Beware the backlash

As US trade pressures squeeze India as well as China, Jayanta Roy Chowdhury assesses the impact on the economies and foreign policy strategies of these two Asian powers

US President Donald Trump has launched what some consider to be a ‘dangerous’ trade war against China, America’s only challenger in the global power sweepstakes. While this is certain to have repercussions on global growth, it can be understood in the larger context of the US trying to revive its flailing economy and its need to show the world that Pax Americana remains intact.

However, what is not clearly understood is the reasoning behind America’s trade tirades and pressures against India, its largest potential ally in Asia against the rise of China. In early March, President Trump issued a notice to end trade benefits to India under the GSP (generalised system of preferences), which allows duty-free exports to the US of about 2,000 products from developing countries. This special status was placed under review on the grounds that India, the largest beneficiary of the GSP scheme, wasnot reciprocating with greater access to its market.

This was followed up two months later by a visit by US Secretary for Commerce Wilbur Ross, who took Indian officials to task, openly complaining that ‘US businesses face significant market access barriers in India’. The issues taken up by the team led by Ross ranged from high tariffs and US airlines not being allowed to do their own ground handling to rules for e-commerce, which American companies felt discriminated against them.

Indian officials who were part of the negotiating team said the Americans were insistent on getting ‘bargains’. India was willing to concede on many issues but was‘not ready to accede on all counts despite the tough bargaining by the Americans’. Less contentious concerns, such as letting US airlines handle their own ground handling,were resolved.(Delta plans to resume flying New York to Mumbai from this winter, taking on Gulf-based airlines which monopolise the growing Indian air traffic to the US.)

However, central issues like complaints about tariff and non-tariff barriers have not yet been settled, though India has made unilateral offers of tariff cuts. Nor have Indian complaints regarding barriers against their software firmsbeen resolved.  US goods and services trade with India totalled an estimated $142.1 billion in 2018, with India enjoying a trade surplus of $24.2 billion.

Even before this, Trump had repeatedly attacked his Asian ally, much to the consternation of State Department diplomats, claiming that India is a ‘tariff king’ and imposes ‘tremendously high’ tariffs on American exports.  Last year he dismissed as inadequate the Narendra Modi government’s decision to halve import tariffs on Harley-Davidson motorcycles from 100to 50 per cent.

Add to that the USA’s extremely disruptive fiat that India, along with other allies such as Japan, stop buying oil from Iran. This threatens India’s attempt to build its own rival to China’s ‘One Road-One Belt’initiative by constructing not only the Chabahar port on Iran’s Makran coast but also a network of roads and rails linking Afghanistan and Central Asian republics with the port, and thus to India proper. Iran is believed to have quietly hinted to India that it should follow China’s lead in continuing to buy Iranian crude or risk the gains it has made in Iran.

All this has happened despite India having pulled its weight by silently partnering the US in its war against terror. India is also seen as the only strong ally in America’s pivot towards Asia. Several military pacts signed by the two on sharing logistics, training and communications have virtually made them military partners, without stating it openly.

The ‘Quad’ which the US tried to forge as a counterpoise to China – with India, Japan and Australia as the other members – hasnot been totally successful, but is still a grouping that regularly meets, conducts naval exercises with an eye on China and speaks out openly against Beijing’s bid to turn the South China Sea into an exclusive Chinese pond.

US Secretary for Commerce Wilbur Ross has complained of ‘significant market access barriers in India’ for US businesses
US Secretary for Commerce Wilbur Ross has complained of ‘significant market access
barriers in India’ for US businesses

In fact, within a week of Ross’s visit to New Delhi, the US Chief of Naval Operations, Admiral John M. Richardson, weighed anchor during a trip to the same city to talk about the next round of naval exercises with India. Richardson’s visitfollowed US Secretary of State Mike Pompeo’s statement that the US was ‘banding together with like-minded nations like Australia, India, Japan and South Korea to make sure that each Indo-Pacific nation can protect its sovereignty from coercion’.

Yet the verbal attacks by the US leadership on India’s trading system, and even steps such as denying India a continued exemption from its embargo on Iran selling oil to the global community, are seen as moves contrary to America’s stated strategic interests in ties with India.

However, many believe there is method behind Trump’s apparent ‘maddening’ disruptions. Since World War II, the United States has emerged as the world’s biggest marketplace, where every nation aspires to sell. Japan, Korea and almost all the ‘Asian tiger’ economies grew their economies by trading with America and Europe in the 1950s through to the 1970s. China too has followed that model since 1979, and India since 1991.

As a consequence, the US has the highest trade deficit in the world, which currently stands at a staggering $621 billion – roughly the size of Saudi Arabia’s GDP in 2017, to give a comparison. The reason for the deficit boils down to the US as a nation spending far more than it earns. This extra money is fuelled by the sale of US federal bonds to banks and foreign governments (China is the largest holder of US Treasury bonds) and most of this money is spent on buying foreign goods.

It was only natural that at some stage the US would try to rectify this huge deficit and demand that the world buy more of what it produces, and agree to it protecting its home turf to some extent. The death of American manufacturing in its inner cities through the 1990s and 2000s, as cheaper Chinese and Latin American manufacturers replaced costlier American products, coincided with the period when the US trade deficit rose from zero to a substantial amount, threatening its long-term economic prosperity.

In some ways, if one looks at the issue dispassionately, Donald Trump’s ‘America First’ policy is not very different from what the Japanese adopted after the Second World War, or the policy of reforms implemented by China under Deng Xiaoping,  or even the course of action taken by India after the initial rush of free imports in the post-liberalisation 1990s. The only difference is the aggression which accompanies the US’s attempt to set right its economy.

Nevertheless, the fact remains that the abrasive manner in which President Trump is going about trying to right his nation’s perceived wrongs by stalling trade deals and threatening trade blockades through duty walls has proven to be hugely disruptive. As one Indian mandarin remarked drily, ‘It’s hardly the way one can win friends or allies.’

The way forward has to be accommodation by both the nations the US has targeted, as well as by the Trump regime itself, which has to understand that, while protecting the American economy may be laudable, disrupting the world trading order may cause its own backlash on the US economy. It could also kill any chance of a US and global recovery, or of allies like India and Japan giving their wholehearted support to Pax Americana.

Jayanta Roy Chowdhury is a senior Indian journalist

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