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BW Businessworld

Diplomacy: No Disruption

India and the United States have locked horns over trade measures of late, but our intangible relations still click in bilateral relations

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India lost its trade privileges with the United States and ceased to be a beneficiary of the Generalized System of Preferences (GSP). President Donald Trump announced, “I have determined that India has not assured the United States that it will provide equitable and reasonable access to its markets.  Accordingly, it is appropriate to terminate India’s designation as a beneficiary developing country effective June 5, 2019.”

The GSP programme was introduced in 1976 to promote economic growth in developing countries and allowed duty-free export of certain products from these nations to the United States. Indian exports within the ambit of the GSP are worth $5.6 billion and some 3,000 items now lose duty-free access to the US market.

President Trump’s diktat on GSP was actually the second blip in the hitherto cordial relations between India and the United States. The first occurred when the US proposed raising the application fee of H-1B visas, which when implemented, will increase costs of IT firms doing business in the US. The visa is a temporary permit to work in the US. The H-1B visa approvals of the top seven Indian IT companies dropped 43 per cent from 14,792 in 2015 to 8,468 in 2017, according to the US think-tank, the National Foundation for American Policy.

Even so, India does seem to occupy a position of primacy in President Trump’s South Asia strategy, and defence and security cooperation between the two nations are certainly on a new high. The US President’s decision to release advanced weapons systems to India, such as unmanned aerial vehicles and his decision to treat India on a par with traditional NATO allies are clear pointers to deepening defence ties. In his Council on Foreign Relations (CFR) report, former US Ambassador to India, Robert Blackwill writes, “The Trump Administration has worked to make India a more prominent part of its regional strategy. After changing the name of US Pacific Command to US Indo-Pacific Command in May 2018, the United States is now planning its first tri-service exercise with the Indian military.” The United States and India have taken up the Defence Technology and Trade Initiative (DTTI) for co-production and co-development of military equipment under seven joint working groups to explore and collaborate on critical projects, such as aircraft carriers, jet engines, intelligence, surveillance and reconnaissance, chemical-biological protection, naval systems and air systems.

The contradictions?

President Trump’s decision on GSP is in tune with the other strategies he has adopted to arrest the US trade deficit. In 2018 the bilateral trade between India and the US was worth $142 billion and trade balance was in India’s favour. The US is, as US Secretary of Commerce, Wilbur Ross has pointed out, a net investor in India. In 2017 India’s foreign direct investment (FDI) in the US market tallied up to $13.1 billion, while the FDI from the US in India exceeded $44 billion.

Some thistles have sprouted up along the way, though.  Wilbur Ross has for instance, refused to commit sale of crude oil to India at cheaper rates to compensate for the loss of Iranian oil. India imported a considerable amount of crude oil from Iran till the United States refused to allow exemptions to the sanctions it had imposed on the West Asian nation. Iran, which also faces sanctions from the European Union (EU), had been offering India a long-term credit facility, insurance and the ease of logistics for the crude oil imports.

So, why is the US miffed? Ross is known to have raised concerns about India’s new e-commerce rules implemented in 2018. The rules were vociferously opposed by the US e-tail giant Amazon and other enterprises such as Flipkart, which was acquired by the US retail chain Walmart. In its response to BW Businessworld, the U. S.-India Business Council (USIBC) said, “Given the many benefits e-commerce offers Indian and American sellers and consumers, we were surprised that the Government of India introduced significant new FDI restrictions in the sector without notice or consultations with the businesses that would be most impacted.”

The $16 billion acquisition of home-grown Flipkart by Walmart was incidentally, the world’s largest e-commerce deal. “U.S. firms have invested billions of dollars in India’s e-commerce infrastructure and industries on the basis of India’s former FDI policy for the e-commerce sector, and both the new restrictions and prospect of unpredictable policy shifts may deter foreign investment broadly, as well as limit future growth in India’s e-commerce sector and the manufacturing industries utilising e-commerce platforms,” a USIBC spokesperson said.

