent of the to­tal.

In the dairy sec­tor, In­dia re­fused the US per­mis­sion to ex­port milk and milk prod­ucts un­less its com­pa­nies cer­ti­fied that “the source an­i­mals have never been fed with feeds pro­duced from in­ter­nal or­gans, blood meal and tis­sues of ru­mi­nant ori­gin”. The Union com­merce ministry was clear that there would be no re­lax­ation for US ex­porters as the reg­u­la­tion pro­tected the re­li­gious sen­ti­ments of

THE REA­SON WHY IN­DIA HAS NOT DRAWN CLOSER TO THE US IS BE­CAUSE MODI BE­LIEVES THE EMERG­ING WORLD ORDER WILL BE MUL­TI­PO­LAR AND WE NEED TO BE MULTI­ALIGNED

the pub­lic. Mean­while, the US gov­ern­ment also de­manded that In­dia lower rates on seven tar­iff lines, in­clud­ing smart watches, mo­bile phones and tele­com net­work equip­ment. In­dia ar­gued that apart from cre­at­ing a level play­ing field for do­mes­tic man­u­fac­tur­ers, the im­port duty of 20 per cent yielded rev­enues of $3.2 bil­lion to In­dia an­nu­ally. Wash­ing­ton was clearly frus­trated with New Delhi’s ap­proach and a trade of­fi­cial re­marked, “There was so much un­der­brush that could have been cleared—small items that could have eas­ily been sorted out. Now there is a dan­ger that these would catch fire and en­gulf the en­tire re­la­tion­ship.”

AN UN­FAIR CHARGE

In­dia’s com­merce ministry, though, de­fends its ap­proach, stat­ing that Amer­ica has un­fairly been com­ing down on In­dia. Since Trump took charge in 2017, the trade deficit has fallen by more than $3 bil­lion. Of­fi­cials point out that US arms supply to In­dia has been grow­ing steadily and ac­counts for an av­er­age $2 bil­lion a year which does not fig­ure in trade sta­tis­tics. In the next five years, there are arms deals worth $25 bil­lion that In­dia is look­ing to sign with the US for air­craft alone (see Mil­i­tary Wish­list). Nor does the US take into account the many items In­dia im­ports from other coun­tries and which have a high con­tent of American parts which in­di­rectly ben­e­fits its econ­omy. Also, over 180,000 In­dian stu­dents go to the US an­nu­ally to study in its uni­ver­si­ties, and spend over $10 bil­lion an­nu­ally. That too is not counted in the bi­lat­eral bal­ancesheet. In­dia pointed out that many of the du­ties it le­vies on goods were ap­proved by the WTO, based on the coun­tries’ ca­pac­ity to gen­er­ate rev­enue. And In­dia had made con­ces­sions on many IPR (In­tel­lec­tual Property Rights) is­sues that the West wanted. Frus­trated by ne­go­ti­a­tions with the US, an of­fi­cial says, “The US wants a win on ev­ery­thing. We have only a $20 bil­lion trade deficit com­pared to China’s $400 bil­lion, and they are arm-twist­ing us on ev­ery­thing. This is in­sane. Not a sin­gle coun­try has any sym­pa­thy for the Amer­i­cans and the way they are go­ing about doing things.”

And it isn’t trade alone that has been caus­ing fric­tion. In­dia faced the brunt of the sanc­tions the US im­posed on any coun­try doing business with Iran. The coun­try ac­counts for 10 per cent of In­dia’s oil im­ports, and the US agreed for a six-month waiver till Delhi found alternativ­e sources. Last month, the US ter­mi­nated all such waivers, forc­ing In­dia to pick up oil at higher prices from other coun­tries. When Pom­peo was in Delhi, Jais­hankar un­der­lined the im­por­tance of the need to en­sure the sta­bil­ity, pre­dictabil­ity and af­ford­abil­ity of In­dia’s en­ergy in­puts as it im­ported as much as 80 per cent of its re­quire­ments.

Another bone of con­tention is In­dia’s arms im­ports from Russia, par­tic­u­larly the S-400 mis­sile deal which was signed in Oc­to­ber last year. Here, too, the US has im­posed

sanc­tions on any coun­try buy­ing arms from Russia. It has also threat­ened to not sell its top-of-the-line ar­ma­ments to any coun­try that de­fied this re­stric­tion. In­dia was firm in its re­fusal to can­cel the deal as it has a long-stand­ing re­la­tion­ship with Russia and has asked for a pres­i­den­tial waiver against sanc­tions. Pom­peo was un­will­ing to com­mit to this on his visit, but there are in­di­ca­tions that the US may re­lent, pro­vided In­dia com­pen­sates them on other is­sues.

