Tariff conundrum

On May 5, President Trump tweeted for a fresh look for a high tariff on Chinese goods worth US$ 200 billion imports from 10 per cent to 25 per cent from Friday, if the renewed negotiation failed. The US alleged China for backtracking from its previous offers. The negotiation failed. The US activated a new 25 per cent duty on US$ 200 billion worth of exports from China, effective from 1st June.

India is not far from the pounce of America's high tariff trade war. President Trump slammed India for high tariff, tweeting it a "tariff king" and accused it of trade deficit with the US. During the recent bilateral trade meeting, the visiting US Commerce Minister Willbor Ross blamed India for "overly restrictive" tariff, which brought a jolt to US's exports to India, and eventually caused trade deficit with India. He said that India ranked 13 of US's exports because of the high tariff. Whereas, the US is the biggest export destination for India.

India hogged a blemish for "unjust trade" and fell in the warrant list of US's high tariff cudgel. US fixed India in the watch list of 301 and threatened to withdraw GSP benefits as a counter-attack on India's price cap on medical devices, such as cardiovascular stent and knee implants. It also threatened to drag India in WTO Dispute Settlement Body on export subsidies. India lost the entitlement for subsidies after crossing the cap of US$ 1000 per capita income level. In retaliation, India threatened to impose a high tariff on 29 items from the US.

The slugfest between India and US will linger with no side bowing for adjustment. Against this backdrop, FTA (Free Trade Agreement) could be recourse to resolve the trade dispute. US Ambassador to India, Kenneth Juster mulled for FTA between US and India. A top American business advocacy group, US-India Strategic Partnership Forum (USISPF), asserted for FTA. It believed that FTA would be key to resolve the trade irritants. The President of USISPF believed that "Once you have FTA, all the issues of tariff will go away".

The US is the second biggest trade partner of India, after China. In 2017-18, the US accounted for 9.7 per cent of India's total trade. Incidentally, India's trade relation with China and US countries are diagonally opposite to each other. While China is the trigger for the trade deficit, the US is pivotal for export growth, yielding trade surplus. It helped in offsetting a chunk of trade deficit, triggered by China. In 2017-18, the US's trade surplus offset 13 per cent of India's total trade deficit. Against this backdrop, a lesson can be drawn for India before vying for retaliation against the US.

In trade and investment relation, US is more significant to India than vice-versa. The US is the biggest export destination for India and a major foreign investor. To this end, any retaliation by India means opening a Pandora Box.

The US is the backbone for India's export growth. In 2017-2018, it shared one-sixth of India's export, accounting for 15.8 per cent. It is gear to India's export growth. For example, in 2017-18, India's a total export surged by 10 per cent and the US was the main gear to this growth. It shared 13.4 per cent of India's export.

In the basket of exports also, the US has been playing an important role. It is the biggest importer of readymade garments, marine products, diamonds and pharmaceuticals, which are the major components of India's exports. Incidentally, besides earning foreign exchange and reducing the trade deficit, exports to the US paves the way for generating employment opportunities in India. This is because garments and diamonds are labour intensive industries.

Both World Bank and Peterson Institutes studies have predicted significant gains for both US and India if a free trade agreement is concluded. Before Trump, US was a believer in low tariff and oppose to protectionism. With a turnaround in the trade policy under Trump regime, US and India are in the same boat of protectionism with their aim for America First and Make in India respectively. Given this paradigm shift of the US's trade policy, FTA will play an important role in gearing up the trade relationship between the two countries.

With tariffs done away under FTA, trade potential between the two countries will increase through trade-related investment. The US has the advantages of technology and financial muscles and India has an edge in providing low cost of production base and big domestic demand. FTA will encourage US investors to invest in India in the lure of low-cost production while importing high tech products duty-free as inputs. Eventually, it will help in reducing the trade deficit.

Manufacturing of mobile phone by US investors can be a case in point. Currently, more than 85 per cent of component and material costs for making a mobile phone is imported. India produces only 5-10 per cent of the billing cost, which includes casing, plastic and box packaging. Most of these components and materials are imported from China because of low price advantages. With basic duties on components and materials waived off under FTA, which are around 10-12 per cent, US manufacturers will have an edge over the manufacturers, who are dependent on imports from China.

India is on the trend for heading towards a new manufacturing dynamism after digitisation and automation, which embraces component base industries. These industries require technology and skilled manpower. FTA with the US will leverage the benefit of technology transfer through the import of components and materials at low cost.

This will have a dual impact on US-India trade relation. On one hand, it will have a propitious impact with the increase in US's exports of inputs to India, and on the other side, it can pose a big challenge to China's low coat dumping in India.

Increase in US's exports will have a cascading impact on US-India economic relation. It will increase the US's investment in India, along with exports. Eventually, it will quell the US's ire against India and pitch for a win-win situation for both countries.

(The views expressed are strictly personal)