A trade war refers to an economic conflict occurring when a nation imposes tariffs or quotas on imports, resulting in subsequent retaliation by foreign countries. The escalation of this results in a trade war. A trade war starts when a nation attempts to protect its domestic industries and create jobs. The implementation of tariffs on imported goods is supposed to give a competitive advantage to the domestic producers of that product, as their prices are usually lower by comparison. However, in the long run, a trade war costs jobs. It depresses economic growth for all countries involved and triggers inflation as imports are now pricier because of the tariffs.
President Trump started trade wars as he wanted to reduce the $621 billion US trade deficit, which was the world’s largest since 1975. In early 2018, Trump said “Trade wars are good and easy to win,” and this resulted in his imposition of tariffs on steel and Chinese imports which began America’s trade war with China.
It seems like Donald Trump was not fully contented with fighting a trade war with China alone. His recent actions with respect to India, like terminating GSP preferences and ending waivers to export oil from Iran can set the stage for a new trade war. This time, it will be USA versus India.
Ending Iranian oil waivers
The announcement by the US Secretary of State Mike Pompeo, regarding USA not renewing exemptions that were granted to India and seven other countries regarding their imports of oil was the first sign of possible tensions between India and USA. The sanctions were placed on Iran in the first place, as USA wanted Iran to alter its policies in the region with respect to its support for militant groups and the development of ballistic missiles.
India is the second largest purchaser of Iranian oil after China, which accounts for about 10 percent of India’s oil needs. Oil from Iran is also quite lucrative for Indian refiners as Iran provides 90 days of credit purchases along with cheaper freight duty due to proximity of the two nations. India also enjoys good relations with Iran since both the nations have common concerns regarding the future of Afghanistan, and also because of India’s heavy investments in the Chabhar Port in South-Eastern Iran, which could act as a gateway to Central Asia bypassing Pakistan, for India. Thus, with the non-renewal of the exemptions on the import of Iranian oil, India would have to import oil from other nations instead of Iran, and this would not only affect Iran’s GDP as it would be losing out on a major customer, but it could very well add a dent in India – Iran relations.
Now, India did listen to USA by agreeing to these sanctions as it does require the United States’ help to keep a check on China’s growing geopolitical ambitions in the region. With hostile neighbours- Pakistan in the West and China in the East, India’s security concerns do outweigh the country’s economic considerations and thus for now, require us to comply with US sanctions, despite high financial cost for our country. For now, India, which imported 23.6 million tons of Iranian oil in the FY2019, will fill the gaps left by Iranian oil, with imports from other major oil-producing nations such as Saudi Arabia, Mexico, Nigeria and the USA. However, forcing India to accept USA’s diktat on Iranian oil has resultantly put a strain on the relations between the two nations.
The Russian military partnership issue
The second aspect of the tense relations between USA and India is with respect to CAATSA – Countering America Adversaries Through Sanctions Act – which allows the USA to punish Russia’s military partners based on business dealing with Russia, violating the American Law. Section 231 of the new law allows USA to impose sanctions on these countries as punishment. India being one of the largest buyers of Russian weapons is quite vulnerable to this Act. However, since CAATSA is an American law, it can be challenged as it restricts global free trade and is fundamentally illegal.
India is conducting strategic talks with Russia to purchase the Russians’ S – 400 air defence system. However, USA wishes to capture the Indian defence market as part of its own in order to build up the country as a counterweight to China. USA has even declared India as a major defence partner, paving the way for sales of high-tech military equipment. USA is willing to sell equipment that previous administrations did not consider so that India could switch purchases from Russia to America. This includes Lockheed Martin’s F-21 and Boeing’s F/A-18 fighter jets and possibly the fifth generation F-35 jets, only if India terminates its deal with Russia.
However, Russia has been a long-standing ally of India ever since the Cold War period and is the biggest source of India’s military equipment. India choosing to scrap the deal with Russia would spell hostile relations between the two nations. It would also imply India surrendering its autonomy in decision-making which may generate negative consequences in diplomatic relations.
