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India-US trade ties hit a new low

The delicately balanced economic relations between the two countries have slipped further since the diplomatic row over Devyani Khobragade. A tug of war is on in several sectors, especially pharmaceuticals, solar power and aviation

Barack Obama & Manmohan Singh
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Once considered 'strategic natural allies', India and the United States are now witnessing one of the worst periods in bilateral ties. US President Barack Obama's visit to India in November 2010 had raised expectations that the relationship would be cemented further. Instead, it has only hit rough patches since.

There are several dialogue mechanisms, such as the Ministerial Trade Policy Forum and a ministerial-level Economic and Financial Partnership, to strengthen bilateral engagement on economic and trade issues and iron out differences. But all of them seem to have stopped functioning, especially after the recent diplomatic row following the arrest of Devyani Khobragade, India's deputy consul general in New York, over charges of visa fraud.

US International Trade Commission (USITC), a quasi judicial body that advises the US President and US Congress on trade matters, has launched an investigation into India's trade, investment and industrial policies. It has sought permission to visit India to carry out the probe, but India has refused to cooperate. USITC believes that India is not doing enough to allow innovation and is insisting on local procurement, which is adversely affecting American firms.

Pharmaceuticals, solar power and aviation are some of the sectors that have been affected by these tensions.

On February 26, the US carried out an open campaign at Capitol Hill called 'Harmful Indian Medicines' against the Indian generic drugs industry. USITC has also been holding public hearings in Washington DC as part of its investigation titled 'Trade, investment and industrial policies in India: Effects on the US economy'. Various industry associations from India have appeared for these hearings. In his testimony before USITC,

DG Shah, secretary general, Indian Pharmaceutical Alliance, said, "Innovator pharmaceutical companies have expressed concern about the grant of compulsory licences by India for reasons other than public health emergencies. This is not a provision that is unique to India. Many countries provide for grant of compulsory licences in the 'public interest', a term that is universally acknowledged to have a wider ambit than public health emergencies."

In the last few years, US Food and Drug Administration (USFDA) has also intensified its actions against Indian drug companies, especially Ranbaxy, with increased inspections and regulatory measures. India is the largest drugs supplier to US and accounts for 40 per cent of the generic drugs used in the US. During her visit to India from February 10 to 18, Commissioner Margaret Hamburg said that if Indian wanted to increase its presence in the US, it would have to adhere to standards. In 2013, US FDA had sent out 21 warning notices concerning the quality of drugs. Half of these were directed at Indian companies, including Ranbaxy and Wockhardt.

During the last meeting of the India-US Financial and Economic Partnership in Washington in October 2013, US firms had been extremely vocal about the "deteriorating innovation climate" in India. American companies have been particularly miffed ever since the controller general of patents, designs and trademarks decided to grant compulsory licence to Natco Pharma to produce and sell generic versions of Bayer-Onyx's cancer drug, Nexavar.

The matter got accentuated in April last year when the Supreme Court of India rejected a plea by Swiss company Novartis to patent its cancer drug, Glivec.

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The uncomfortable undercurrents are evident even though India and US are negotiating a bilateral investment treaty. In the last one year, there have been over 70 senior-level visits from both sides, including those of US Vice President Joe Biden and US Secretary of State John Kerry. In September 2013, Prime Minister had also visited the US and had held a third summit-level meeting with President Obama. None of this has eased tensions.

"It would not be proper to relate the Khobragade case to the series of measures that the US has taken or proposes to take against India," says Biswajit Dhar, director general, Research and Information System for Developing Countries, a Delhi-based think-tank under the ministry of external affairs. "between India and US have been on the edge for quite some time and the US has handed out similar threats in the past. It has had a long-standing issue with India's intellectual property regime, in particular the patent laws. India was one of the first countries that US targeted after it introduced the Special 301 provisions (which identifies trade barriers to US companies and products due to intellectual property laws) in its trade act," Dhar says. He says there are serious differences of perception about India's patent law between the two countries. While India has tempered the patent rights by introducing provisions to meet the public policy objectives like access to medicines, US would like to see unhindered exercise of its rights by the patent owners.

Now the US Chamber of Commerce has asked its government to put India under the 'Priority Foreign Country' list so that its intellectual property laws can be closely scrutinised. This would, in effect, also rank Indian among the worst violators of intellectual property rights. A final call on this will be taken by US Trade Representative Michael Froman by the end of April. The chamber has alleged that India is adopting localisation measures under which it is asking US companies to transfer technology to domestic firms or produce locally to get more access to the markets here.

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Earlier this month, US dragged India to the World Trade Organisation's (WTO) Dispute Settlement Body, filing a second case against it under Phase 2 of the Jawaharlal Nehru National Solar Mission. It alleged that the mission made it compulsory for solar power developers to use Indian-manufactured equipment instead of American products and thus, "discriminate against US exports". US had filed a similar case in February last year during Phase I but had not pursued it.

There are other trade disputes too. While India has taken US to WTO over duties on import of steel rods, US has filed a case against India on poultry imports. "One can definitely argue that the American companies are trying to make their own rules. But that does not mean we should not draw our red line," says Chintamani Mahapatra, chairperson, Centre for Canadian, US and Latin American Studies in the School of International Studies, Jawaharlal Nehru University. "Bilateral tensions are soaring because US wants more access to Indian markets," Mahapatra adds.

Trade figures indicate why US is getting increasingly miffed with India. The reached an all-time high of over $63.7 billion in 2013, with almost $20 billion trade surplus in favour of India. According to the US Census Bureau, in 2013, while US exported goods worth $21.87 billion to India, its import from India was worth $41.82 billion, with the over trade being a record $63.7 billion - an increase of 1.7 per cent from the previous year.

US is the fifth largest source of foreign direct investments to India. According to official statistics of September 2013, the cumulative FDI inflows from the US from April 2000 to March 2013 amounted to about $11.6 billion - that's nearly 6 per cent of the total FDI into India.

Meanwhile, increase in visa fees, processing delays and other procedural difficulties have made it tedious for Indian professionals to obtain a US visa. In August 2010, US enacted the Emergency Supplemental Appropriations Act to raise $600 million for augmenting US Border Security by hiking the fee applicable to H1B and L category visas until 2014. Later in December 2010, the James Zadroga 9/11 Health and Compensation Act extended the period of enhanced fee on H1B and L visa categories to 2015.

The US is now in the process of overhauling its immigration regime under which it has proposed measures that are expected to severely impact Indian information technology firms given that they are the largest users of H1B.

In yet another blow to India-US ties, US Federal Aviation Administration has downgraded India's aviation safety rating, thus grounding the plans of Indian carriers such as Air India and Jet Airways to increase the number of flights to the US.

"The Obama administration's focus on India has always been a little weak," says Sanjay Notani, partner, Economic Laws Practice, a multi-disciplinary law firm. "But considering the size of the Indian market, it will not be prudent for US to ignore India. Moreover, these tensions in bilateral relations are nothing but US trying to gain greater foothold as India develops. Ultimately, India and US have to get into a bilateral arrangement like a Free Trade Agreement to get preferential market access." That, he says, will reduce these tensions.

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