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Transatlantic Take

U.S.-India Trade Ties: Rebuild Trust, Then Plan to Expand

February 08, 2021
by
Richard Rossow
7 min read
This article is a part of Agenda 2021, an edited series where experts provide ideas for strengthening U.S.-India and Europe-India cooperation in five different policy areas. It is part of GMF’s India Trilateral Forum, conducted in partnership with the Swedish Ministry for Foreign Affairs and the Observer Research Foundation.
 

As the Biden administration assumes office, there is an urgent need to repair the mounting damage to U.S.-India commercial ties. Unfortunately, with both countries mired in coronavirus-induced slowdowns, political appetite for trade liberalization will be limited. The initial focus must be to stop digging the hole they are in, finalize their modest trade agreement, then start setting the table for something more inspiring. India and the United States have areas of overlapping economic interest that should be the basis for deeper bilateral economic engagement.

Americans have the perception that India has a long, unbroken history of trade protectionism, but this is not true. Since the country’s process of economic liberalization began in 1991, the direction of economic reform has been positive, if somewhat choppy. U.S. companies certainly pushed for faster reforms and liberalization, but there were relatively few reversals. Progress on trade, however, has lately seen reverses. Since coming to office in 2014, the government of Prime Minister Narendra Modi has steadily closed India’s market to imports. This is in response to very high goods trade deficits, which have hovered in the $140–$190 billion range in recent years. Anti-import steps include increases in customs duties on hundreds of products as well as an expanding list of sectors with import-substitution rules, normally applied to areas of government procurement. India has also expanded price controls, particularly in healthcare products, which is viewed as a type of trade barrier.

The Trump administration aggressively responded to the concerns of U.S. businesses about India’s protectionism. Its most significant step was revoking India’s trade preferences under the Generalized System of Preferences (GSP) program in March 2019. The United States suspended issuance of new H-1B visas in April 2020, a crucial business tool for India’s powerful information technology services (IT) sector. The United States had earlier won a case in October 2019 at the World Trade Organization over India’s export-subsidy program. India was also affected by the Trump administration’s March 2018 increase in tariffs on steel imports.

The two nations agreed to try and negotiate a modest trade agreement. This focused on lowering a set of India’s trade barriers in exchange for some level of restoration of its GSP trade benefits. However, despite multiple rounds of negotiations, this narrow agreement is yet to be concluded. 

The global coronavirus-related slowdown has highlighted some areas of strength—and weakness—in U.S.-India trade relations. Goods trade has fallen from around $8 billion per month to an average of $6.5 billion per month in the 12 months through October 2020. India has fallen two places to the 11th rank among U.S. goods trade partners. Services trade, however, has been much more stable. The Reserve Bank of India’s monthly data shows that India’s services trade has only fallen by about 4 percent in the last 12 months compared to the prior 12-month period, while its most recent survey of India’s IT services trade shows that over 60 percent of IT services exports flow to the United States. There is thus some evidence that services trade has remained stable, and prior studies show that such trade is largely with the United States.

As the Biden administration takes office, commercial relations will be the weakest pillar of the U.S.-India relationship.

As the Biden administration takes office, commercial relations will be the weakest pillar of the U.S.-India relationship. As both countries look to grow out of their respective coronavirus-triggered economic slowdowns, unilateral or bilateral trade liberalization will initially be difficult. However, there are important targets Indian and U.S. leaders should consider in the near term as they build larger aspirations.

First, both nations must agree to stop consistently taking protectionist steps. Simultaneously, the Biden administration should let the H-1B suspension lapse. Finalizing their modest trade agreement will provide the two countries’ leaders an important dose of confidence, apart from the actual benefits from the agreement itself. India should also commit to a data-flow regime that does not impede cross-border data flows.

After these first steps, the two countries can hopefully start to look at something more ambitious later this year or in early 2022. A full free trade agreement may not be feasible. It would involve more dramatic turnarounds in Delhi and Washington than is likely possible, particularly during the pandemic. However, targeted agreements that help expand trade while meeting other objectives may find more support.

A full free trade agreement may not be feasible. It would involve more dramatic turnarounds in Delhi and Washington than is likely possible, particularly during the pandemic. However, targeted agreements that help expand trade while meeting other objectives may find more support.

Secured data flows: If India’s pending data-flow policies are partially due to security concerns with China, the United States and it can consider an agreement to secure data flows.

Climate-change mitigation: Combatting climate change is expected to be an area of complementarity. The two countries can consider a bilateral agreement that provides certain related types of investment protections, trade preferences, and other forms of cooperation such as higher-education research collaborations.

Next-generation manufacturing: India and the United States are concerned about losing manufacturing competitiveness due to global competitors. Some of these competitors enjoy a high degree of assistance from their governments. Important new technology domains—such as electric vehicles, battery storage, autonomous vehicles, and advanced robotics—will drive new manufacturing investments globally. Falling behind in these sectors will trigger increased protectionism in both nations. Together they present massive markets and powerful research capacities.

While these agreements would be somewhat narrow in scope, they would have massive potential to scale up. And the represented sectors have a strategic value above the potential trade benefits.

The United States and India could also work together in regional and global institutions on commercial matters, particularly those with a strong security overlay. This could be carried out through the quadrilateral security dialogue (Quad), the Indian Ocean Rim Association, or the proposed D10. Or the United States and India can hold consultations on the issues above and consider jointly presenting them to relevant bodies like the Quad or the D10. Even these multilateral efforts could be rooted in a strong bilateral partnership.

Data flows: Like-minded nations can develop a common set of criteria to assess the security of data-flow risks with companies in countries with low levels of transparency, and jointly act if these principles are broken by a developer.

Strategic infrastructure: Competing for developing strategic infrastructure projects in Asia, the United States and India can potentially create platforms and criteria to help unlock private-sector investment. This could build on the new U.S. Blue Dot Network program, denoting projects meeting higher development standards to attract private-sector participation.

Communications equipment: Shared concerns about sourcing 5G equipment and undersea cables could be the starting point for cooperation between like-minded nations to ensure the security of new communications technologies.

Sourcing of critical minerals: All nations that have, or hope to have, emerging technology manufacturing require a range of critical minerals sourced heavily from China. They may find ways to cooperate to diversify supply. Jointly sourcing can quickly drive down costs and make new markets more competitive for sourcing such materials.

Investment review network: The United States and other nations review incoming investments for strategic concerns. Information gathered during these reviews, and the process itself, are valuable tools that could be shared among like-minded nations.

It will be crucial to thoughtfully stagger U.S.-India commercial ties now that the Biden administration has taken office. The last four years were marked by a moderately intense trade war. With their respective coronavirus slowdowns, both countries may find it difficult to look at any major commercial initiatives immediately. They must first pause their fight and find some confidence-building steps such as signing their trade deal. Beyond this, several trade issues have a powerful strategic overlay. They could become the basis for a new era of positive commercial relations between India and the United States, and the utility of cooperation in areas like 5G deployment and investment reviews could be components of deeper multilateral cooperation.

Richard Rossow is a senior adviser and holds the Wadhwani Chair in U.S.-India Policy Studies at Center for Strategic and International Studies. In this role he helps frame and shape policies to promote greater business and economic engagement between the two countries.

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