Hyderabad: Ahead of the upcoming Modi-Trump meeting in Houston on Sunday, chances of a breakthrough in the strained Indo-US trade relations appear brighter than any time in the last couple of years. But the give-and-take needed to break the impasse is tricky. A deal will not be easy to clinch for both sides will want to extract the maximum for itself.
Speculation on a possible breakthrough is rife, though, after the news agency PTI reported that US President Donald Trump told reporters aboard Air Force One on Wednesday, while on his way back from California to Washington DC, that an announcement by him should be expected at Prime Minister Narendra Modi’s Sunday rally in Houston.
White House had said that Mr Trump will join Mr Modi’s at a gathering of 50,000 members of the Indian diaspora at the “Howdy Modi!” event in Houston on Sunday. Mr Modi is scheduled to be in the US for the United Nations General Assembly (UNGA) annual session in New York from September 21 to 27. The two leaders could hold a second round of meetings there.
No details of what Sunday’s announcement could be were shared, but the development assumes significance in wake of President Trump's unwavering focus on reducing the $-30 billion trade deficit the US has with India. India's exports to the US reached nearly $ 48 billion in 2017-18, well ahead of the imports from the trading partner of $ 27 billion.
Earlier, on Monday, Commerce Minister Piyush Goyal had announced that the two sides were finalising a trade offer. He had not confirmed if it would be announced during the Modi-Trump meetings, though.
With an eye on domestic American politics and protection for local jobs and business, Mr Trump has over the last few months repeatedly complained publicly about “high tariffs” slapped by New Delhi on American products. At one point, he even described India as the “tariff king”.
Tensions between the two sides peaked in June this year when the Trump administration rescinded the benefits Indian exports enjoy under the Generalised System of Preferences (GSP) programme.
The GSP allows the duty-free entry of products from designated beneficiary countries to give a boost to developing economies. Under the programme, 4,800 goods from 129 designated countries enjoy duty-free access to the US market. Before losing the trade preference benefits under the programme, India was the largest beneficiary of the GSP.
The withdrawal resulted in an immediate loss of preferential access at zero or minimal tariffs to the U.S. in case of about 1,900 products, or about half of all Indian products exported to the country.
Beyond the immediate tariff advantage, Indian exporters stand to lose competitiveness, and therefore, market share for imports into the U.S. to other low-income countries such as Vietnam and Bangladesh in industries where margins are wafer-thin. This is especially so for price-sensitive products eligible for higher GSP benefits such as leather products, pillow/cushion sleeves and woven women’s apparel.
Therefore, the most desirable outcome from India’s point of view from the Modi-Trump meet would be a restoration of the designated GSP benefits to Indian exports.
As far as the US goes, the minimum expectation is likely to be a withdrawal of the retaliatory tariff hikes New Delhi had operationalised in response to the termination of the GSP benefits on 28 US items including almonds and apples. Mr Trump has issued a public demand for the withdrawal of these.
Earlier, on June 2018, in response to Washington’s 25% tariff hikes on steel and 10% levies on aluminium, New Delhi had accused it of unfair trade practices, and, seeking to signal a muscular approach, threatened retaliatory tariffs on $235 million of U.S. imports.
Even as the two sides strived to reduce tensions through official-level talks, signs of thaw were seen late August when Prime Minister Modi informed President Trump at a 40-minute meeting on the sidelines of the G7 Summit in the French city of Biarritz, where India was a special invitee, that New Delhi planned to step up imports, including oil, from the US and that $ 4 billion worth of imports were already “in the pipeline”.
But President is unlikely to be satisfied with just a reduction in tariffs. He can be expected to insist on much more. At the centre of the protracted dispute is a row over “equitable and reasonable access” market access for U.S. medical and dairy industries.
While the dairy industries’ demands are difficult for Mr Modi to yield to, given the political and economic imperative of protecting the very large and mostly unorganised Indian dairy sector, it is true that New Delhi’s use of price control measures against imported drugs and medical devices has grown substantially.
Cardiac stents were put under price controls in February 2016 and knee implants attracted similar action in August 2017, after which trade margins for many medical devices are sought to be capped.
U.S. manufacturers are right to complain that in doing so, New Delhi has meted out differential treatment to them vis-à-vis domestic players.
For domestic companies, the price to distributors is considered while in the case of global manufacturers the base proposed is the landed costs of imports. The U.S. medical device industry wants price controls on cardiac stents and knee implants withdrawn and would like products to be treated on a parity with domestic medical devices through a trade margin rationalisation regime.
New Delhi has preferred to act against unreasonable price mark-ups through price controls when the same outcomes can be achieved through other types of policy alternatives. The United States Trade Representative (USTR) has a point when it says price capping counts as a trade barrier.
Mr Modi can easily address these concerns by replacing price controls with trade margin rationalisation measures, applying them equally to domestic and foreign manufacturers.
Another source of friction the bilateral trade relations is India’s data localisation policies. On this too, Mr Modi is unlikely to be able to soften up. The Reserve Bank of India has issued new norms for localisation of all sensitive data belonging to Indian users of various digital payment services to be complied by card payment services such as by Visa and MasterCard and also of companies such as Paytm, WhatsApp and Google which offer electronic or digital payment services.
Many US companies, such as Google, Mastercard, Visa and Amazon, are concerned over the impact of the new rules on their operations.
It may not be possible for India to give in to these demands for national security reasons. Indian users’ data cannot possibly be allowed stored outside the country, with no access for the Indian government to them. Secondly, data localisation can also give a fillip to the start-up sector in India. In any case, the increased costs for US companies on servers, the UPS, generators, building and personnel for complying with the data localisation rules are unlikely to make a big dent on the profitability of global giants.
India imports $4 billion of American energy products annually and has intentions of forging closer ties with the US in this area, as discussed at Mr Modi and Mr Trump’s parleys in the French city of Biarritz last month. A follow-up on that initiative may offset some of the US pressure, and improve chances of a breakthrough in Houston.
Puja Mehra is a Delhi-based journalist and the author of The Lost Decade (2008-18): How the India Growth Story Devolved into Growth Without a Story
