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Are India, US on the brink of trade war?

Political rhetoric ahead of Presidential elections in US is denting trade ties

Nayanima Basu  |  New Delhi 

After many years, the world’s oldest and largest democracies, India and the US, have locked horns in an unprecedented manner over a series of trade disputes that have left a question mark on trade relations between the countries. The imbroglio, on issues such as poultry exports, duty on steel rods and professional visa fees, has seen both approach the (WTO)’s (DSB) to put an end to the bitter dispute.

However, some experts believe the dispute is about more than what meets the eye. Others feel the situation is normal, one akin to any between strong trading partners. Over the last couple of years, as the US gradually saw a change of regime, trade ties between India and the US have seen a paradigm shift. A look at what is happening behind the curtains reveals significant factors influencing the US’ stance with its leading Asian trade partners. A large part of it is political rhetoric aimed at winning the confidence of the US citizenry, which loves to see their leader raise a strong and stern voice in global matters.

In March, the US commerce department had imposed a 286 per cent countervailing duty on specific steel rods imported from India, arguing these products were heavily subsidised and, therefore, led to an unfair pricing mechanism. In 2010, the US had increased fees for professional visas — H1B and L1 — for applicants of firms in which more than half the employees were immigrants. India challenged both the moves in the WTO, while the US moved the WTO’s DSB against India for restricting its poultry exports into the country.

“Since the economic downturn, lobbies in the US have been quite active in securing their interests. Often, in the name of securing jobs for American citizens, the prevailing mood in the administration is to aggressively secure incremental market access, ostensibly to remedy the bulging current account deficit. The former dimension has found expression through actions taken against service providers in India or select industries in China that have, or could have, a sizeable presence in the US market,” says Biswajit Dhar, director-general of the New Delhi-based Research and Information System for Developing Countries. He adds action taken by the US administration on trade can, therefore, be quite independent of the political relations US shares with its partners.

According to a senior official from the ministry of commerce and industry, the US has become “extremely protectionist” in the last couple of years, and is linking just about everything to the coming Presidential elections in that country. “They are entirely playing to their domestic constituency. It is their way of jingoism,” the official told Business Standard, on condition of anonymity.

In stark contrast to the rising friction in trade between the countries, US President Barack Obama’s visit to India in November 2010 had seen much bonhomie between the nations. Obama had then scouted for greater access for US companies to the Indian market, signing deals worth billions of dollars.

Some trade analysts view the recent trade disputes as indirect fallout of the of global trade talks in the WTO, stalled for more than a decade. Recently, the US had urged emerging countries like India and China to take more responsibility in giving market access to goods and services from developed countries. But some say the US is simply jittery over India’s success in the information technology sector. Some states in the US have also called for a ban on outsourcing.

Manoj Pant, professor at the Centre for International Trade and Development (School of International Studies, Jawaharlal Nehru University), believes the tensions are part of the continuing dispute in WTO meetings in which demands for a cut in duties and non-tariff barriers in developed countries, particularly the demand for reduction in agricultural subsidies, have been getting support. “It is well known that he (Obama) is employing this rhetoric as his popularity rating is falling and anti-outsourcing is his known position against Republican (Mitt) Romney. Remember, he had employed the same rhetoric before the last election,” Pant said.

Protectionist tendencies in the US usually gain traction during presidential elections. Democrats are particularly known to whip up national sentiment and step up the offensive against foreign entities. This is evident from President Obama’s campaign in which he spoke of bringing back “jobs that have moved overseas”.

“These recent tensions are, to some extent, due to the ongoing financial crisis. The administration needs to play to the gallery and show it is strong. While it says it is fighting for the interest of its citizens, at the back of its mind, the measures are to win elections. I believe all these issues will be resolved once the elections are over,” said of the Indian Council for Research on International Economic Relations.