Sources in the Union Ministry of Commerce and Industry, however, say that the e-commerce platform is evolving and such measures give equal space, check predatory pricing and deep discounts that threaten the domestic retail industry.



How fair was the Indian government’s decision on e-commerce norms? Dhruva Jaishankar, Fellow at Brookings Institutions in Washington said, “I can’t address the fairness, but the US feels rightly or wrongly, that India has started to unfairly protect some critical growth sectors of its economy, specifically the e-commerce and data markets, which will disadvantage major US -based multinationals.” The new e-commerce norm, he felt, had been the “straw that has broken the proverbial camel’s back”. It has, he said, “added to a number of complaints from the US industry about Indian protectionism on such things as medical devices and dairy.”

Data localisation 
The US Secretary of Commerce has said that the US goal was to eliminate barriers to US companies operating in India. The barriers he spoke of, included diktats on data-localisation, which overseas investors find binding, a compromise on data security and an increase in the cost of doing business. Trade bodies like the USIBC seek flexibility on the issue. “Data policies restricting the flow of data can serve as barriers to continued growth and expansion of services in the Indian markets and affect not only the Indian consumer, but also the growth of the Indian payments market as a whole,” a USIBC spokesperson said. The USIBC is ready to work with the Indian government on the best path to resolving data storage issues for payment companies operating in India.

The China factor 
“Frankly, in every clash, there is an opportunity. There are risks also. I don’t deny that. And, obviously, my job will be to manage the risks and maximise the opportunity,” S. Jaishankar said in his maiden public address as India’s Foreign Minister. As a matter of fact, US investors feel that Prime Minister Narendra Modi’s ‘Cooperative Competitive Federalism’ mantra is working well. It is encouraging competitive states to develop their own policies to attract investment.

In May a massive 100-member trade delegation of corporate top brass arrived in India as part of the Trade Winds Indo-Pacific Forum 2019. The visit aimed to engage with the Indian government and identify measures that could make India an attractive destination for global manufacturing supply chains. “This is particularly relevant for companies seeking to ‘derisk’ their exposure to China due to growing US-China trade tensions and conflicts on IPR and technology supremacy,” explained a delegate. “With the right level of incentives and policy shifts, there is a significant role for USIBC and the US-India trade partnership to play in the global value chain,” he said. US companies from diverse sectors such as aviation and defence, energy, healthcare, digital services, automotive, consumer goods and agribusiness are keen to shift their focus toward India. The urgency to seize the opportunity, though, is not yet evident in the corridors of South Block. Foreign policies now must open towards real term trade and investment gains–that hardwork which our beureucrats in the ministry are wary of trading. Dhruva Jaishankar offers an explanation. “In the short run, India is unlikely to benefit from a U S - China trade war. India does not have the capacity to export most of the products that might benefit from the resulting trade diversion. The biggest beneficiaries may in fact be Canada and Mexico, who have agreed to a revised trade agreement with the United States. However, in the long-run, the fact that many countries  not just the United States, but also Japan, Australia, Taiwan, South Korea, and parts of Southeast Asia  are making explicit attempts at diversifying their trade relationship away from China, will undoubtedly benefit India.”    

The era of defense coorporation

The little blips in trade relations, however, is hugely outweighed by an evolving and deepening cooperation in defence and security between the United States and India. As a matter of fact, the US is poised to become India’s second largest defence partner. The bilateral trade in defence equipment between the two nations has catapulted from nil in 2008 to an anticipated $18 billion this year. In 2016, the United States elevated India to a Major Defense Partner by conferring the Tier - 1 status in Strategic Trade Authorization.

India and the US are working on a framework to facilitate transfer of critical military technology and classified information by US defence firms to the Indian private sector for joint ventures announced in June by the US Administration. Last month, Lockheed Martin offered to manufacture its newly rolled out F-21 fighter in India.  

The two largest democracies are well aligned to play the major role in the world where we now often come across the  conflict on the rule based global structure—and that India is confronted now and later. Democracies do engage in argument and counter argument and that no disruption.


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