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
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.