NEW DELHI — On 5 June, 2019, the Trump Administration removed India from its Generalised System of Preference Program (GSP), a preferential trade agreement for developing countries under which Indian goods worth $5.7 billion had gone into the United States duty free. A day after the U.S. President Donald Trump announced his first official trip to India, his government removed India from a list of developing countries that are given trade benefits on the grounds that India is a member of the G-20. This naturally makes it harder for India to regain its GSP status, a key demand from New Delhi in the fraught negotiations with Washington.
This has happened despite Prime Minister Narendra Modi’s best efforts to woo President Trump.
As Modi and Trump smile and wave over the next two days, Kashish Parpiani of the Observer Research Foundation in Mumbai explains the intricacies of the trade deal and the harsh fallout of American conservatism in India.
“Tensions have really reached a crescendo,” he said.
Tensions have really reached a crescendo.
What is this trade deal between India and the United States?
India and the US do not have a formal trading arrangement. They do not have a formal security arrangement. But still the US-India relationship has been promising. We are at $142.6 billion in terms of annual trade of goods and services. In terms of military cooperation, we do the most number of exercises with the Americans than with any other country. It seems a lot of natural convergences have borne this progress.
Now, there is a need to formalise and institutionalise this relationship in formal agreements. A trade agreement is certainly a part of that. But what is baffling is that the trade deficit between India and the US has been narrowing in the past three years. Despite that, tensions have increased.
The trade deficit between India and the US is less than a tenth of the trade deficit that the US has with China. And still, tensions have increased. It gives you a sense that American apprehensions on this matter, on trade with India, go beyond mere consideration on trade imbalances. It’s about duties. From an American point of view, it’s about gaining fair access into the Indian market.
What are obstacles to the trade deal?
Dairy is one. On dairy, it is not an issue of tariffs but certification. India has been saying that the American dairy products can surely come into India, but they have to assure the Indian consumer via packaging, that none of the products that are up for sale are procured from animals that have been fed blood meal. Blood meal is a protein supplement that the American dairy industry uses to get greater yield from their cattle. It is derived from dead ruminating animals, dead bones, dead blood and so on. India is putting the argument that it hurts our religious sentiments if products like that are going to be up for sale and no one is going to buy them. So, the U.S. dairy industry needs to create a different production line just to cater to the Indian market. A production line in which cattle have not been fed blood meal and reinvest in a specific packaging for the Indian market. That is what their dairy industry has not been willing to do.
What are the other hurdles?
The other hurdle is that the Indian government brings down the prices of American pharmaceutical products like coronary stents and any implants by nearly 65% to 80%. We do that because our consumer base is largely middle income that cannot afford to pay humongous prices for these vital products. The Americans say if you want to do that then do that, but why should we take a hit on our per unit cost. You do that on the landed cost. You give us our margins on the per unit cost. The Indians are countering that by saying that don’t think about the per unit cost, but think about the big market that you are entering. The sheer quantity that you will sell will give you your numbers.
These are two big issues.
How would Trump’s re-election — if it happens — change the dynamics of this trade deal?
It would definitely become harder. The Americans are approaching India with the attitude that if you are not going to do this deal now then wait till President Trump gets re-elected. The Americans are saying that then you will be forced to deal with us again and you may not get the terms that we are offering you currently. You can expect Trump to get a little harsher and unconstrained on trade because he is not going to have the pressures of re-election.
You can expect Trump to get a little harsher and unconstrained on trade...
Is removing India from its Generalised System of Preference (GSP) list connected with the trade deal?
From what I understand of how the Trump administration negotiates, it likes to get competitive leverage by pursuing a zero-sum game. It’s been long known that a partial trade deal will happen between India and the US and the US wants to get more access to agricultural goods, dairy products, Harley Davidson motorcycles amongst other things.
Now, what does India want in exchange? For India, it was let’s get our GSP benefits reinstated. In 2017, India was the biggest beneficiary of the GSP program. Products worth $5.7 billion went into the U.S. duty free. It was natural that GSP is something that India wants again in exchange for a limited trade deal.
But what does the Trump Administration do? It announces last week the dates of the president’s visit to India and barely two days after that the office of the U.S. trade negotiator releases a federal notice, talking about how he is kicking particular countries off a list, which is a list of the developing countries of the world that pose no threat to American industry and businesses.India was thrown off with the rationale that India is a developed country and not a developing country anymore.
India was thrown off with the rationale that India is a developed country and not a developing country anymore.
How is that connected to GSP?
It is connected to GSP because GSP is a preferential trade arrangement only for the developing countries. Now, when Indian negotiators go back to the table and say that we want GSP back, the Americans will say that you are classified as a developed country from now on. That is the American way of negotiating that has increasingly come to the fore under Robert Lighthizer (United States Trade Representative). This is classic American conservatism on trade.
This is classic American conservatism on trade.
What is going on with the H1-B visa?
