New Articles

U.S.-INDIA TRADE TIES CONTINUE TO DEFY GRAVITY

india trade

U.S.-INDIA TRADE TIES CONTINUE TO DEFY GRAVITY

Despite economic headwinds and each country’s zero-sum approach towards trade, India is firmly among the United States’ ten largest goods trade partners. And it’s a fair bet that the best years for U.S.-India economic cooperation lie ahead.

Sometime within the next two decades, India is likely to become the world’s third-largest economy. Within the next five years, India will surpass China to become the world’s most populous nation and a key global market. Thus, it is no surprise that India is already among the world’s most attractive markets for foreign investment.

U.S.-India Trade in Numbers

Presently, India is the United States’ ninth-largest goods trade partner and has the potential to be U.S. seventh largest goods trade partner in the next decade. In March 2019, bilateral goods trade crossed the $90 billion mark for the first time during any 12-month period. From India’s perspective, the trade relationship is even more important. In 2018-2019, the United States replaced China as India’s top goods trade partner, a position it had lost over a decade earlier. India’s goods trade surplus with the United States in fiscal year 2018-19 was $16.9 billion, more than double the surplus with the next highest trade partner, Bangladesh.

However, this positive story hides a difficult truth — trade did not grow evenly between the first half and second half of the calendar year. Bilateral trade grew 5.2 percent over the full year but contracted over the last six months of 2019 by nearly eight percent. The U.S. goods trade deficit with India widened during the year, from $18.5 billion in 2018 to $23.2 billion in 2019. While that number obviously pales in comparison to the $346 billion goods trade deficit with China or the $100 billion deficit with Mexico, it is the 11th-largest deficit with any U.S. trade partner.

US-India goods trade up

Caught in Global Headwinds

Globally, economic growth remains relatively depressed – even prior to COVID-19. The International Monetary Fund dropped its prediction of India’s economic growth by nearly a full point between July and October 2019 to 6.1 percent. Moody’s had downgraded India’s outlook to negative, “partly reflecting lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses.”

COVID-19 has plunged the Indian economy to 1.9 percent growth this year, though with a forecasted recovery of 7.4 percent growth. Some of the drop in growth and trade over the second half of this year are outside the control of either nation, but the imposition of trade barriers can be controlled, particularly as Prime Minister Modi wishes to attract more foreign direct investment to boost post-COVID-19 recovery.

The government of Prime Minister Narendra Modi came to office in May 2014 for its first five-year term. The government quickly moved on significant reforms, touching on taxation, legal, foreign investment liberalization, and other key investment impediments. However, since its re-election in May 2019, the Modi government has been much less aggressive in pursuing economic reforms while also considering restrictions in areas like data flows and e-commerce that can seriously undermine investor confidence in India.

Similarities Causing Friction

Trade deficits continue to occupy an important place in policymaking in Washington and New Delhi. Both nations’ leaders approach trade as more of a zero-sum proposition and are deeply concerned about protecting — and growing — domestic manufacturing. The worry about a widening trade deficit has often sparked protectionist tendencies from both sides.

In the recent past, Prime Minister Modi has adopted local content mandates in sectors with high levels of imports, raised customs duties in sectors he seeks to protect, adopted price controls on pharmaceuticals and medical devices as well as on credit card fees and airline tickets, and imposed limitations on foreign direct investments in sectors including e-commerce. For its part, the United States included India as part of new tariffs on steel and aluminum, revoked India’s trade benefits under the Generalized System of Preferences (GSP) program and threatened further actions, including placing new limits on technology worker visas.

FDI in India up

Rebounding into a Stronger Relationship

Trade was beginning to slow prior to COVID-19 and the economic effects of the pandemic are yet to be fully realized as the future remains uncertain. But U.S.-India relations have shown surprising resilience and improvements in the face of serious speed bumps.

How policymakers respond to these challenges – whether they choose to erect trade barriers or continue to liberalize – will determine whether both countries can use the opportunity to rebound into a stronger commercial relationship or whether each will retreat, potentially hampering long-term recovery.

