Trade error

US goes too far, but India's response could have been better

The United States administration has decided to exclude imports from India and Turkey from its Generalised System of Preferences (GSP) scheme. The scheme allows for certain sets of goods to be imported into the US with zero tariffs. India is currently the largest beneficiary of this scheme, with about $5.6 billion worth of imports benefiting. This is a disturbing development for Indian exporters who are already stressed, and shows the US in poor light. It’s true India’s tariffs are generally high, and its general stance on trade is protective, but the US government’s moves have also been inconsistent. For example, US President Donald Trump’s repeated insistence on balancing bilateral trade runs counter to all the canons of free trade. He has complained about tariffs on solar panels while imposing such tariffs himself. 

However, the Indian government’s sanguine reaction to the GSP withdrawal appears misplaced. The government has argued that the concessions amounted to a duty reduction of less than $200 million a year, so there is unlikely to be any effect on exporters. This is an unfortunate response to what is a serious setback to Indo-US trade ties. Many exports from India have wafer thin competitive advantages. Thus, the difference made by this change could be more substantial than the figure cited by the government. It is also worthwhile to consider what this means for Indo-US economic relations more generally. India runs a moderate trade surplus with the US, only about $23 billion. Even given the current US administration’s protectionist impulses, this should not have been allowed to devolve into a major confrontation that led to excluding India from a programme that it has benefited from since the 1970s. It is not as if India has not made concessions — for example, duties on motorcycle imports from the US have been slashed, following Mr Trump’s repeated invocation of the tariffs India imposes on iconic Harley-Davidson machines, which are made in an electorally significant state. But it is clear that it has not made the strategic case for more integrated economies effectively enough to the US. Among the trade lines that are due to be hurt are chemicals and engineering — precisely the sort of manufacturing exports that India needs to grow going forward in order to create sustainable jobs within the country. 

Unfortunately, there has been a certain myopia in the Indian trade establishment about the national interest. Recent Indian populist moves can be held responsible for this state of affairs. For example, restrictions on US-made medical devices, particularly cardiac stents and knee implants, have inflamed opinion in Washington DC. The unfortunate fact is that Indian patients have themselves not benefited considerably from price controls in this sector, given that hospitals find it easy to merely shift the cost burden elsewhere. The dairy sector is another flashpoint. India has essentially argued that “religious reasons” prevent the import of dairy products from the US. One of the issues is that the US has not banned the use of bovine somatotropin, or “bovine growth hormone”, produced from cattle’s pituitary glands, as a supplement in dairy farming. It is unclear why a compromise involving labelling could not have been found, even if religious reasons were considered sufficient for such a major breakdown in trade relations. India’s options are limited. For example, it had proposed retaliatory tariffs of about $235 million on 29 American goods, but has put off implementing these six times already in the hope that a negotiated trade settlement will come through. Such fruitless exercise does not mean much. At a point of inflection in world trade, when pressure is gathering on the People’s Republic of China and trading networks are in flux, India should have been more proactive.