When it comes to the US-India economic engagement, President Donald Trump and Prime Minister Narendra Modi have a lot in common. Both are pragmatists with transactional approaches to trade and investment. They are guided not by economic theories but by their views of what is good for their respective economies and political prospects in the short run. On trade, their approaches can be described as mercantilist with little appreciation for specialisation and comparative advantage much less the invisible hand of Adam Smith.
Trump seems particularly obsessed with trade deficits as if the deficits were akin to losses on a profit and loss statement. Unfortunately, the US has a trade deficit with India. Fortunately, the goods deficit declined last year from $22.9 billion to 21.2 billion. But this may not be good enough for Trump.
Neither Trump nor Modi is afraid of protecting their own industries, but both are ready to apply the epithet “protectionist” to foreigners who raise market barriers. Both seek fewer regulatory constraints for their businesses domestically but are ready to constrain foreign competitors. Both are enamoured of tariffs as primary tools of international trade.
Populist Political Approaches
These short-term, transactional, and overtly populist political approaches to economic engagement are only exacerbated when, as now, Modi is in the midst of an election and Trump is already involved in a campaign for re-election. Under these circumstances, it is not surprising that the list of trade and investment disputes between the US and India is long and growing with little progress being made toward actual resolution of these disputes. Structural changes that could exponentially expand the economic relationship between the US and India are but a faint hope.
And yet the numbers on the US-India trade show robust growth – about 18 percent for 2018 over 2019 and on track for about the same in 2019. While year-on-year figures for both foreign direct and foreign indirect (portfolio) investment from the US into India are down slightly – minus 3.5 percent and $12.1 billion respectively — investments from India into the US are up and most investors on both sides seem happy with their returns. What can explain the seeming contradiction between increasing numbers of economic disputes and the ground realities of trade increases and investor satisfaction?
First, the trade growth figures are somewhat misleading. They are calculated on a relatively small base. Even though India is America’s ninth-leading trade partner, the size of US-India trade pales in comparison to US trade with its leading trade partners Canada, Mexico, the European Union, and China. For example, US goods trade with China in 2018 was $659 billion and with India only $87.5 billion. Further, the trade figures are somewhat misleading because of growth in a few sectors that are not indicative of the overall relationship. The most interesting of these is the leading category of diamonds and jewellery where US raw materials are sent to India and then reimported to the US. Much the same might be said of the increase in exports of oil to India and the reimportation of gasoline.
Second, a robust US-India security relationship is now driving US-India economic engagement. This is just the opposite of what happened when the economy of India was liberalised in the 1990s. The economic opening of India has been a major driver in changing the strategic relationship. The influence happens in two ways. Defence trade is up, with the US now selling billions of dollars of defence systems to India each year. Further, political/security matters seem to operate in a feedback loop with economic engagement. Positive developments in either aspect of the relationship seem to reinforce growth in the other.
Third, neither Trump nor Modi are opposed to businesses making money. In fact, both are pro-business and do not impugn profits or the profit motive. With this common outlook, businesses on both sides tend to see the climate for trade and investment as favourable and act accordingly.
Fourth, neither Trump nor Modi seem to take US trade and investment disputes as seriously as general rhetoric aimed at domestic audiences might suggest. For example, Modi's government has basically brushed aside the importance of the US potential withdrawal of benefits under the Generalized Systems of Preferences. Trump for his part has been long on nasty Tweets and trade threats. But the reality is that he has not yet pressed for measures that would substantially lessen the US trade deficit with India.
The Path Forward
Under the present approaches of Trump and Modi, the prospects for a breakthrough in US-India economic engagement that would unleash the full potential of these two very large supposedly market-driven economies are not good. One hopes that, at least, growth at present levels will continue.
However, the greater danger is that without changes in approach on both sides, trade and investment disputes will continue to increase. At some point, the substance of these disputes may begin to have serious consequences. This may happen as soon as May 2 when the US says it will withdraw the Indian waiver on sanctions for the importation of Iranian oil.
Trade rhetoric may become more than words. The result will be further discontinuities and lost opportunities at best. At worst, disputes may start to have real-world consequences that can seriously undermine the U.S-India partnership no matter how closely strategic interests are aligned.
After the Indian elections and before the US 2020 presidential reaches a boiling point, the US and India should use the window of political opportunity to resolve at least some of the existing disputes. This would be in the national interests of both countries and in the interest of cementing the relationship between these two great democracies.
Raymond E. Vickery, Jr is a former U.S. assistant secretary of commerce, senior advisor at Albright Stonebridge Group, and senior associate (non-resident) with the Wadhwani Chair in US-India Policy Studies at CSIS.
Breaking Down Elections 2019 is a series of articles by experts of Center For Strategic and International Studies that will go beyond the headlines to provide a deeper look into what the 2019 Lok Sabha Elections means for the Indian polity and electorate.