What does India-US Trade Wars Portend?

March 16, 2018: In public both India and the US admit that the bilateral relationships in all possible segments are at an all time high. But in private, all such high talks are seemingly punctuated with hiccups and heart burns. Many thought the only irritant in the otherwise cordial relationship between the two largest and oldest democracies is the H1-B visa. But many such things are surfacing mostly in the trade arena.

Close on the heels of US imposing higher import duty on steel and aluminum to protect the domestic industries and purportedly to protect the domestic jobs, an unsubstantiated accusations on India putting tariff walls against the US import of Harley Davidson motor bike, blue jeans and cranberries et al, have surfaced. The latest attack is on the export subsidies being granted by India for its exports under various schemes.

The US charge is that subsidies extended to half a dozen export products by India do not comply with the WTO norms and should be scrapped. These include incentives to SEZs and incentives on merchandize exports under various schemes. According to the US, the quantum of incentives/ subsidies offered by India to the exports aggregate to US$ 7 billion annually and it wants India to scrap such schemes. It has already dragged India to WTO on this count.

India’s stand is presently both offensive and defensive. As an offensive step, it tries to explain what that are being offered do not come under subsidies but are incentives to get over various handicaps being faced by the Indian exporters, such as infrastructural bottlenecks and to neutralize incidence of taxes. As a defensive approach, India is telling the US authorities that it should be given further time of eight years to conform to the WTO standards, which are allowed under the WTO.

According to WTO rules, a country, which has achieved a per capita income of US$1000, should end the export subsidies. India has reached that landmark only in 2015-three years ago-and it still can enjoy the comfort for another five years.

In this tug war between the two countries, there are certain narratives, where public debate has yet to take place. Not many know that on March 6, 2018, the first consignment of gas from Louisiana was flagged off to India’s Dabhol port.

Earlier to that, India imported crude oil from the US for the first time in the last 40 years. Admittedly, all these are good gestures between two countries, who want to better their trading relationship. Not much has been reported that in October last year, when the prices of liquefied natural gases fallen in the international market, India wanted to renegotiate the deal in, but was rebuffed. But India could pitch the negotiations with Qatar around that time and was successful in its effort.

Gail will have to take delivery of 182.5 trillion BTU (British theram units) of LNG amounting to US$ 3.5 million tones a year, costing close to US$ 4 a metric million BTU, higher than if bought from nearby Asian countries under spot price scheme. This involves an additional payment of Rs 40,000 crore for the entire period, according to Prof Ranganthan, a former professor of economics and energy, IIM Bangalore (appeared in the edit page of ET on 14th March 2018). Gail of course will pass on the burden to the consumers. There are also other stiff clauses in the contract, which are not very relevant in the present context.

This incident explains how India would have to bite the bullet in certain conditions to help the two-way trade to grow . If India expects the same degree of comforts from the US, it is only a natural process to catalyze the trade between the two countries and more precisely as positive gesture to the credo Buy American or America First. Such sacrifices should not lead to a syndrome “ Head I win, tail you lose”. Because such an approach in the ordinary parlance is known as “arm twisting”.