Reduce trade tensions

United States Secretary of Commerce Wilbur Ross will be in India this week amid growing tensions that threaten to destabilise trade relations between the two countries. Many are concerned that India will have to go the extra mile to placate an increasingly protectionist US if it is to retain its privileges as a developing country. Mr Ross’ visit comes amid reports — not yet confirmed officially by the Indian commerce ministry — that the US is considering removing India from its “Generalised System of Preferences” trading plan. Under the GSP, India — as a developing country — gets the opportunity to export several kinds of goods tariff-free to the US. The system was put into place in the 1970s, and India is one of the biggest beneficiaries of it as it now stands — by some estimates, about a quarter of the revenue foregone under the scheme is on account of Indian exporters. The importance of zero-tariff lines can be judged from the fact that Indian apparel exporters, for example, struggle to export to the European Union, where they receive no such benefits, in comparison to countries, such as Bangladesh, that do.

The United States’ concerns about Indian trade practices may be somewhat overstated because of the political climate in that country, given that its trade deficit with India is relatively small in absolute terms. The trade deficit is barely $22 billion, as compared to the $566 billion deficit with the People’s Republic of China. But India’s clumsy trade practices have made the situation worse. Restrictions on stents, for example, have led to complaints in the US about the medical devices sector becoming closed. The dairy industry in the US has also complained — and President Donald Trump has specifically referenced Harley Davidson motorcycles, which are made in an electorally significant state. These irritants had led to 50 trading lines being taken out of the zero-tariff GSP mechanism last year.

However, since then the disagreements have intensified. Recent policy changes in the digital space have reportedly been particularly problematic in the US’ eyes. For example, the Indian government and regulators have come down hard on the side of data localisation, forcing international companies in the digital space to store some data within India, which they see as a commercial disadvantage. In addition, recent moves in the e-commerce sector have been widely seen as protectionist. E-commerce marketplaces that depend on foreign direct investment have been told they cannot even run specific promotions or hold inventory or invest heavily in sellers on their platforms.

These changes are seen as favouring Indian firms and removing a level playing field. It would be unfortunate if such changes were taken without the larger picture in mind. The US-China trade war was supposed to open up opportunities to increase Indian exports. Creating a robust exports ecosystem has been priority for the government, and removal of the GSP would be a severe blow to attempts to create jobs in export-sensitive sectors. The government will have to give Mr Ross a patient hearing and see if there are compromises that can be worked out that serve the Indian national interest. Protectionism is not in anyone’s interests — but certainly not in India’s.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel