U.S.-India trade spat may be spiraling into a trade war

President Donald Trump meets with Prime Minister Shinzo Abe of Japan, center, and Prime Minister Narendra Modi of India, at the G-20 Summit in Osaka, Japan, on June 28, 2019. (The New York Times)

WASHINGTON, D.C.-- For all of the bonhomie between President Donald Trump and Prime Minister Narendra Modi on the sidelines of the G-20 summit in Osaka, Japan on June 28, U.S. business and industry as well as key U.S. lawmakers and policy wonks at influential think tanks, believe the U.S.-India trade spat may be spiraling into a trade war.

Consequently, there is growing concern among them that the scrupulously nurtured U.S.-India strategic partnership over recent decades could rupture if the trade issues and tariffs—that are uppermost in President Trump’s mind, to the extent that he calls India the ‘King of Tariffs’-- are not sorted out soon and some kind of rapprochement reached without any further retaliatory tit-for-tat tariffs by Washington and New Delhi.

On the eve of his summit with Modi, Trump served notice about his anathema towards tariff against American products when he tweeted, “I look forward to speaking with Prime Minister Modi about the fact that India, for years having put very high Tariffs against the United States, just recently increased the Tariffs even further. This is unacceptable and the Tariffs must be withdrawn!”

Trump’s tweet came just a three days after U.S. Secretary of State Mike Pompeo’s meeting with India’s new External Affairs Minister Subrahmanyam Jaishankar in New Delhi when he said, “Great friends are bound to have disagreements. The United States has been clear we seek greater market access and the removal of trade barriers in our economic relationship.”

“And today, I address these differences in the spirit of friendship and I think that the two of us will be able to see a good outcome for each of our two countries.”

At a joint press conference, before they began their closed door meeting with their respective delegations in Osaka, when Trump was asked about his often insulting tweets and remarks about Indian tariffs on American exports, he said, “We’ll be talking about trade,” and predicted “It’ll be very positive.”

But the jury is still out after these talks as to whether any promises or pledges were made by either side to bring down the trade tensions a peg or two and eschew from it affecting other facets of the relationship, particularly the U.S.-India defense partnership, considered the crown jewels of the relationship, but now with its own irritants in the wake of the Trump administration making clear that it’s concerned over India’s decision to purchase $5 billion worth of Russian-made S-400 missile defense systems and that it’s highly unlikely that India would be given a pass from the CAATSA(Countering America’s Adversaries Through Sanctions Act) sanctions if India consummates the deal with Moscow.

Modi’s tweet nor the briefings from either side offered any clarity if the looming trade war tensions had been alleviated and/or if any compromises had been reached.

“The talks with @POTUS  were wide ranging. We discussed ways to leverage the power of technology, improve defense and security ties as well as issues relating to trade. India stands committed to further deepen economic and cultural relations with USA. @ real DonaldTrump,” Modi tweeted.

Foreign Secretary Vijay Gokhale pointed out that “on trade issues negotiations are not done at the level of leaders, so neither time nor the level permitted any discussion on concrete issues.”

He said, “The idea was to clear the air and then to set the agenda for discussions in resolving the trade matters and in that direction both leaders have directed officials to now move forward and I think that is where we found this discussion very open and very productive.”

But Gokhale acknowledged that concerns over trade ties were on the table “and what was agreed was that the trade ministers of both countries would meet at an early date and would try and sort out these issues,” and that Modi had said that “now we should now look forward and we should see how we can resolve some of these issues.”

Some business and industry sources, who wished not to be identified, told India Abroad that the dye seemed to have been cast of these trade tensions being taken to a new level when just a day after Pompeo's conciliatory remarks at the U.S.-India Business Council’s India Ideas Summit on June 12, Commerce Secretary Wilbur Ross had launched a no-holds barred attack reminiscent of Trump’s India is the ‘King of Tariffs’ when he all but made the same condescending remarks, and they speculated that this may have been the straw that broke the camel's back with India that had been reluctant to impose retaliatory tariffs after the GSP benefits accorded India were stripped by the Trump administration, punched back with some punitive tariffs of its own, including some as high as 70 percent.

