June 26th, 2019 : In no-hushed words US Secretary of State Mike Pompeo and India’s Foreign Minister S Jaishankar acknowledged deep-seated bilateral trade-issues, most contentious being India’s import tariffs on US manufactured goods and its $24Bn trade surplus. Upping the ante, President Trump ordered withdrawal of India’s GSP benefits (specific import duty benefits currently valued at USD 60Bn for India)[ Office of the United States Trade Representative, United States will terminate GSP Designation of India and Turkey, 2019. ] and tweet-attacked Modi at the onset of G20 Osaka summit.[ Alex Valentina Pop & William Mauldin, “Trump, at G-20, says there will be ‘very big’ trade deals with India, Japan”, Business Standard.] India in turn responded by vowing to protect its national interest and slapped counter-tariff schedules on 28 US commodities such as apples, walnuts and almonds. In an effort to hopefully ease tensions, experts and negotiators will formally begin ‘trade-talks’ in New Delhi on July 12th marking what has already been months of intense strain on India-US relationship. In parallel, US-China also re-initiated round 2 of trade-talks in Washington on the 12th of July.

At this critical juncture eminent economists continue to flag the slowing of global economy and warn that this ever-expanding trade war, now engulfing India after US-China-Mexico-Canada could become an inflection point – either engulfing other countries into a Global Trade War leading into a shrink and recession or re-setting the global trade balance in favor of some more than others. Much rests on New Delhi negotiations as both Trump & Modi posture themselves as strong leaders unwilling to be pushed around. However, it will be the below external factors/dimensions which are expected to impact the end result of talks, much more than the trade deficit & tariff structures for which the discussions were initiated. The world waits in anticipation.

Emerging external dimensions & scenarios:

• Iranian Oil & S-400 Missile Defense Deals: Upholding his election promise President Trump withdrew from the Iran Nuclear deal and begun to beat down Iran’s economy with direct economic sanctions, alongside indirect lobbying countries to not purchase cheaper Iranian oil via the CAATSA - (Countering America's Adversaries Through Sanctions Act) which has been US’s traditional sanctions act against Iran, Russia, North-Korea. India has continued to hint that it may snub US and purchase Iranian Oil. At the same time US expressed displeasure at the announcement of India’s purchase of S-400 missile defense system from Russia. At least for now India has kept US pressure at bay but has certainly strained relationships and it will be near impossible to keep these deals out of the trade talks. India also risks damaging its relationships with Iran & Russia if it changes its stance.
• Office of the United States Trade Representative, United States will terminate GSP Designation of India and Turkey, 2019.
• Alex Valentina Pop & William Mauldin, “Trump, at G-20, says there will be ‘very big’ trade deals with India, Japan”, Business Standard
• Non-US Tariff structures: China in the recent months has reduced its tariffs on other trading nations such as India, Bangladesh, South Korea, Sri Lanka among others while raising retaliatory tariffs on the United States. For instance, since the start of 2018, China has increased its tariff on US products to 20.7% on average while lowered its average tariff to 6.5% on other WTO trading countries. If India, Mexico begin to follow suit and create lower tariffs for non-US trades, it will certainly begin to dent weaponization of tarrifs as a sustainable US foreign policy. (Ref: Figure 1: Source: Peterson Institute of International Economics)

  Figure 1: China’s Average tariff rate for US vs ROW

• Digital Warring: In the recent past, Indian Government and the Reserve Bank of India have pressed foreign firms to store data collected from Indian consumers locally, upsetting Washington. Firms like Facebook, Amazon will no longer be able to send or share data with their Corporate HQs outside Indian waters. India has also signaled that it could follow France and others in imposing a digital tax on profits of global tech firms (currently 3% in France). This is generating greater head-winds on the digital competition and can most certainly ride on current disputes and make a trade-talk compromise even so elusive.
• Pompeo-Jaishankar angle: While each negotiation has a human angle beyond numbers and expectations, given that both leaders are seasoned diplomats and not politicians in the common sense brings a greater strength to the trade-talks. The human side is further amplified as both have tremendous confidence and trust of their respective President-Prime Minister and is of critical importance when it comes to near-fall out moments as they come with each side testing waters. The edge though maybe with Jaishankar as he has recently seen the Chinese resist and gain leverage by not buckling down to pressure in round 1 of DC talks.
• Negotiation process & policy succession: Aptly evident from US-Mexico-Canada trade deal recurrent negotiation fallouts were questions on negotiation stability and its confidentiality, given how a 2am social media outburst can potentially break matters before final details are etched. Also, equally recent history of complete policy reversals such as Paris Climate Accord and Iranian Nuclear Deal may cast policy succession concerns between India-US.
• Negotiation process & policy succession: Aptly evident from US-Mexico-Canada trade deal recurrent negotiation fallouts were questions on negotiation stability and its confidentiality, given how a 2am social media outburst can potentially break matters before final details are etched. Also, equally recent history of complete policy reversals such as Paris Climate Accord and Iranian Nuclear Deal may cast policy succession concerns between India-US.
• The Common Challengers: While all may seem at cross-roads between India and US, the rapid rise of China’s military and economic influence in the Asian subcontinent and Pakistan’s unwillingness to credibly act against terrorism are common foes that India and US must fight. Trump administration’s vociferous advocacy for FATF (Financial Action task Force- watchdog for financial corruption and counter-terrorism) action against Pakistan is in India’s interest and can help reign in on terror funding.[ Alyssa Ayres, “Pakistan, Terrorism, and Meeting Trump,” Council on Foreign Relations(blog), July 18, 2019, https://www.cfr.org/blog/pakistan-terrorism-and-meeting-trump. ] US on the other hand can leverage India’s geo-strategic location and seek to challenge China’s dominance in the Indian Ocean and South China sea.
• Historical Dimension: If history is any lesson, United States knows that through time its skirmishes and full-blown ‘trade-tariff wars’ have yielded mixed results at best and in most cases it quickly repealed them as domestic consumers paid the brunt, jobs shrunk, no clear winners emerged or the US was simply the bigger looser. The historic dimension will be at the fore-front as India pushes for a market driven equilibrium. A brief look at few of the major US trade-wars, the items involved, brief time-line of events and who eventually won/lost if any.

References

• “Stories.” HISTORY, https://www.history.com/news.
• “Joint Comprehensive Plan of Action.” Wikipedia, 21 July 2019. Wikipedia, https://en.wikipedia.org/w/index.php?title=Joint_Comprehensive_Plan_of_Action&oldid=907257051.
• “France Passes Tax on Tech Firms despite US Threats.” BBC News, July 11 2019. https://www.bbc.com/news/world-europe-48947922.
• “Subrahmanyam Jaishankar.” Wikipedia, 21 July 2019. Wikipedia, https://en.wikipedia.org/w/index.php
• Suri, Manveena, Nikhil Kumar and Rishi Iyengar. “Pompeo to India: Even Friends Disagree.” CNN, June 26, 2019. https://edition.cnn.com/2019/06/26/india/mike-pompeo-delhi-india-visit-intl/index.htm.
• Office of the United States Trade Representative, United States will terminate GSP Designation of India and Turkey, 2019.
• Alex Valentina Pop & William Mauldin, “Trump, at G-20, says there will be ‘very big’ trade deals with India, Japan”, Business Standard. June 28, 2019 https://www.business-standard.com/article/economy-policy/trump-at-g-20-says-there-will-be-very-big-trade-deals-with-india-japan-119062800432_1.php.
• Alyssa Ayres, “Pakistan, Terrorism, and Meeting Trump,” Council on Foreign Relations.