Can MAGA and MIGA co-exist? India-US trade tariff talks may hold the key

While a trade deal between India and US looks natural, given differences in economic structure, India will need to improve quality of its exports failing which US will simply turn to other producers

In his 2023 book 'No Trade Is Free', former United States Trade Representative (USTR) Robert Lighthizer recounts his trade negotiations with India in 2020 for a mini trade deal that ultimately failed to materialise.

 

“We raised our issues: tariffs, agriculture access, medical device impediments, barriers to e-commerce and insurance, discrimination in the electronic payment sector, fish subsidies, and the list goes on. We made headway but could never quite close a deal. I always felt that (Piyush) Goyal wanted one but had to contend with the bureaucracy and the farmers as well as with me,” Lighthizer says, describing trade minister Goyal as a "smart, gifted politician from Mumbai".

 

As India and the US prepare to sit down to decide the broad contours of the proposed “first tranche of a mutually beneficial, multi-sector” Bilateral Trade Agreement (BTA) announced by Prime Minister Narendra Modi and US President Donald Trump during the former’s recent visit to Washington D.C., many of the issues listed by Lightizer are expected to once again dominate the US' list of demands.  

 

“To advance this innovative, wide-ranging BTA, the US and India will take an integrated approach to strengthen and deepen bilateral trade across the goods and services sector, and will work towards increasing market access, reducing tariff and non-tariff barriers, and deepening supply chain integration,” both sides said in a joint statement earlier this month.

 

Goyal has claimed the BTA will be the “mother of all deals”, providing huge opportunities for Indians and Americans to work together and complement each other’s strengths in a very turbulent world. 

 

Win-win deal?

 

At first glance, a trade deal between India and the US looks natural. Given differences in their economic structure, they traditionally specialise in different sectors — India in labor-intensive goods and IT services, and the US in high-tech products. However, India’s ambition to move up the value chain and market access concerns make negotiations complex.

 

“The BTA will be a test of how far India is willing to accommodate the US in its efforts to reduce bilateral trade imbalance by removing market access barriers and also, how much India is able to expand its own economic and security agenda through the framework. India’s negotiations need to be tactful and forward-looking in this regard,” said Amitendu Palit, research lead (trade and economics) at the Institute of South Asian Studies (ISAS), an autonomous research institute at the National University of Singapore (NUS).

 

A senior government official, requesting anonymity, said though the contours of the proposed trade deal are yet to be finalised, it is expected to be a comprehensive one. “Americans will not just settle with goods. For them, ecommerce matters as Amazon, Walmart-Flipkart are here. So they may want us to comply with their standards and rules. Telecommunications services also may be part of the deal as Starlink wants to come to India. Tesla won’t come without investment protection through a bilateral investment treaty. It will be goods, services and investment,” he pointed out.  

 

India has already cut tariffs on some major US exports such as high-end motorcycles and bourbon whisky. “Going forward, it might need to slash tariffs on imported electric vehicles to increase local market access for Tesla, as well as on several agricultural exports, such as dairy, fruits and vegetables. Cutting tariffs on dairy will be politically difficult. India’s best strategy might be to go for phased cuts. This might not be necessary for many other items though, as many US exports are not items for mass consumption in India,” Palit added.

 

A former senior commerce ministry official who has earlier negotiated with the Trump administration said America has no export capacity that will threaten us. “We are short-sighted in not allowing import of items like blueberries etc. We should ask the US to bring down duty on labour-intensive products such as textiles, leather and gems-and-jewellery from 5-7 per cent to zero,” he said.  

 

Palit said India’s big ‘wins’ in the BTA should target services. “It should trade off tariff cuts on US exports vis-à-vis the benefits it picks up in services. India already enjoys a strong reputation among leading US businesses for being an ideal location to establish Global Capacity Centres (GCCs). With the US businesses eyeing India for more long-term investments in technology and innovative sectors, India should capitalise on the sentiments in the BTA. More on-site US presence in GCCs can also help India in negotiating better deals for short-term movements of professionals, as they travel back and forth between their Indian and US operations,” he added.

 

Reciprocal hurdle

 

Hours before Trump met Modi, the US president announced plans to impose reciprocal tariffs on major trading partners to ensure fair and reciprocal trade. Reciprocal tariffs on US’ trade partners will aim to reduce bilateral trade deficits and will be calculated on the basis of the tariffs faced by American exports to partner country markets, along with other market access inhibiting factors like non trade barriers, government subsidies, extra-territorial taxes and exchange rate policies.

 

S&P Global on Monday said India along with South Korea and Thailand will be the most vulnerable to potential reciprocal tariffs by the US, based on the tariff differential with the US.

 

“We have to convince the US not to impose reciprocal duty on us and force us to reduce duties on non-reciprocal basis since we will be negotiating a trade deal and will bring down tariffs for the US,” the former commerce ministry official said.

 

The serving government official quoted earlier said there will be erosion of the market for India if reciprocal tariffs are imposed. “Vietnam in the competing textile space is going to benefit as their non-reciprocal tariffs are quite low. Chinese companies are manufacturing engineering, auto components out of Vietnam. They will also benefit largely,” he added.

 

Ajay Srivastava, founder, GTRI said that ahead of the April announcement of reciprocal tariffs, India should make an advance offer to the US where it can eliminate tariffs without hurting domestic industries and agriculture. “If the US rejects India’s offer, India should refuse unfair concessions and consider countermeasures, similar to China’s response to Trump’s tariffs,” he added.

 

In response to the 10 per cent tariff by the US, China has retaliated with counter tariffs and launched antitrust probes into NVidia and Google.

 

Opportunity for domestic reforms?

 

Speaking at the Kerala Global Summit last week on India Inc’s apprehension about the proposed trade deal with the US, Goyal said they would be better advised to be bold and believe in India's growth story. “I don’t think there is any cause for concern, they should enter into this negotiation from a position of strength boldly. We are willing to compete with the US. Can there be any product where we can’t compete with an economy with a per capita income of $80,000 per person? We are at $3,000 per person. Is there any product we can’t compete with the US with such a large differential of labour cost? We can assure them that this is a golden opportunity to expand business, it will open up a floodgate of new business opportunities,” he added.  

 

The former commerce ministry official said India is paying a price for not putting its house in order. “For how long can you give tariff protection to your industry? We have kept tariffs at 100 per cent for the auto sector for the last 20 years and we say we are world beaters in auto manufacturing. Our consumers pay a heavy price for the lack of competitiveness of our domestic industries,” he added.

 

The official said since India’s exports are mostly low-value-added products, their demand is very elastic while Chinese products are inelastic in demand. “When the US raises tariffs on Chinese goods, the US consumer has to absorb the higher tariff. In our case, the US consumer will shift to alternatives available elsewhere which will force our exporters to absorb the tariffs,” he added.  

 

The government official quoted earlier said the US may also have problems with India’s complicated import requirements and quality control orders which it considers non-tariff barriers.

 

“Over a period of time, the competitiveness of MSMEs have eroded as they didn’t upgrade their technology. They are not able to export items that they were able to sell in the past. That needs to change,” he added.

 

With Trump’s America First agenda (Make America Great Again) and Modi’s call for Viksit Bharat (Make India Great Again), the success of a 'MEGA' partnership will hinge on how both countries navigate their differences and sensitivities.