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Thursday, Aug 22, 2019

India must make the most of the US-China trade war to advance its international agenda

It should seek out a middle ground and agree to strong trade negotiations with the US at the G20 summit

analysis Updated: Jun 27, 2019 20:22 IST
Atman Trivedi
Atman Trivedi
India’s tariffs hit just before US Secretary of State Mike Pompeo arrived in New Delhi this week to promote US-India ties
India’s tariffs hit just before US Secretary of State Mike Pompeo arrived in New Delhi this week to promote US-India ties(AFP)
         

In the new government’s first big move regarding the United States, India raised tariffs last Monday in retaliation for Washington yanking preferential access to the American market and imposing duties on Indian metals.

Compared to the trade war now underway between Washington and Beijing, the skirmish between the United States and India appears small in scale. Yet even this narrow trade tiff should elicit real concern behind Raisina Hill’s closed doors.

It’s not just that with the current US president, a sudden, rapid escalation could always be around the corner. India’s response, while understandable, deepens scepticism about whether National Democratic Alliance 2 is serious about opening India’s markets — a necessary step to cement the country’s role as a leading player in the global economy.

In recent years, New Delhi has raised tariffs, imposed restrictions, such as price controls and local production rules, and hampered multilateral initiatives.

These moves notwithstanding, Prime Minister Narendra Modi’s government had been a model of restraint in responding to President Donald Trump’s provocations. When Trump refused to issue India a waiver for global steel and aluminium levies last year, Modi repeatedly abstained from retaliation.

Then, this May, Washington revoked India’s developing country status, granting duty-free access on about $6 billion in Indian goods. While the impact to India’s economy was localised, the rebuke arrived while the country was in the midst of elections.

Now armed with an overwhelming mandate, Modi may have decided that one, ill-timed message deserves another. India’s tariffs hit just before US Secretary of State Mike Pompeo’s recent visit got underway in New Delhi to promote US-India ties.

What happens next is anyone’s guess. The Trump administration has been in a punitive frame of mind lately, but Pompeo’s engagement presents an opportunity for a fresh start. No one likes negotiating with a gun held to their head, but getting too defensive is a luxury the Indian government cannot afford.

A number of US companies are deepening their investments as business conditions improve in India, but frustration in some corners of American business is also simmering. New restrictions on e-commerce and financial data flows and related pending laws could help trigger a wide-ranging investigation into India’s trade practices. Once initiated, such a public airing of India’s linen would likely result in tariffs across large swathes of the economy. Just ask China.

With unemployment reaching a 45-year high and growing questions over India’s actual growth rates, now is not a good time to become the next casualty in Trump’s trade war. Before real damage is done, Modi and Trump should meet as planned at the G20 summit and agree to serious trade negotiations. India needs to come to the table with significant proposals that seek out middle ground, rather than assume that the president can be placated by promises of more defence and energy purchases. His trade negotiators, American businesses, and Congress, are focused on broader market access issues.

But there is a more fundamental reason for a trade rethink. Virtually every Asian nation that has recently risen to middle-income status or better has done so on the back of its export performance. As economist Kaushik Basu has pointed out, India’s exports have been flat for the past five years. India should be emerging as the alternative to tariffed Chinese products, not be on the outside looking in at Asian value chains.

In today’s integrated global economy, India cannot significantly increase its exports while hiding behind a protective wall shielding imports. That’s a recipe for watching others race ahead.

Asian countries have been busy using regional and bilateral trade agreements to catalyse domestic changes that enhance their competitiveness.

Meanwhile, India has withdrawn from trade deals. In reality, many Delhi elites harbour doubts over whether it is ready for global competition.

Fortunately, many of the steps that would strengthen the country’s competitiveness in job-creating sectors have already been recommended by leading government economists. This familiar litany of reforms includes changes to land acquisition and labour laws, privatisation of banks and other State-owned assets, improved regulatory coherence, and streamlined government decision making.

Such reforms present hard choices, but ones that can no longer be avoided. Their implementation will allow all companies to grow at scale and make India the global manufacturing and export hub envisioned by Make In India.

Enacting complementary trade policies that open markets boils down to political will.

The current government has a commanding majority in the Lok Sabha, and it may be on track to claim the Rajya Sabha by 2020. The Opposition is in disarray. At the sub-national level, the BJP is a part of the ruling government in a majority of states.

This unique window won’t last forever. The government should make the most of this trade disagreement, to advance an ambitious and transformational agenda.

Atman Trivedi is managing director at Hills & Company, International Consultants, and adjunct fellow at the Pacific Forum. He previously worked on India matters at the US Commerce and State Departments and on the US Senate Foreign Relations Committee

The views expressed are personal

First Published: Jun 27, 2019 19:22 IST

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