Soyabean, almonds and motorcycles versus Madhubani prints and T-shirts. The ongoing US India tariff war will be fought over such items, and the consumers of both nations will suffer as a result. There is a subtext as well as a broader context to the dispute.
The US and India have been shadow-boxing about tariffs for a while. US President Donald Trump has complained multiple times about US companies not getting easy access to Indian markets. On the flip side, India has complained about the US putting tariffs on steel.
Since June, India has been threatening to increase tariffs on 29 items it imports in some quantity from the US. Now it is likely to finally act upon that threat. The situation has come to a head because the US has decided to remove India (and Turkey) from the list of countries that receive benefits under the Generalised System of Preferences. That is a US scheme under which certain countries are allowed to sell a list of some 1,500 items duty-free.
Under the Generalised System of Preferences, India exported about $5.6 billion worth of goods duty-free to the US. Its removal from this scheme will lead to customs duties of about $190 million being imposed on these goods. This is a relatively small proportion of India’s export to the US.
India exported $47.9 billion worth of goods to the US in 2017-’18 and worth $38.8 billion in 2018-’19 (April-December 2018). India’s total exports of goods is worth $300-odd billion. In turn, India imported goods worth $26.6 billion from the US in 2017-’18, and worth $26.3 billion in 2018-’19 (April-December 2018).
There is therefore a small trade surplus in favour of India. The removal of India from the Generalised System of Preferences scheme and the imposition of higher tariffs will increase the price of those items, which will no longer be duty-free. In “retaliation” India will impose new customs duties on 29 to 30 export goods to “compensate” for that $190 million imposed as tariff.
Trump angry or US lobbying?
The subtext to this round of tariff hikes is that Trump appears to be angry about India blocking access to its domestic markets. Given Trump’s track record, this could mean that some Indian real estate deal the Trump family was negotiating has gone sour due to red tape.
It could also be a decision driven by lobbying from exasperated US businesses, which have suffered from a sequence of policy changes in India. Specifically, India has capped the prices of medical devices, such as stents, and it has blocked the entry of dairy products on religious grounds. The price controls on stents are ostensibly to prevent patients from being charged huge sums for a life-saving device. The ban on dairy products are due to the fact that American cows are “non-vegetarian”. However, India had cut customs duties on big motorcycles with engines above 800cc – Trump had specifically mentioned duties on Harley Davidsons.
More than just imports and exports, Americans are hassled about multiple changes in e-commerce rules, which hobble American retail giants Amazon and Walmart’s ability to do business in India.
For example, there are new restrictions on products e-retailers can sell via subsidiaries on their marketplaces, and indeed, overseas e-retailers cannot use an inventory model. This favours, for example, a Reliance, which can both use an inventory e-retail model, and sell via subsidiaries. The Indian government’s attempts to ensure that all Indian data should be maintained on servers based in India also imposes higher costs and creates new security issues for all businesses (not just overseas concerns).
Negative sum game
Why is raising tariffs a lose-lose situation, or negative-sum game, as the game theorists call it? First, the consumers of both countries will pay more for the same set of products. “Compensation” is the wrong word to use – Americans will pay more for Indian goods and Indians for American goods.
That is inefficient. If Indians can make textiles cheaper than Americans while Americans grow cheaper almonds, it makes sense for Indians to eat US almonds and Americans to wear Indian clothes. By forcing Indians to pay more for almonds and Americans to pay more for Indian clothes, consumers in both nations not only overpay; they also have less money to spend on other stuff. So higher tariffs just spread pain.
The whole tariff hikes and retaliatory hikes business is stupid. When imposing tariffs and retaliatory tariffs, the two governments hope that the affected exporters of the other nation will lobby hard for the removal of tariffs. If tariffs are cut on both sides, we will be back to square one!
America has a point about the broader context of access where e-commerce is concerned. The restrictions on e-retailing also hurt Indian consumers who pay higher prices and get less choice. If it results in monopolistic access for a single e-commerce player, whether that business is Indian-owned or not, the situation will get even worse.
A great deal of global gross domestic product growth over the past 30 years can be attributed to the removal of global tariff barriers. Trump wants to return to an earlier era by hiking tariffs. Unfortunately, India’s policy-makers have a similar mindset.
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