Much of the rea­son why In­dia has not drawn closer to the US is be­cause Modi be­lieves that the emerg­ing in­ter­na­tional order will be a mul­ti­po­lar one. And that it is im­por­tant for In­dia to be multi-aligned, bal­anc­ing the var­i­ous forces and en­sur­ing bet­ter re­la­tions with some and bad re­la­tions with none. While the US may be keen that In­dia take its side in its trade war with China, New Delhi is clear that its re­la­tions with Bei­jing are in­de­pen­dent of its deal­ings with the US. Wash­ing­ton, though, is miffed with the alacrity with which the Modi gov­ern­ment moves to sort out dis­putes with China, and how it does not ex­hibit the same sense of ur­gency in deal­ing with US de­mands. On the pos­i­tive side, the Trump ad­min­is­tra­tion has strongly backed In­dia’s con­cerns about ter­ror em­a­nat­ing from Pak­istan and warned Is­lam­abad that it will not tol­er­ate cross-bor­der at­tacks. Sig­nif­i­cantly, the US

backed In­dia when Modi or­dered the Balakot strikes that in­volved In­dian Air Force jets cross­ing the Line of Con­trol into Pak­istan. US in­tel­li­gence agen­cies also share reg­u­lar in­tel­li­gence in­puts with their In­dian coun­ter­parts on ter­ror­ist ac­tiv­i­ties in Pak­istan.

THE E-COM­MERCE BUG­BEAR

There is fresh trou­ble brew­ing, though, over In­dia’s new draft e-com­merce pol­icy. Not to men­tion the dis­ap­proval the US has ex­pressed at In­dia doing business with Chi­nese tele­com gi­ant Huawei whom it has re­cently banned for se­cu­rity rea­sons. Pom­peo was aware of the num­ber of con­tentious is­sues that the two coun­tries would have to deal with while keep­ing the larger vi­sion of en­gag­ing in a mean­ing­ful strate­gic re­la­tion­ship. “We have an enor­mous eco­nomic re­la­tion­ship be­tween our two coun­tries,” he said, “and it is ab­so­lutely in­evitable that coun­tries that have a re­la­tion­ship as deep, as strong, as eco­nom­i­cally con­nected as ours, will from time to time find places where they just can’t quite fig­ure it out for the mo­ment. We are work­ing on them and we’ll fig­ure them out.”

By ap­point­ing Jais­hankar, a for­mer for­eign sec­re­tary, as ex­ter­nal af­fairs min­is­ter, Modi has also brought in an ex­pert to deal with the US. Along with Pom­peo, the two could make a dif­fer­ence in cut­ting through the noise and come out with so­lu­tions that would be a win-win for the two coun­tries. As Tel­lis says, “What Trump wants is sat­is­fac­tion on some spe­cific is­sues. Now the ques­tion is, how hard is it for In­dia to ac­tu­ally come out with so­lu­tions that sat­isfy these par­tic­u­lar asks? I think if the spe­cific is­sues can be re­solved and this leads to get­ting the US off In­dia’s back, it is not a bad in­vest­ment for In­dia to make.”

What Pom­peo did was in­ject pos­i­tiv­ity in the ne­go­ti­a­tions and re­it­er­ate Amer­ica’s keen­ness to en­hance its strate­gic re­la­tion­ship with In­dia. A se­nior In­dian diplo­mat, who was in­volved in the meet­ings, ob­served, “Pom­peo was con­ge­nial and not at all ac­ri­mo­nious. The big take­away was that the US con­veyed that the In­dian re­la­tion­ship is im­por­tant to it. That In­dia has a strong gov­ern­ment, it is a coun­try on a good growth path and whose in­ter­ests are sim­i­lar to American ones. The will­ing­ness to work with us came through very well.” Pom­peo’s visit also laid the ground for Modi and Trump to build on dur­ing their bi­lat­eral meet­ing on the side­lines of the G-20 sum­mit. It will take a lot of hard work and give and take. But the good thing is that In­dia and the US, rather than butting their heads against each other, are work­ing out ways to shake hands and re­solve their dis­putes.

JACQUELYN MARTIN/AFP/GETTY IM­AGES

PUTTING A SMILE ON IT US Sec­re­tary of State Mike Pom­peo (left) with In­dia For­eign Min­is­ter S. Jais­hankar in New Delhi on June 26

AIR POWER An American AH-64 Apache he­li­copter

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