How India should respond to dispute over tariffs with US

About 100km south-west of Delhi in the industrial belt of Bawal in Haryana stands an assembly plant of Harley-Davidson. One of only three such plants the iconic American motorcycle company has outside the US, it employs 170 people. That’s a small number, but in Trump’s fight against what he calls the unfair trade practices of “tariff king” India, which has led to the US withdrawing zero tariff benefits on some 1,900 Indian products, Harley-Davidson loomed large.

Trump’s repeated tirades against high Indian tariffs on premium bikes forced India to reduce the duty on completely built units of such bikes to 50% from 75%. India, however, denied the charge of being a high-tariff nation, holding that its tariff regime is fully compliant with its commitments under the World Trade Organisation rules.

Sajeev Rajasekharan, managing director of Harley-Davidson India, in an interview, refused to reveal the capacity of the Bawal plant. But he said 13 out of the 17 models of the bikes sold in India are assembled in India, including the best-seller Street 750cc.

Trade tension

On 4 March, the Trump administration decided to scrap duty benefits on $5.6 billion of exports from India by early May, alleging that India has introduced a “wide array of trade barriers that create serious negative effects on United States commerce”. The Generalized System of Preferences (GSP) programme allows duty-free entry of around 1,900 products from India into the US market, benefiting exporters of textiles, engineering, gems and jewellery and chemical products. Both sides were negotiating a trade package after the United States Trade Representative in April last year announced that it was reviewing India’s GSP eligibility, following complaints filed by the US dairy and medical devices industries on market access issues. While American dairy companies were upset at Indian import restrictions, its medical devices industry had opposed Indian price ceilings on stents and knee caps.

However, “disproportionate” demands by the US led to a collapse of the talks, leading to the withdrawal of GSP benefits from India, the largest beneficiary of the US programme.

The trade war goes further back than the cancellation of the GSP. In March 2018, the US unilaterally hiked duties on steel and aluminium imports from major trading partners, including India.

India has the option of enforcing tit-for-tat tariff hikes on 29 US products including almonds, apples and phosphoric acid worth $235 million in response to that measure. But New Delhi has been deferring its implementation month after month, apparently unwilling to take a harsh measure amid ongoing talks between the two sides on a possible trade package.

India is unlikely to implement the decision and may yet again extend the deadline by another month after the current deadline expires on 31 March.

“The US is not just another trade partner. We need to take into account the fact that our strategic partnership is growing at a fast pace and millions of Indian tech professionals are working in the US,” a commerce ministry official said, speaking under condition of anonymity. However, he added that revoking the retaliatory tariffs at this time will send the wrong signal to the domestic audience and show the Indian government as weak.

“Hence, the deadline for its implementation may be further extended. A final decision will be taken by the Prime Minister’s Office,” he added.

The US is also peeved with the new restrictions on e-commerce companies, directly impacting the Indian operations of Amazon and Walmart-owned Flipkart. The proposed data localisation norms could also impact internet giants like Facebook and Google, and complicate the bilateral trade relationship.

The bigger S&D Game

However, analysts believe there is a bigger gameplan: The US wants large developing countries like India and China to forgo the special and differential treatment they enjoy. It has recently convinced Brazil to give up similar benefits in return for membership of the Organisation for Economic Cooperation and Development. India, however, has been arguing that it lags behind developed countries on many socio-economic parameters and hence remains a legitimate beneficiary of differential treatment. Biswajit Dhar, professor at JNU said: “India has to assert its rights under WTO. It just cannot allow one member country to unilaterally redefine the rules of the game.”