The big blow- No more GSP
The latest instance of USA’s animosity towards India has been reflected in the removal of India from USA’s preferential trade programme known as the GSP (Generalized System of Preferences). It came into effect from June 5 onwards. The GSP is a beneficiary programme in the USA which provides member countries tariff free access to the US Market. The objective of this scheme is to ensure faster growth of developing economies by allowing their exports into the much-advanced US market.
Due to the GSP scheme, India was able to enjoy preferential tariff on 50 of the 94 different products the country exported to the USA. Over time India amassed 5.6 million dollars’ worth of preferential tariff, making it the biggest beneficiary of this scheme among the 120 countries that constitute the GSP membership. This led to an eventual trade surplus for India with the USA, which implies that India exports more to the USA than it imports.
USA was not happy with the way the conditions were normalized. Their opinion was that the country was always on the short end of the receiving stick. For instance, the New York Times estimate claimed that India exported $83.2 billion in goods and services to the United States in 2018, but the US just gained $5.6 billion from the Generalized System of Preferences. Trump wanted reciprocity and wanted India to reduce tariffs on USA products too like the motorcycle brand Harley Davidson. In February 2018, India complied and did indeed reduce tariffs on Harley Davidson. But Trump was not satisfied and wanted more items to be added to this kit which in fact led to the signing of a presidential decree alleging India of not assuring the United States equitable access to its markets. This resulted in the official removal of India from the GSP list.
In retaliation, India announced an increase in tariffs on 28 categories of imports from the United States. The increased tariffs on goods worth $1.4 billion, cover almonds, walnuts, apples and finished metal items, among other products. According to the 2018 US department of agriculture data, India is by far the largest buyer of US almonds and is also the second largest buyer of US apples. The tariffs on these goods would make them more costly in the Indian domestic market and as a result the Indian consumer would limit purchases of US almonds and apples and instead substitute them for other products. This would mean lower demand and consequent lower US imports into the nation which could increase US trade deficit with India. These Indian tariffs on US goods could further impact growing political and security ties between the two nations.
Ultimately, India did not stand to lose out so much economically with being removed off the GSP member scheme. India is no longer an underdeveloped country and does not really require this form of a support on the trade front. However, this removal has indubitably caused social tensions between the two nations which ultimately resulted in India implementing retaliatory tariffs on US imports.
Will there be a trade war?
It seems the US President runs the country like a business entity and ultimately he wants the best possible benefits for his nation. He is also due to complete his first term as American president by November 2020. In this regard, if he brings down USA trade deficits and provides greater protection to American businesses, he can look for the possibility of a re-election.
The Indian counterpart on the other hand, is also under pressure to protect Indian companies – much like Trump himself. India is a fast-growing economy and Modi, who was recently re-elected, is also trying to protect the interests of the people. Both leaders have become quite nationalistic in their approach and this is harbouring tensions between the two nations.
Richard Rossow, a specialist on US-India ties at the Center for Strategic & International Studies in Washington, believes that a reason for the worsening of the trade relations between the two nations is because both leaders – Trump and Modi – look at trade as a zero-sum game, which refers to a situation in game theory in which one person’s gain is equivalent to another person’s loss and as a result the net change in wealth or benefit is effectively zero. International trade is not supposed to be a zero-sum game as the nations engaged in international trade aim at obtaining things more cheaply than one can produce the same for themselves. Nations which treat trade as a zero-sum game spell disaster for their economies in the long run as eventually no country would want to engage in trade with that particular nation.
India and USA are two major international players. The strain in trade ties between the two economies has come at a time when global economic growth is being projected to slow down because of trade tensions between the other two major economies – USA and China. The RBI has even cautioned India that there is weak global demand because of the escalating trade wars which can influence export and investment activities. However, unlike the case with China, USA has declared a more favourable approach with regard to its trade tensions with India. The message is very evident in what Pompeo said at the US-India Business Council meeting- “We remain open to dialogue, and we hope that our friends in India will drop their trade barriers and trust in the competitiveness of their own companies”.
Picture Courtesy- Center for American Progress