Ross in his keynote on June 13, said, “The US is India’s largest export destination; while India, with a population of 1.35 billion people, is only our 13th largest export market… This imbalance is due — importantly — to overly restrictive market access barriers.

“India’s average applied tariff rate of 13.8 per cent remains the highest of any major world economy. It has a 60 per cent tariff on automobiles, and 150 per cent on alcoholic beverages. On motorcycles, it is 50 per cent while ours is just 2.4 per cent. Its bound tariff rates on agricultural products average 113.5 per cent, and are as high as 300 per cent,” he complained bitterly.

In contrasting it with the U.S. Ross said, “The U.S. has zero tariffs on 61 per cent of the total value of our imports, encompassing more than 17,000 categories of products. On thousands of additional products, our tariffs are lower than what other countries impose.”

He added, “High tariffs, non-tariff barriers, and unfair trade practices by our global partners have cost our nation entire industries, good-paying jobs, and lost innovation. These protectionist practices also breed companies in places like India that have not become globally competitive, and, therefore, hurt local economies.”

Ross declared, “These barriers, some of which are new, impede the development of viable commercial relationships.”

The Commerce Secretary said that during a visit to New Delhi in May, he had assured Modi that the Trump administration “would hold off on its GSP decision until after the election, so that it would not interfere with them,” but that concerns over tariffs “needed to be addressed in order to avoid a possible negative decision”.

“They were not addressed and, therefore, because India has not assured the U.S. that it will provide equitable and reasonable access to its market, President Trump terminated India’s GSP designation,” Ross said.

Michael Kugelman, Asia Programdirector and senior associate for South Asia at the Woodrow Wilson International Center for Scholars in Washington told India Abroad in an interview that “it’s quite clear that Pompeo’s visit to India was more about damage control than deal making. And that’s exactly what we should have expected, given the serious tensions on the commercial side of the partnership.”

He noted that “Pompeo went out of his way to offer positive messaging and effusive praise about India and the relationship, which was clearly meant to signal Washington’s continued commitment to the partnership—and to addressing the obstacles—during one of the most tumultuous periods in bilateral relations for several years.”

But Kugelman said, “It also appears that the two sides didn’t make that much headway in addressing their various bones of contention.”

He acknowledged that the Modi-Trump meeting at the G20 was as expected with both leaders emphasizing the positives, particularly the defense partnership and shared efforts to push back against China.”

“But Trump is notoriously unpredictable, and we know that trade policy is very much on his mind,” he predicted that offhand complaint about tariffs on Harley-Davidsons, tweets and remarks like India being the “King of Tariffs” certainly could not be ruled out in the future as American farmers and others exporting to India feel the pain of Indian tariffs.

 Kugelman said, “Ultimately, after the Pompeo visit to India, the two sides are still treading water and trying to figure out the best way to get safely to shore. They’re not in danger of sinking or drowning, but the bottom line is that the relationship continues to be at a fragile point. It’s no longer possible to just shrug off the tensions on the trade and economic side.”

“The partnership on the whole is affected, and it’s in need of a reboot. It’s hard to sustain a deep, broad, and strategic partnership with such serious strains on the commercial side,” he said.

Kugelman predicted, “I fear the US and India are entering uncharted territory in their trade tensions. It's the tit-for-tat sequencing that's so troubling--first the US withdrew GSP privileges, then India-after many months of restraint-imposed new tariffs, and now the US is likely to impose new caps on H-1B visas. That's some pretty serious escalation playing out over relatively little time.”

He also pointed out that “the commercial side of the relationship has long lagged behind the fast-growing defense partnership, and the disputes over protectionism are longstanding, but what makes the situation more serious now is the Trump effect.”

Kugelman said, “The White House, led by Trump himself, is intent on taking an uncompromisingly stringent position on trade that will brook little flexibility or moderation,” and argued that U.S.-India trade tensions are a reflection of a larger U.S. policy on global trade that is bound to cause frictions with U.S. friends and foes alike.”

