By Subrata Majumder
While all the major countries, pinched by Trump’s unilateral high tariffs, took retaliatory measures by raising the tariff on imports from USA, India went one step forward and two steps back. Twice, it suspended its decision to impose high tariff on 29 items from the US. By the original schedule, high tariff was to be imposed from 4th August. It was deferred to 18th September and further to 2nd November.
Skepticism has increased over India’s real intention behind the trade retaliation against USA. Analysts view this a result of India’s overdependence on US in respect of military ties. And now this military alliance has grown deeper. What has impelled the revitalization of defence ties with USA?
Ever since USA declared India a “Major Defence Partner” in 2016,the focus on defence ties outweighed the economic relations. In this context, the recent 2+2 dialogue between the two countries is significant. It led to the signing of Communication Compatibility and Security Agreement (COMCASA). This agreement is considered a new journey for the consolidation of military ties between the two countries in the context of technology transfer and defence procurement.
Hitherto, Russia has been the dominant player in defence ties with India. According to analysts, Russia has 67percent stake in India’s defence procurement. The existing system of procurement debars USA from supply of defence equipment. It is believed that COMCASA will pave the way to supply equipment with transfer of high technology, which is mandated in the US law of Foreign Military Sales (FMS).
The FMS system of sales, which includes transfer of technology, mandates that the sales must be approved under the Arms Export Control Act (AECA) of USA and it will be authorized by the President. Under such stringent regulation, the US reluctance to share technology in the context of India’s long binding relation with Russia was an important impediment.
Another important outcome of 2+2 dialogue was the readiness to begin negotiations on Industrial Security Annex (ISA). This will further open the window for greater scope for Indian companies to get the latest technology.
The agreement on COMCASA and the launching of the negotiation on ISA will act as a pivot to India’s Make in India initiative for the development of its defence industries. Under this initiative, greater focus is made to open the defence industry to the private sector through policy parameters, such as broadening FDI participation in the industry.
The decision to start exchanges between US Naval Forces Central Command (NAVCENT) and Indian Navy will be another milestone for strengthening maritime cooperation in the Western Indian Ocean.
Besides defence ties, US sanction on Iran is another factor which hinges on India’s retaliation against Washington. The sanction will be effective from 5th November, 2018. Iran is the third biggest source of India’s crude oil import. It accounts for 10 percent of the total crude oil import. Amidst the global oil price volatility, which deepened energy crisis and is unlikely to impact inflation, India needs earnest cooperation of the US for wavering the sanction. Against this backdrop, India seemed to have been drawn into a dilemma to exercise retaliation against US.
Nevertheless, the retaliation has little significance in terms amount of impact on trade. The 29 items identified for high tariffs account for less than one percent in India’s total import from US. It was only $240 million out of the total import of $26, 611 million in 2017-18.Neither does the import by India account for a big share in USA’s world export. Hence, this cannot be treated as “tit for tat” action against USA. . India’s major items of imports from USA are aircrafts, electronic goods, automobile components and non-electrical goods.
In contrast, if India’s retaliation heightens US anger, leading to more items being put under high tariff, other than steel and aluminum, India will be at a more disadvantageous position. Exports of readymade garments and gems and jewelry (particularly diamond and precious stones) for instance, will lose the prime position if they are brought under high tariff. Both these items account for one-sixth of India’s total exports – garments with 5.5 percent and gems and jewelry with 9 percent shares in 2017-18. And, US is the biggest importer of these two items from India. Both items are under close watch by the USA since India has violated WTO rules by continuing subsidy even after crossing the cap of $1,000 per capita income a year. USA has already threatened to drag India to the WTO dispute settlement body.
Against this backdrop, that is, precedence of defence ties to economic relation and basket of trade, the conventional wisdom suggests that India should refrain from escalation of retaliatory action against US.
Trump’s high tariff trade war is against China and India. But the high tariffs are a punitive action mostly against China, which devastated USA’s domestic industry. China accounted for 47 percent of USA’ world trade deficit. Washington has accused China and other emerging nations, which are export based economies, for reaping the benefits of the liberal markets in US by unfair means and not reciprocating by opening their own markets.
India is far behind US in terms of power game. In trade and investment, USA is more significant to India and not vice–versa. US is the biggest export destination for India and a major foreign investor in the country. It is a major turf for employment generation in India as the US is the biggest importer of labour intensive products from India, such as readymade garment and other textile products. To this end, a tit for tat retaliation by India may open a Pandora’s box. (IPA Service)
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