Current status: The consultation process under the WTO’s DSB is over, without any solution. The US has now asked for a panel, to refer the case to the WTO court formally

India's position

  • The Department of Animal Husbandry has issued a notification saying import of poultry products will be restricted from countries that have cases of avian influenza, even if those fall under the low-pathogenic category. But, the directive is country-neutral. However, imports from the US are restricted, as it had low-pathogenic cases till September 2011.
  • Indian authorities attribute this to the nature of the contagion, saying there can be no restrictions on the movement of birds

The US's position

  • India's claims are unscientific. The US believes low-pathogenic cases should be dealt lightly
  • The US has accused India of violating the agreements on Sanitary and Phytosanitary Measures and Technical Barriers to Trade of the WTO.

Current status: The consultation process under the WTO’s DSB got over last month, without any solution. India has now asked for a formal WTO panel to resolve the dispute.

India's position

  • The US has arbitrarily imposed countervailing duties on certain steel rods and flat products
  • India has said, in its complaint, that the measure is a violation of the WTO rules.
  • The steel manufacturers’ lobby in the US is feeling the heat due to India's competitive pricing

The US's position

  • American steel-makers are suffering due to competition from unfairly subsidised imports
  • The US contends that India heavily subsidises the state-run mining companies, which supply iron ore to the private players

Current status: Indian authorities have decided to take up the case with the WTO’s DSB. But, the matter doesn’t carry weight as of now, because the IT companies, impacted by the visa move, have not come up with relevant data

India's position

  • India has said the US is using a particular law — Public Law 111-230 (Border Security Act) — that substantially enhances fees of applications for L1 and H1B Visas, for applicants who employ more than 50 per cent of employees who are immigrants. As a result, India IT giants like Tata Consultancy Services (TCS), Wipro, Infosys and Mahindra Satyam have come to be affected
  • The bill nearly doubles the skilled-worker H-1B and L1 visa fees, to $4,500 a applicant (from $2,320), for any company with at least 50 employees, of whom foreigners comprise more than 50 per cent
  • While the Indian government maintains the rate of visa rejections has gone up to 40 per cent last year, Nasscom data suggests it is as high as 70 per cent. This is hurting the profit margins of the IT companies
  • The hike in visa fees has led to the violations of the US's commitments under Mode 3 (commercial presence) and Mode 4 (movement of natural persons) of the WTO

The US's position

  • The move is part of their normal regulatory process, and not a violation of the WTO laws

Notwithstanding the recent disputes, two-way trade in goods and services has increased almost five-fold in the last decade — from $18 billion in 2001 to about $90 billion in 2011. It is expected to touch the $100-billion mark this year.

Earlier this year, visiting US Commerce Secretary John Bryson had asked India to remove the hurdles to trade — high tariffs and intellectual property rights. He had expressed concern over India’s sourcing decisions in areas like information technology, electronics and solar energy. These, he said, made it harder to invest in India. He had also asked India to have more “accountability, transparency and integrity” in commercial matters.

The US’s foreign direct investment in India stands at $30 billion, while Indian investments to the US have crossed $3 billion. Trade ties got a major boost with state-run Air India’s purchase of Boeing 787 Dreamliner aircraft. In the defence sector, India has become the US’ third-largest foreign military sales market, owing to sales of the American C-17 and the C-130J fighter aircraft.

“Disputes are common among trading partners. WTO disputes are mainly guided by economic and commercial considerations. This cannot be taken as a sign of a deteriorating bilateral relationship or protectionist tendencies linked with political developments,” said Abhijit Das, head of the Centre for WTO Studies at the Indian Institute of Foreign Trade.

Recently, the US Ambassador to India, Nancy J Powell, said India had become one of the fastest growing sources of investment in the US, creating well-paid jobs for thousands of Americans. Nearly 49 per cent of the high-tech start-ups in Silicon Valley and Washington DC are owned by Indians or Indian Americans. An impressive 60 per cent of Indian software and services exports support businesses in the US.

According to a report by India-US World Affairs Institute, the University of Maryland and the Federation of Indian Chambers of Commerce and Industry, India is the third-fastest growing foreign investor in the US. The study stated there were 372 acquisitions, worth $21 billion, by Indian companies in the US between 2004 and 2009. This has created employment for an estimated 40,000 people in the US. In 2010, Indian companies struck 55 outbound deals in the US.

First Published: Thu, August 02 2012. 00:53 IST