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A file photo of Prime Minister Narendra Modi (left) and US President Barack Obama. Photo: Reuters
A file photo of Prime Minister Narendra Modi (left) and US President Barack Obama. Photo: Reuters

A trade war brewing

Obama's obsession with 'Made in America' and export to India does not match up with Modi's mantra of 'Make in India'

While pundits and commentators were busily parsing US President Barack Obama’s much-publicized town hall address in Delhi, and the talking heads in television studios were fiercely debating whether his comments on religious freedom were intended as a slight to his host, Prime Minister Narendra Modi, most observers paid short shrift to the more important speech that Obama gave during his brief visit to India.

On Republic Day, 26 January, the two leaders addressed a summit meeting of business leaders from both countries. While Modi’s speech was broad—Obama himself referred to it as expansive—Obama’s, by contrast, was quite specific, and laid out his agenda for how the bilateral economic relationship ought to unfold. While paying lip service to the idea that enhanced trade would be a “win-win"—in economic jargon, that international trade is mutually gainful, rather than being a zero-sum game—the examples he gave to illustrate the idea pointed, rather, to a mercantilist mindset.

Increased US exports to India, Obama argued, would be good for American workers. But he did not make the logical and reciprocal argument that increased imports from India would be good for Indian workers—because, presumably, this would require conceding that some American jobs in import-competing sectors might be lost. Rather, he not-so-subtly shifted ground by arguing that Indian investment—not trade—would also be good for jobs in America.

What is more, his argument for why increased trade would be good for India was mute on the benefits a larger indigenous manufacturing sector would have for India’s economy and on job creation in India. This is what Obama actually did say: “And our growing trade is a win for India, because increased US exports and investment here mean more American-made planes flying passengers on India’s airlines all over the world, more American-made turbines generating the energy India needs to continue with its growth, more American-made machinery upgrading India’s infrastructure."

How exactly, then, does Obama’s obsession with Made in America and export to India match up with Modi’s mantra of Make in India? It doesn’t.

While free trade is mutually gainful, the mercantilist theory of exporting more and importing less is necessarily an adversarial game. We have already seen that India’s success in information technology (IT) led to a protectionist backlash in the US, fuelled by fears of good jobs being outsourced to India. While Indian IT companies have countered these arguments by pointing to the fact that they have set up operations in the US, and thus contribute to skilled employment there, not just in India, it will be more difficult for Indian manufacturers to claim that their exports to the US are good for unskilled American workers employed in industries with whom they are in direct competition.

Cast your glance away from the brightly lit photo opportunities of the two leaders’ warm embraces in Delhi, and you will see that a trade war between India and the US is already brewing.

According to news reports, US secretary of state John Kerry, on the sidelines of the Vibrant Gujarat summit, expressed concern about India’s plan to support indigenous manufacturing in the renewable energy sector, which he referred to as the “Make in India law". Indeed, the two countries are already locked in a trade dispute, with the US alleging that India’s domestic content requirements in the procurement of solar cells and modules violate international trade norms, while India accuses the US of unfairly subsidizing its own manufacturers.

The matter is set to be taken up on 3 February by a dispute settlement panel at the World Trade Organization (WTO) in Geneva, at which the US will make its first submission. Meanwhile, raising the stakes, state-owned NTPC Ltd is expected to call bids, on 4 February, for developing 750 megawatts (MW) of solar photovoltaic projects in Rajasthan, Madhya Pradesh, and Telangana—open only to domestic manufacturers—according to a recent report in this newspaper.

While this dispute may appear minor in the context of the larger bilateral economic relationship, it would be folly to write it off as an isolated and idiosyncratic irritant. As Make in India proceeds apace—especially if domestic procurement requirements are mandated across sectors—one should fully expect many more such trade disputes to break out—not just with the US, but with other major trading partners as well.

More broadly, the rise of export-driven manufacturing powerhouses who are seen as threatening to American manufacturing industries—starting with Japan, then the East Asian miracle economies, and most recently China—has always resulted in a protectionist backlash, even a xenophobic one, in the US. There is no reason to believe India will be treated any differently if Indian manufacturing exports to the US begin to surge.

As the warm glow of Obama’s India visit fades, the realities of US domestic politics will impinge on the bilateral economic relationship, especially with a presidential election in which there is no incumbent looming next year. We would do well to be prepared.

Every fortnight, In the Margins explores the intersection of economics, politics and public policy to help cast light on current affairs.

Comments are welcome at views@livemint.com. To read Vivek Dehejia’s previous columns, go to www.livemint.com/vivekdehejia--

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