_______________________________________________________________________

Rossow

Richard M. Rossow is the Wadhwani Chair in US-India Policy Studies at The Center for Strategic and International Studies (CSIS) in Washington DC.

This article originally appeared on TradeVistas.org. Republished with permission.

Iran port to be developed by India will handle shipments of export cargo and import cargo in international trade.

U.S.-India Trade: The Good News & the Bad

The U.S. Census Bureau recently released data on U.S. goods trade with India through June 2015. The trend of reducing the U.S. trade deficit with India has continued—and even accelerated.

In the first six months of 2015, the U.S. goods trade deficit with India has shrunk 6.3 percent, largely fueled by a 14.3 percent increase in U.S. exports to India.

While the moderating trade balance is great news for the United States, it indicates that Prime Minister Narendra Modi’s Make in India campaign has not had a substantial impact on India’s desire to follow China’s path to become the workshop to the world.

From India’s perspective, trade with the U.S. has historically been one of its few bright spots. India has one of the largest goods trade deficits as a percent of GDP among members of the G20. Despite softening oil prices and a more stable currency, India’s goods trade deficit hit $137 billion—nearly 8 percent of GDP in the 2014–2015 fiscal year. While below India’s all-time high deficit of $191 billion from FY 2013, the deficit remains a major factor in economic policymaking.

Its impact on India’s leadership is particularly noticeable in the government’s reluctant attitude toward global trade talks, in the adoption of compulsory local manufacturing rules in a variety of industries, and in Prime Minister Modi’s highly visible Make in India campaign.

The sudden progress of the U.S. toward more balanced goods trade with India presents a unique challenge to U.S. policymakers. Increasing U.S. exports is great for American firms. At the same time, it may augment India’s anti-trade sentiments and cause Indian policymakers to expand anti-import

measures such as local manufacturing rules.

In the midst of the key bilateral meetings in September, the U.S. International Trade Commission (USITC) is scheduled to release an updated study on India’s trade policies during the first year of the Modi government. The first USITC report, issued in December 2014 and covering policies in place prior to Modi’s election, was quite critical of India’s trade policies.

In September, the United States and India will hold their first Strategic and Commercial Dialogue, and days later, Prime Minister Modi will return to the United States. The United States has already offered to help strengthen India’s manufacturing sector, including in strategic sectors such as defense. And foreign investments, both direct and portfolio, are quite strong and help to offset broader possible concerns about the trade deficit.

Recent economic engagement with India has tended to focus on negative aspects of our trade relationship, particularly in the U.S.-India Trade Policy Forum. The concerns raised in these platforms are generally quite serious and deserve attention. But U.S. policymakers must be mindful that we are

experiencing a possible turning point. Despite concerns about India’s trade policies, U.S. exporters are generally doing quite well right now. We do not want to appear to have a tin ear when it comes to India’s own needs to strengthen its economy.

The U.S. trade deficit with India is still two-to-one, so we are not yet on a clear path toward balanced trade. But the sharp correction this year raises important questions. At some point, strengthening the Indian economy must be viewed through a strategic lens, rather than a purely commercial lens. Having a stronger economy is a critical precedent for Indian policymakers to show greater interest in global trade discussions. It will also empower India to provide alternative paths to the economic diplomacy for which China now enjoys regional primacy. And it will allow India to more quickly realize its full capacity to devote money and time to regional security matters, in whatever form this may take.

While the most important decisions that determine trade flows are made by private-sector entities, government discussions can play an important role. Such talks can result in formal trade agreements, remove trade barriers, expand critical government-facilitated training activities, encourage government-led trade missions, and highlight areas for future collaboration. But the recent goods trade data presents a conundrum to policymakers from both nations. Balanced trade is generally ideal, yet in the current environment it could prove damaging to our relationship in other ways.

 

Richard Rossow holds the Wadhani Chair in US-India Policy Studies at the Center for Strategic and International Studies in Washington, DC.