He said, “I don't think an outright trade war is in the offing. As bad as things look on the commercial side of the partnership, I don't think that Washington will escalate as much as it has with the likes of China.”

Kugelman said, “There's a recognition here in Washington that strategic partnership with New Delhi matters, and particularly with the recent rollout of an Indo-Pacific strategy that envisions India playing an essential role in helping the U.S. carry out its Asia policy and push back against China.”

“So, while we're likely going to see tariffs imposed by both sides, I don't think the US will ratchet tensions up to the next level by, for example, investigating India's trade practices.” 

But Kugelman said that by no means does this mean that “we should expect smooth sailing ahead? Not necessarily. And let's be clear--there are several potential provocations on the economic side that could harm the relationship in a big way.”

He said, “If India does go ahead with its S-400 deal with Moscow and the U.S. decides to penalize New Delhi for violating U.S. sanctions on Russia, then the U.S. and India would be faced with their biggest diplomatic crisis in years--perhaps since the (former Deputy Indian Consul General in New York Devyani)Khobragade affair from a few years back.”

“So, to be sure, there are several scenarios that could unfold and leave the two sides in an unsettling all-bets-are-off position,” Kugelman said.

But he reiterated that he did not believe that a trade war is imminent because thankfully, “Both sides have been working on high levels to ease trade tensions and find some type of middle ground. This is the sign of a healthy relationship that enjoys trust and goodwill.”

“So, as bad as things have gotten, I'm sure both sides will be working actively on high levels to try to bring things back from the brink,” he said.

Aparna Pande, Director of the India Initiative at the Hudson Institute—a D.C. think tank—lauded what appears to have been a frank discussion between Pompeo and Jaishankar. The important thing to remember is that at least a dialogue is going on.”

“However,” she told India Abroad, “Both the countries need to find a reasonable equilibrium. Disagreements must not be allowed to outweigh pursuit of shared interests.”

Pande told India Abroad, “The importance of India is understood by the American political leadership,” and she referred to the missive to Pompeo by Rep. Eliot Engel, chairman of House Foreign Affairs Committee as reflective of this.

In his letter to Pompeo on the eve of his trip to India, Engel wrote, “The measure and strength of bilateral relationships cannot be boiled down to trade deficits and tariffs.”

Engel also complained that there is “lack of predictability and coherence” in the Trump administration’s strategic relationship with India, and said “there is a growing view that the administration is attempting to coerce India into complying with the U.S. demands on a variety of issues, rather than negotiating with them as a strategic partner.”

"I am deeply concerned by the inconsistencies between the administration's rhetoric and actions toward India, which are further exacerbated by the lack of a confirmed assistant secretary more than two years into this administration's term," he said.

Engel acknowledged, “The trade concerns are real, and the United States must continue to work with the Indian government on market access and other important issues like international child abduction and human rights.”

"But the administration must also demonstrate a predictable, coherent, and consistent strategy that strengthens the US-India cooperation, especially in areas where our interests and values align. It's critical that American engagement support those in India who seek to further strengthen India's ties to the United States.” He urged.

And, on the eve of the Trump-Modi summit, an influential bipartisan group of U.S. lawmakers from both the Senate and House, called on PresidentTrump to stay focused on "big picture" of U.S.-India ties.

In their letter to Trump the lawmakers, including Senators John Cornyn(R-Tx.) and Mark Warner (D.-Va.), --co-chairs of the Senate India Caucus—and Reps. Ami Bera (D.-Calif.) and George Holding(R.-N.C.)—both senior members of the House Foreign Affairs Committee, acknowledged, "We understand that trade relations between the United States and India have experienced significant tensions in recent years, with the recent revocation of a trade preference program by the United States and the imposition of retaliatory tariffs by the Indian government on a range of US imports.”

They said these challenges and disagreements “demand sustained attention and dialogue given the importance of each country to the other's economic success,” and argued, "While our economic relationship may have its ups and downs, it delivers countless jobs and benefits to our two countries. With India's large youth population, and steady economic growth, these benefits promise to only accelerate in the coming years.”

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