India is trying to get a totalisation agreement on people who have H1-Bs. A totalisation agreement is how do you square the circle on social security and taxes when you have individuals who split their time between the US and India. That is the next step on to the axiom that Indians are going to continue to dominate H1B visas. But immigration being such a hotbed issue and at the core of Trump’s 2016 campaign, and possibly once again in the 2020 campaign, I don’t think anyone wants to sort out the H1B visa, right now. It’s going to be on the back-burner.
I don’t think anyone wants to sort out the H1B visa, right now.
Has the NDA government continued the UPA government’s approach to the US?
In many ways, it’s been a continuum with the U.S. Not only has it taken the baton forward, it has only built on it.
PM Modi has made great efforts to woo Trump. Why is there so much friction?
I think it’s about both sides failing to progress the issue beyond a top heavy approach. For the longest time in the post Cold War-era, the relationship has largely been dependent on the political chemistry between the two heads of state, whether it is a Bush and Manmohan, who enjoyed working together, or Obama and Manmohan, where Obama revered Manmohan Singh’s advice on macroeconomics even when it came to the eurozone crisis. There is a lot of personality driven partnership and camaraderie there. The same for Modi and Obama and Modi and Trump as it was for Clinton and Vajpayee.
Not being able to move away from this top heavy approach is a failure. If we had moved away then we wouldn’t have been at a stage where a head of state, in this case Trump, would be used as a leverage point to say — he is coming next week — do you want to get this deal done or not. If we had progressed on building this relationship on multiple levels, these issues would not play out in the open. These would be settled behind a consultative dialogue that happens behind closed doors.
Look at some of the allies that America has — Japan, South Korea, Canada, Mexico, the UK. Trump has a style of insulting and being brash about things on Twitter, but mostly issues with these countries have been solved behind closed doors because their relationships have been institutionalised over 40, 50, 60 years. With institutionalised relationships, a lot of these differences get divided down the political ladder, where empowered cabinet secretaries can make decisions. With India and the U.S., it’s a one step forward and two steps back kind of situation.
With India and the U.S., it’s a one step forward and two steps back kind of situation.
Does Trump see India as a defence partner?
Trump has a thing about buying American. The buy American plan is to make it easier for defence companies to sell to foreign nations. There are two tracks of arms procurement from the US. There is the DCS (Direct Commercial Sales) track and the other is the FMS (Foreign Military Sales) track.
Foreign Military Sales have to be routed through the government, through the US Congress, because some platforms are so sensitive that the US government needs to sign off on it first. In the case of DCS, you don’t need that approval from the political establishment. These could be small ancillary weaponry, not big platforms like fighter jets.
Under Trump, the state department has reduced the red tape in terms of increasing the relevance of DCS track. The gains of that were witnessed in the year after Trump took office when Americans hit their highest peak at 55.66 billion dollars because of these actions. It is a priority for the Trump administration to sell more and India emerges as a natural partner. India, after Saudi Arabia, is the largest importer for arms. Why wouldn’t they want to tap into this rising economy that is increasingly going to have enough economic heft to spend as much on its defence?
Is Trump carrying on the Clinton-Bush-Obama legacy when it comes to India?
In many ways, yes. The Obama administration while leaving talked about India getting status as a major defence partner. In 2016, the Trump administration put that into policy. It’s not been grounded in legislative precedent yet. The bill on that has not yet been voted upon, but the executive branch led by Trump has put that into force already.
The Trump administration has also accorded India with the Strategic Trade Authorization - 1 status. India is now the only third Asian country after Japan and South Korea to have that designation for arms export. There is a commitment not only to continue on that legacy but also build on it by making it easier for future administrations to sell more and engage in Indian capacity building.
Does the Trump base in the U.S. care about his trip to India?
It plays really well with the Trump base. We buy almonds worth $600 million from the U.S. The produce comes mainly from California, which is the liberal stronghold of the Democratic party. Trump saying let’s see how big the Indian market is for nuts and let’s try selling them pecan nuts becomes an election talking point. Pecan nuts are mostly based in Trump land, the flyover states like Georgia. He says my trade deal with India is really helping you because I just got you another market. Instead of buying almonds, they will also buy pecan nuts. In that sense, the Trump base cares what happens with India.
It feels like Trump is calling all the shots?
Maybe we have seen the writing on the wall that Trump is going to come back. So, this is the time that you appease so that Trump 2.0 will be a little less aggressive on the trade front. I think that’s a calculation that a lot of other countries also made when they gave the Trump Administration a renegotiated deal, especially China. Why would China offer a phase 1 deal at the end of January, a minimal but a symbolic victory?
If you look into the deal, it’s nothing of great substance. It’s a lot of Chinese declaration to buy more from the Americans and nothing more than that. Nothing on intellectual property, nothing on theft of intellectual property or forced transfer of technology to Chinese counterparts. None of those systemic changes or reforms, but just a lot of commitments. That too is enough for Trump to go back to his base and say that he has been productive in term one. I think that’s a calculation that we are making as well