Selling A New Agenda

When Prime Minister Inder Gujral met US President Bill Clinton trade was not at the top of the agenda. But it was the subtext that underlay the entire meeting. India is, as we never tire of telling people, the worlds second largest market after China. And the US is by far Indias biggest trading partner. Therefore the symbolism of the meeting was clear; and so were the economic forces driving it.

But while Indo-US trade has boomed in the last six years since liberalisation, there are clouds on the horizon. Will cheap Mexican imports displace Indian exports to the US? And will India upset the trade apple-cart by hanging unnecessarily tough at the WTO?

Clinton and Gujral certainly didnt have time to go into these issues during their photo-op meeting in New York. Behind-the-scenes, however, officials on both sides will be poring through the trade figures to see where the selling game can begin. And, more importantly, India has turned up on the radar screens of American businessmen, as the potential of the market has become more obvious.

Indo-US trade dates all the way back to the 18th century. But, more recently two events have spurred the efforts of both sides to boost trade. For the Americans, the ending of the Cold War has made it take a second look at India. Add to that the fresh business opportunities presented by the opening of the Indian economy.

Dont forget that the US is by far Indias largest trading partner and it has been for quite a long time now. It accounts for about 13.8 per cent of Indias trade. Not even the United Kingdom, with its historical connections with India can match that to any extent.

The figures tell the whole story about how Indo-US trading relations have skyrocketed since the beginning of the decade. Back in 1990-91 Indo-US trade was stuck around the Rs 100 billion mark. In 1996-97 that climbed to Rs 352 billion a rise of 250 per cent. The US accounted for 19.8 per cent of Indias total exports in 1996-97, up from 14.7 per cent in 1990-91. Its share in Indias imports fell to 8.8 per cent in 1996-97 from 12.1 per cent in 1990-91. Though India had a trade deficit with the US of Rs 4.5 billion in 1990-91, it has enjoyed a favourable trade balance ever since.

That isnt the entire story. The US is now the central country in the giant Nafta (North American Free Trade Zone). Nafta includes both the US and Canada and the two countries account for 21 per cent of Indias exports. Conversely, 10 per cent of Indias imports come from these two countries.

The trade picture has changed in several ways since the 1990-91 period. At that time Indias trade balance was in the deficit to the tune of Rs 7.3 billion with the US and Canada. Exports from India to North America accounted for 15.6 per cent of Indias total exports, and imports from this region accounted for 13.4 per cent of Indias total imports. Since 1991-92 Indias exports to North America have risen steadily (except for 1993-94) and imports have fallen. Of course, it should be pointed out that the US is the biggest customer for Indian goods. Nearly 95 per cent of our exports to the Nafta countries, goes to the US. Similarly, 90 per cent of the imports from Nafta are from the US.

This may seem like a fairly happy scenario. But there could be trouble looming on the southern borders of the US. There is a big question: will Mexico which as a member of Nafta is on the inside track turn into a serious competitor with India in the US market.

There are two views about whether Mexico will eventually become a threat for countries like India in the gigantic US market. On one hand a World Bank study has pooh-poohed Indian fears. It estimated that around 2 per cent of Indias trade with the US might be affected by the Mexican challenge.

Other economists, however, believe that the threat could be much more serious. They point out that Nafta countries like Mexico will displace India as potential trading partners. Says economist Dilip Nachane: Mexico is a serious competitor with India for the American market. Several items including textiles and some commercial crops from Mexico compete with similar items from developing countries.

What advantages does Mexico have over India, and indeed the rest of the world. As a member of the free trade zone Mexico gets automatic duty-free access to US markets. And this could be a serious threat since Indian exporters havent been able to make a dent with high value-added products. Most exporters still focus on the low-end of the market with products like diamond jewellery, textiles, cashew nuts and iron and steel products. Only in software does India have an edge. Therefore, there is clearly a threat that the US will buy Mexican in these segments.

There are also other irritants that are hampering the growth of Indo-US trade. On one hand the Americans have been pleased by Indias efforts to introduce market-oriented reforms. But on the other hand, they have been irked by the slow pace of reforms. Paula Stern, a US commentator says: India should make its unilateral domestic reforms applicable globally. India can benefit from how it packages its liberalisation vis-a-vis the US-India bilateral relations, and vis-a-vis Indias multilateral negotiations at the WTO.

Despite everything there have been ups and downs in Indo-US economic relations during the last few years. One high point came in January 1995 when the former US Commerce secretary Ron Brown led a high-level trade and investment mission to India that resulted in the signing of agreements worth more than $ 7 billion in power generation, transportation, financial services, telecommunications and health care products.

Now, the two sides have reached the tougher part. The US is trying to take proceedings in Geneva one step further and wants India to start negotiations on a phased opening up of the financial services market. US negotiators like Jeffrey Lang the deputy trade representative have frowned on Indian rules like the one that prevents foreign banks from owning more than 15 per cent of the countrys total banking assets. Also, India is obliged at present, to only issue eight bank branch licences in a year.

The US has also been trying to drag India kicking and screaming to a WTO agreement in Geneva. At the last round of negotiations the Americans took a tough stand and refused to accept Indias demand for a long period before the phasing out of quantitative restrictions (QRs).

Many Indian economists, however, argue that the US has not been evenhanded in its efforts to blast away tariff walls. The US, certainly operates behind high tariff walls when it suits them. In products like sugar, peanuts and wheat, tariffs are reported to be as high as 244 per cent, 174 per cent and 83 per cent respectively. Similarly, the Europeans play the same game and impose giant-sized tariffs on products like beef, wheat and lamb. The tariffs are 213 per cent, 168 per cent and 144 per cent respectively. Japan also imposes huge tariffs when it suits them and have slapped a 388 per cent tariff on wheat products.

Which way will Indo-US trade move in the years to come? A great deal depends on what happens at the WTO negotiations. Nachane suggests that India should relax rules on the import of consumer goods. But in exchange it should ask the US to go easy on textile imports. However, he predicts trouble ahead because India doesnt appear to be taking the WTO seriously. The US, on the other hand, is likely to haul India to the dispute settlement tribunals at every opportunity. And that could poison the atmosphere at a times when two-way trade is going pretty well. While Indo-US trade has boomed in the last six years, there are clouds on the horizon. Will cheap Mexican imports displace Indian exports to the US? And will India upset the trade apple-cart by hanging unnecessarily tough at the WTO?.