PM Modi’s US Visit May Boost India’s Economic Ties but China Strategy Needs Work

Prime Minister Modi is scheduled to travel to the United States on 22 June for an official state visit hosted by the US President Joe Biden and First Lady Jill Biden. From the statement released by The White House, the visit seems to be lucidly aimed at deepening US-India strategic partnership in areas of defence, military, space, and energy security.

 According to the White House,

“The upcoming visit will affirm the deep and close partnership between the United States and India and the warm bonds of family and friendship that link Americans and Indians together. The visit will (also hope to) strengthen our two countries’ shared commitment to a free, open, prosperous, and secure Indo-Pacific and our shared resolve to elevate our strategic technology partnership, including in defence, clean energy, and space. The leaders will discuss ways to further expand our educational exchanges and people-to-people ties, as well as our work together to confront common challenges from climate change, to workforce development and health security.”

This will help bolster an already strong economic and strategic partnership. From 2021 onwards, the US became India's largest trade partner and net exporter. A large volume of India's exports, particularly in services, has been anchored towards the US markets, despite significant trade-related issues between both nations. We look at a few of them here.

India-US Trade as Part of the Quad (2018-22)

India is crucial for the US' effort to develop a strong countervailing force to China in the Indo-Pacific.

For the Quadrilateral Security Dialogue (commonly known as Quad) and beyond, India’s dominant export-import partnership is with the US, and the largest percentage share of total trade with the US is estimated to be the highest, at 18%.

Even though India’s import dependence on China continues to be a problem from a trade policy standpoint, a deeper entwinement of economic and security ties with the US will help both countries in striking a coalition against Chinese influence in the region and much of Asia.

In 2021-22, India’s trade surplus was USD 32.8 billion with the US. Beyond services, major export items from India to the US include petroleum polished pharmaceutical products, jewellery, light oils, petroleum, and frozen shrimp. Major imports from the US include petroleum, rough diamonds, gold, coal, waste and scrap etc.

Many countries - not just those part of the Quad, but also within the Association of Southeast Asian Nations (ASEAN) - are interested in decoupling their supply-chain dependence on the Chinese, especially post COVID 19, while entrusting a more expansive trade partnership with India. This hasn’t been easy because of India’s domestic economic landscape and policy ecosystem which continues to face several bottlenecks.

More importantly, for any nation to 'successfully’ decouple against China (or find a good complementary trade alternative), India needs to develop a powerful economic narrative outside of China’s influence.

During 2021-22 alone, India-China trade aggregated at USD 115.42 billion as compared to USD 86.4 billion in 2020-21. See the Figure below for noting India’s bilateral trade levels with China during the last four years (2018-22).

Potential for Service-Based Trade Expansion from India

At a time when the global economy is facing headwinds from different external shocks, India’s own macroeconomics of the open economy, particularly from the trade account, has seen rising exports. This occurs despite the fact that with a higher import balance, its net account faces a deficit. Notwithstanding the deficit, India is observed as a vital economic market and a destination for investment to yield growth.

For a long term economic outlook, the area to focus India’s trade and industrial policies needs to be geared towards services, where its competitive and comparative advantage is more clear. It is also an area where India, with the US as its trading partner, has consistently done well within the field of exports.

The other area where the government has focused its bilateral relationship with key partners has been concentrated in signing more comprehensive free trade agreements, or Free Trade Agreements (FTAs).

India, under Modi, has tried to push for this with its trading partners, such as the UAE, Australia, UK, and USA. However, the success of signed FTAs yielding high trade returns for any given country, or in creating ‘good’ jobs, is mixed, especially given how most trade networks and supply chains have decentralised, multi-country based integrated loops for value-added and cost-benefit reasons. As a result of this, any deterministic advantages of trade to any given nation’s own worker-population (such as signing an FTA) may hardly be affected positively.

Despite this being the case, the Indian government has remained keen in ensuring stronger FTAs. Whether India and the US sign an FTA soon remains a question. However, when we look more closely at the key concerns for mitigation in the US-India Trade Axis, a lot needs to be done before any meaningful agreement may be put in place for these two vital, strategic allies.

Concerns to Mitigate in the US-India Trade Axis

During the Trump administration, bilateral trade issues between the US and India grew over tariffs and other policies. Trump wanted a renewed trade deal with India. As a trade deal to address certain market access issues reportedly concluded in 2020, it did not eventually materialise. Under the Biden administration however, the US seems far less combative viz-a-viz India on trade and hopes for greater cooperation.

