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View: Why on earth is the US batting with China against India?

US exports to India have grown 28% in 2018-19, which is two-and-a-half times faster than Indian exports to the US

, ET Bureau|
Updated: Feb 11, 2019, 12.03 PM IST
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What’s flummoxing is that the US is batting with China against India on this, least realising that Chinese phones, not US ones, will flood the Indian market if Delhi lowers tariffs.
Why is it that US President Donald Trump speaks in admiration of Chinese President Xi Jinping even though the US has the highest trade deficit for 2017 with China — $566 billion — but taunts India for a $22-billion deficit? In his State of the Union address on February 5, Trump emphasised US efforts for a trade deal with China, said he had ‘great respect’ for Xi while earlier he had mocked Prime Minister Narendra Modi when listing India’s developmental aid in Afghanistan.

But the trade deal with China still looks out of grasp as Trump’s March 1 deadline draws closer while the pressure on India grows by the day, through threats like withdrawal of trade benefits under the Generalised System of Preferences (GSP).

This time, it’s said, the provocation has come from India’s decision to go ahead with its ‘toughened’ e-commerce policy, even though US companies affected by this move have found innovative ways to beat the problem — for now. More importantly, both sides had agreed that they will insulate trade negotiations from other commercial policy matters.

Then, why bring in GSP, especially during election year in India? There are many legitimate reasons to be frustrated with India’s tariff levels, its policies and red tape. But New Delhi has also demonstrated more than just intent to address Trump’s trade concerns.

US exports to India have grown at about 28% in the first six months of 2018-19 which is roughly two-and-a-half times faster than Indian exports to the US.

This indicates that the trade deficit, an issue red flagged by Trump, will maintain a declining trend this year. It’s quite possible that India may just drop off Trump’s list of top 10 countries, which have large deficits with the US.

Export Growth
The prognosis is even better. The biggest US export growth has been in oil and gas, which is at $4.5 billion. This will further grow once US adds some necessary infrastructure to meet Indian demands. Nearly 300 Boeing aircraft are to be sold to India over the next seven years. This amounts to about $39 bn, and deliveries are expected to start 2019-20.

Even in defence, where much more could have been done, it’s noteworthy that the US has secured $18 billion worth of contracts in the last decade.

High-end, expensive purchases, like the armed Sea Guardian drone, are in the pipeline. So, business has essentially flourished in favour of the US despite an overall grim global picture.

Yet, the GSP threat looms on India. Let’s analyse this. The oft-quoted figure is that Indian entities corner $5.6 billion of the $23-billion benefits the US doles under its GSP system. This is roughly 25%, which is significant.

But there’s another way of looking at it. How much more would Indian entities have to shell out if these benefits were withdrawn? The back-of-the-envelope calculation, as the Indian side has worked out, would cost exporters $190-200 million at current US tariff levels outside GSP. In fact, regardless of the politics, it’s time Indian business starts thinking of ways to gradually reduce its dependency on the GSP system.

Politics of the Situation
So why is the US unwilling to recognise Indian efforts at narrowing the trade deficit? The answer, perhaps, lies in the politics of the situation than in the data and substance of trade.

A giveaway on this is the US demand to lower customs duties on information & communication technology (ICT) products in line with the World Trade Organization’s (WTO) 1996 Information Technology Agreement (ITA). This covers a range of electronic items, including smart mobile phones for which India is now the second-largest assembly point after China.

India has levied 10-20% duties, and has argued that since these items did not even exist when the ITA-1 was signed in December 1996, it’s under no obligation to keep them at low tariff levels. Which is why India has also stayed out of ITA-2 that was agreed two years back.

What’s flummoxing is that the US is batting with China against India on this, least realising that Chinese phones, not US ones, will flood the Indian market if Delhi lowers tariffs. In other words, the US is picking a fight with India to get Chinese phones gain easier access into the Indian market.

Clearly, Trump wants a big political victory on trade after South Korea and Mexico. And if it’s not going to be China, then it ought to be India. More importantly, it should not be projected as some mutually agreed halfway house, but a deal dictated on India.

The idea is to, perhaps, demonstrably underline the power differential, which goes with the style that prompts mockery of the Indian leadership and its efforts. A lot is possible among strategic partners. But a client State-like behaviour may not be one of them.

The US needs to reset the political tone of this conversation, especially after the doubts Trump’s shift on Pakistan (to negotiate a deal with the Taliban) has created. Else, it runs the risk of widening the rift where actually not much beyond medical goods, boric acid and dairy goods exist.
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