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India cannot afford a trade tiff with the US

G Chandrashekhar | Updated on June 19, 2019 Published on June 19, 2019

The US is our largest trading partner and much of our exports are labour-intensive products. Negotiations are the best option

As India readies retaliatory duties on 29 goods of US origin worth $200 million (BusinessLine, June 14) in response to the US imposing tariffs on Indian steel and aluminium products, concerns are emerging whether the country is really ready for a tariff war similar to that between the US and China.

Without doubt, the scale in the two cases (US-China and US-India) is vastly different. China has the economic and political clout to deal with the US; but India is certainly not in that league. While US trade deficit with China runs into a few hundred billion dollars, with India it is minuscule at about $20 billion.

For a year New Delhi kept postponing the decision to impose retaliatory tariffs on imports from the US, raising hopes of a negotiated settlement; but now expectations appear to have come to a nought.

The US has been demanding greater market access for a number of its products, including dairy items, agri-commodities, medical devices, and so on. But India has been dragging its feet, thereby frustrating the attempts of its largest trading partner. The US is now fed up with India and is trying to force a decision on its demands.

Exclusion of India from the Generalised System of Preferences (GSP) scheme should be seen as a beginning of the US’ hardening stand. Thankfully, India’s reliance on GSP has substantially reduced over the years and the real damage to India should be manageable.

High stakes

Be that as it may, India cannot afford an extended tariff war with the US as the stakes are substantial. It is critical to recognise that a large number of merchandise exports from India to the US are labour intensive. Gem and jewellery, textiles and clothing, as also fish and seafood all carry a huge labour component.

For India, textiles and clothing represent significant export to the US; but we are steadily losing our export competitiveness to other competing origins with lower wages. So, a reduction in these exports or loss of market-share can potentially create job losses in India, exacerbating the already poor jobs growth everyone is talking about.

Another area is services. The American market is crucial for India’s IT services export. Any restriction on IT services would further dampen India’s already fragile export outlook.

The US is India’s largest trading partner and exports to the US have been growing steadily over the last two decades.

A trade friction or tariff war with the US is unlikely to advance India’s economic interests. It will not only hurt India’s already weak exports but also has the potential to hurt labour-intensive export products.

At the same time, the US may not be satisfied with greater market access for dairy, poultry and agri-products alone. The US is unhappy with India’s latest e-commerce and data localisation policies which are seen restrictive. These are seen hurting American business interests, especially for companies such as Walmart and Amazon.

On the other hand, India’s concerns over possible predatory pricing and deep discounting by multinational retailers are real too. Such practices are likely to swamp domestic players. With the middle-class expanding rapidly and organised retail in its new avatar as electronic commerce taking hold, India is arguably among the world’s largest potential markets.

In a dilemma

The Indian government is riding on the horns of a dilemma. On the one hand it faces economic and political compulsions at home to protect and advance domestic interests and, on the other, accommodate the demands of the country’s largest trading partner.

New Delhi must keep in mind the country’s long-term interests. Negotiations are the way forward; accommodation, even if partial, would make sense. At the same time, we cannot have policies that all but shut out foreign investment. We have done little to build genuine global competitiveness for many of the Indian products. It’s time we got down to that task seriously.

The author is a policy commentator and commodities market specialist. Views are personal

Published on June 19, 2019

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