Standing up to Trump

India is finding itself more and more at the centre of the tariff storm raised by the US President Donald Trump.

After a spell of conciliatory approach, last week India inflicted retaliatory duties to the tune of around $250 million on 29 items of US imports.

The move came more than a year after Washington slapped higher tariffs on domestic aluminium (10%) and steel (25%) exports. Since the US punitive levy on Indian metals in March last year, Prime Minister Narendra Modi-led government has been at the negotiating table but things have come unstuck.

At the strategic, trade, economic and political levels also, India is engaged in talks with the US over issues relating to data localisation, Generalised System of Preferences (GSP), policy barriers for foreign e-commerce companies, market access, sanctions against Chinese telecom firm Huawei and others. All being pursued at once; some of them linked to the tariff war.

What has sparked India's retaliatory tariff decision is not very clear, but it seems to have followed the abrupt withdrawal by the US of preferential market access to some of the Indian exports under its GSP programme on June 5.

A few days later, Trump dropped a direct hint of the US's unfair trade with India in his interview to a leading business news channel, repeating the oft-used term "tariff king" for India.

"You look at India, a very good friend of mine, Prime Minister Modi, you take a look at what they have done – 100% tax on a motorcycle. We charge them nothing. So, when Harley (Davidson) sends it over there, they have 100% tax. When they send it, they make a tremendous number of motorcycles. When they send them, no tax. I called him (Modi), I said it's unacceptable. He reduced it by 50% with one phone call. I said it's still unacceptable because it is 50% verses nothing. It's still unacceptable. And they're working on it," he said.

This was more than a nudge to India to correct its tariff structure for the US imports. India's reaction with retaliatory duty has come as a surprise.

New overtures

Many see it as an overture to India sometimes acting in the national interest rather than always giving an impression of a pushover.

Ajay Kumar Sahai Director General & CEO, Federation of Indian Export Organisations (Fieo), who has been working closely with the government on the issue, told DNA Money the call on counter-tariff to the US's higher duty on steel and aluminium was "taken in the national interest".

"People are feeling India should not have retaliated, but I feel the call has been taken in the national interest. And it's okay, as we should not always give the impression that we cannot retaliate to what the US does. Of course, this is not something which we were keen to do. It has been done after being pushed to the wall," he said.

Sahai does not see the reciprocal duty on US goods to have any impact on the bilateral trade. He sees walnut and apple imports from the US being hit the most.

According to him, India's exports are currently growing at around 11% and even after the last week's tariff on the US goods it is likely to grow at the same pace.

Individual versus national interest

Raj Kumar Malhotra, owner of Asian Handicraft Pvt Ltd, who has headed many lobby bodies for handicraft in the past, is not as bullish.

He urged the government to not get into a tariff face-off with the US and convince them to restore the GSP as jobs of over seven million workers employed with garment and handicraft industry could get impacted.

"I don't think that India should retaliate in that way. We are not in a position to retaliate like that. There should be discussions with the US and the government should convince them. Garment and handicraft industry is labour intensive with seven million workers involved. The government knows very well it will affect our employment sector. They should convince the US government that at least for handicraft and garment GSP should be restored," said Malhotra.

He said his US customers saved 3-7% on handicraft imports from India due to GSP benefit. "Now they are asking for a 3-7% discount. If we do not give then our orders will come down and if we do then we will have to pay less to artisans and quality will suffer. There is also competition from China, Philippines and other countries," he said.

Malhotra, whose 35-40% of business comes from the US, said the government could blunt the impact of GSP removal on local players by increasing exports incentive in the form of tradable script from the current 2-5% to 5-10%.

"Today, we get a licence in the form of a duty-free script against our exports, which is tradable in the market. We can sell it. This incentive is 2-5% of our total exports. If this is increased to 5-10%. That will help us a lot," he said.

Sahai said exporters will have to accept the government decision taken in the national interest.

"What an individual feels and what a country feels are different. Definitely, if I am an exporter, for me that is the most important thing, but the country has to look into all aspect. We cannot show a weak posture globally. That is the decision the government has taken and for the national interest, we have to go by that," he said.

Not in cul-de-sac

The exporters' association chief, however, does not see it as the end of the road for India-US trade relations or a shift in their equation. "The retaliatory tariff should not be linked to India's relation with the US. I don't think these are issues which will impact trade. People are talking about US retaliation, we will do something about it when we reach that bridge. This is also not posturing. It has been done after waiting for a very long time. I still feel this is not the end of the road for the two countries. We can continue to discuss and negotiate and we can still find a solution," he said.

And even though India is not pushing for the reinstatement of GSP, the US Secretary of State Michael Pompeo has given clear indications that India could be brought back under the preferential benefit scheme. The US government official is expected to be in India later this month to discuss 5G network technology and data localisation issues with his Indian counterpart S Jaishankar. Modi and Trump are also expected to meet on the sidelines of G20 summit on June 25-26 in Japan.

Stage for trade talk ready

Thus, the stage for these meetings has been set with moves and countermoves by both countries. And, sure enough, the stakes for the two of them are high looking at how their relationship in several areas has only swelled over the years.

The numbers put out by the US Trade Representatives show the trade between India and the US amounted to $142.1 billion in 2018. Ministry of commerce and industry figures reveal estimated overall domestic exports at $535.45 billion for FY19.

As per the US Trade Representative, India's overall trade surplus with the US was $24.2 billion in 2018. Last year, India's total US imports, including agriculture products ($1.5 billion), tree nut ($662 million), cotton ($329 million), fresh fruits ($163 million), dairy products ($48 million, prepared food ($33 million) and others, contributed just 2% of the total US exports.

On the other hand, Indian exports constituted 2.1% of the total US imports. Major exports from India to the US comprise premium metals and stones ($11 billion), pharmaceutical ($6.3 billion), machinery ($3.3 billion), mineral fuels ($3.2 billion), vehicles ($2.8 billion) and agriculture ($2.7 billion).

Directorate General of Foreign Trade statistics shows exports to the US, which is the largest export market for India followed by UAE and China, grew at 9.48%, albeit on a higher base. Interestingly, Chinese exports grew 25.62% during the same period.

Giving Trump Harley Davidson lolly

And trade ties are just one part of the India-US camaraderie, which has developed on several fronts – political, defence, economic, strategic diplomatic and others.

So, while juggling between these interests, India may well see the wisdom in relenting on Trump's Harvey Davidson demand to drive a hard bargain for a more substantive gain.

"He (Trump) is making it (Harley Davidson) an issue. Its tariff has already been reduced (from 100% to 50%). Harley Davidson is not so much of an issue since not many numbers of it are being imported. It is something which can be looked into. I am not sure what call the government will take. Last year, not even 100 pieces were imported. So, it's up to the negotiator to look into those aspects," said Fieo's Sahai.