US & India are changing trade policies towards protectionism – Who is going to gain or lose?
• The US is India’s topmost export destination with a share of 16% in 2018, followed by UAE. Changes in trade policies would bring about some significant impact on Indian trade.
• Some gains from trade are certainly lost for India, as it used to have the highest share of 11% in GSP.
• While protecting agricultural and dairy product sectors is necessary, lowering tariffs for a sector like medical devices could be in India’s interests.
• India should maintain a balanced approach in its trade with US, while simultaneously exploring new market opportunities.
The formation of WTO in 1994 was done based on the objective of moving towards a regime of trade liberalization, market access and free trade. However, in the recent past we have witnessed several trade protectionism measures in some of the big economies of the world. On one hand, when a country like Vietnam has been progressing well in the trade liberalization regime, on the other hand, economies like US, China and India are rather moving away from the path of free trade by denying market access to each other.
Marked difference in the economies in terms of per capita income, resources and infrastructure between India and USA did not lead to a level playing field between the two countries. However, USA is India’s topmost export destination with a share of 16% in 2018, followed by UAE. The country is the second largest destination for India’s imports after China. There has been a growth rate of 5% per annum in Indian exports to USA in between 2014-18 and 12% growth rate over the previous year. Trade policy changes would thus bring about some significant impact on Indian trade. Growth rate of China’s share in India’s exports has been higher than that of USA. Though UAE’s share ranks second in India’s exports, but in the last five years, there has been negative growth rate in exports to UAE.
USA has experienced a trade deficit with India in the recent years. Thus to control the trade deficit, US started the trade warfare by imposing 25% tariff on steel and 10% tariff on aluminium based on National Security Law of the country in 2018. India could have retaliated back with 10% to 50% tariffs on US exports to India on nuts, apples, steel and motorcycles. USA claims that its tariffs on Indian products have mostly been within the range of 7%, but India denied market access to US agricultural products, cell phones, motor cycles based on high tariffs and price controls on medical devices.
Thus, the US withdrew preferential tariff status under Generalized System of Preferences (GSP) to India. Due to this, India would lose the status of duty free exports of some goods to US, which constitute about 11% of US imports. Both US and EU claim that India violates WTO norms by charging tariffs beyond the bounded rates.
The GSP withdrawal would affect Indian exports in sectors like chemicals, auto components and tableware. This would not only affect the Indian exporters of these products, but it would also affect local US manufacturers of finished products as Indian inputs to these industries would be costlier. This in turn would affect US industries’ profitability. Such regressive protectionist policies would affect consumers of both the countries. China and EU would take advantage of the deteriorating trade relations between India and US.
As far as the Indian economy is concerned, protection of agricultural and dairy products is absolutely necessary in terms of food security and to protect marginalised farmers. For years, the US had provided subsidies in the name of green box subsidies to their farmer population that constituted only 2% of their total population. If India had given more market access to US agricultural and dairy products, it would not lead to a level playing field for both the countries.
However as far as other products such as cell phones or motor cycles are concerned, India would have benefitted by reducing tariff rates and they could easily reduce tariff on foreign goods in this sector. In absence of a sound medical device industry in India, imported medical devices would have benefitted hospitals and patients in India to get relatively low cost medical surgeries and medical test-related surgical instruments. So price controls are also required in this industry to benefit Indian patients. Thus without a level playing field, protection is absolutely justified for India.
While many trade experts have claimed that India doesn’t have much to lose due to GSP owing to its low proportion of these exports to USA, some gains from trade are certainly lost as India used to have the highest share of 11% in GSP. India has a fair chance to retaliate back as our country has been the third largest market for US apples and almonds. A higher tariff would definitely affect US exports as it would further deny market access to the Indian middle class.
Higher import tariffs on apples and almonds would not affect the Indian middle class consumers as these products are luxuries for them. Indian higher income groups have a fairly low elasticity of demand for these products due to higher income. Thus the loss in trade would go against US more than India. So India has no threat as of now. But there is a threat potential on major Indian exports to the US in future as withdrawal of GSP works as a signal of future threats. The time has come when India could now explore other markets like Vietnam for its products.
If India allows more market access to the US on apples and almonds, this policy would not affect Indian agriculture much. So a lower tariff would let a portion of the middle income group afford such products. No country would have absolute gain in protectionism. Two strategies could be explored by India: exploring new opportunities by improving bilateral trade relations with other Asian countries; and maintaining a balanced mix of protectionism and liberalisation with the US.
Dr. Rupamanjari Sinha Ray works with MDI Gurgaon since 2008, in the Economics Area, presently as Assistant Professor. She has been awarded PhD in Economics from Jadavpur University in the area of International trade and Environment. Her varied areas of research had been in the field of International Trade and environment, WTO and environment, CSR and Environmental responsibilities of firms, SEZs, Common Service Centres and Carbon financing. The views expressed here are her own.