In November 2021, the Biden-Modi administrations convened a ministerial-level meeting of the bilateral Trade Policy Forum (TPF), the first in four years. In recent months, they also addressed issues related to agricultural market access and India’s digital services tax (DST). 

Yet frictions remain between the two nations, including over the termination of India’s eligibility for the US Generalised System of Preferences (GSP), and the sometimes diverging American and Indian views in the World Trade Organization (WTO).

There are six areas identified below as critical points of concern where India-US would need to cooperate on, if they are willing to develop a reoriented trade axis/vertical for a medium-to-long term deal.

India’s (Protectionist) Tariff Regime: The United States has had longstanding issues with India’s tariff regime, which has relatively higher average tariff rates, especially in agriculture. On top of this, the recent policy interventions made in terms of a temporal wheat export ban accompanied later with restrictions of exports for sugar is going to adversely impact India’s reputation as a credible exporter and trade partner to other countries along with the US. India can raise its applied rates to bound rates without violating its commitments under the WTO, causing uncertainty for US exporters - as it did for certain telecommunications goods previously.

Steel and Aluminium Tariffs and Retaliatory Tariffs: India has opposed the continued US "Section 232” steel and aluminium tariffs, applied since 2018. India then applied retaliatory tariffs against the United States after losing its GSP eligibility and these higher tariffs of 10% to 25% affect about USD 1.2 billion of US exports (as per 2020 data), such as for nuts, apples, chemicals and steel. The two sides have been challenging each other’s tariffs in the WTO. Moving forward, both nations will need a more cooperative bilateral trade-tariff structure to work together.

Digital Services Tax (DST): In November 2021, the US announced a “political agreement” with India on its DST treatment. In exchange for India’s commitment to transition from its DST to a newly-concluded, related global tax framework, the US agreed to terminate additional, already suspended duties on certain goods from India. The duties arose from a US “Section 301” investigation, prompted by concerns that India’s DST was unfair to US firms. This is still an area where both countries would need to take domestic steps to implement the global tax framework.

Services: The two nations are competitive in some service industries. India supplies a large exodus of skilled workers from areas of technology, medical care, etc. to the US. The barriers to market access by US firms include India’s limits on foreign ownership and local presence requirements. A key issue for India is US temporary visa policies, which affect Indian nationals working in the United States. India continues to seek a “totalisation agreement” to coordinate social security protection for workers who split their careers between the two countries. An agreement to ensure easier “skilled worker” mobility between India and US would go a long way in developing a stronger trade in services compact. It would also help increase private remittances to India, which helps improve India’s overall Balance of Payments position.

Agriculture: Sanitary and phytosanitary (SPS) barriers in India limit US agricultural exports. The United States questions the scientific and risk-based justifications of such barriers. Each side also sees the others agricultural support programs as market-distorting; India’s view of its programs from a broad food security lens complicates matters. At the TPF, the two sides agreed to work to finalise market access for a number of products, including for Indian mango exports to the United States and US pork exports to India.

Intellectual Property (IP): The two sides differ on how to protect IP to support innovation and other policy goals, such as access to medicine. Some stakeholders welcomed moves by India to its intellectual property rights (IPR) regime, but they have been disappointed by the pace of reform. India remained on the Priority Watch List of the US 2021 “Special 301” report, which cited such U.S. concerns as India’s patent treatment, high IP theft rates, and lax trade secret protection.

There are other areas for soliciting greater US-India convergence on trade, for example, in renewable energy production, semi-conductor chips, telecommunications, etc.

Signing a more comprehensive FTA with the US may help mitigate some of the above concerns, ensuring better cooperation between the two nations for the long term.

However, signing an FTA with the US is fraught with frictions most of the time, and in the past has seen to be difficult and time-consuming, particularly for developing nations outside its region of economic and military influence.

The hope is that with the Indo-Pacific Economic Framework (IPEF) now created, the new Framework may allow both India and the US to counter their economic dependence on China. It may allow them to seek a reoriented, welcoming bilateral trade partnership on the sidelines of IPEF, while developing trade-capital market integration in comparative advantage positions in areas of services (where India exports most to the US), and in other less competitive avenues like manufacturing and agriculture.

The next few years are crucial for ensuring this.

(Deepanshu Mohan is Professor of Economics and Director, Centre for New Economics Studies (CNES), Jindal School of Liberal Arts and Humanities, OP Jindal Global University. This is an opinion article and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)