US Effect on Indian Trade

Protectionist policy and higher tariff regime by the US president elect may hit Indian export market as America has a share of 15 percent in India’s total exports in 2015-16

By Chandan Kumar

The year 2016 has spring many surprises, not the least of which has been the outcome of the American presidential poll outcome. The economic policy stance of the president-elect Donald Trump has been evident in his oft-repeated ‘inward-looking’/isolationist pronouncements in the course of the election campaign. These though, have not been substantiated with any policy detail for a serious analysis. Much commentary therefore remains in the realm of speculation. There is, however, no doubt that the globalization engendered inequities have been at the heart of Trump’s economic policy declarations. Expectations of a reversal of some of the earlier trade agreements and policies may therefore not be entirely misplaced.

If the expression of an aversion to trade as reflected in the pre-election speeches was to turn into reality then it is possible that the largest trading economy becomes more protectionists in its trade policy. The core elements of trade policy as specified in the course of the election campaign include imposition of higher tariffs on imports from China and Mexico specifically, and a general increase in tariffs otherwise. Mega regional trade agreements such as the Trans Pacific Partnership (TPP) will in all likelihood not be taken forward. Trade agreements in general seen as instruments of unfair concessions breeding inequities may also be subject to re-negotiation; the intention of building a wall between the US and Mexico being most symptomatic of this impending trend.

There have also been indications of a US pull-out from the multi-lateral rule making trade organization, the World Trade Organization (WTO), in case there is any resistance to its imposition of protectionist policies. Other stated intentions have been with regard to changes in immigration policies with a more restrictive visa regime. The broad objective of the policy changes being bringing manufacturing back to the US, greater employment and hence greater prosperity, and in the process, recovery of losses in global trade for the US economy, in particular vis-à-vis the Chinese economy.

As has been predicted by many analysts already, any attempt by the US economy towards the use of protectionist instruments will be countered by retaliatory measures by other economies, including China, with the likely impact being serious in terms of not just the initiation of a trade war with China but that of applying brakes to international trade in general. The WTO has already expressed concern at the slowdown of world trade in 2016 as the pace of growth has been slower than that of the global economy, unlike the trend over the last decade and a half. The US being the world’s largest importer with a share of almost 14 per cent in world imports, the imposition of higher tariffs will naturally be detrimental to world trade.

In addition, the US economy may not gain as the attempt to push domestic manufacturing may imply higher costs and inefficient production, as long established comparative advantages will be altered in the process. While aimed at some, costs of the re-adjustment may be spread across to other economies as well. India, for example, will find it difficult for its ‘make in India’ program to yield substantive benefits in such an adverse global trade environment. Higher tariff walls will be detrimental to manufacturing exports. As the largest export market for India with a share of 15 percent in India’s total exports in 2015-16, higher tariffs in the US may prove to be a difficult hurdle for India to surmount and to convert its potential comparative advantage through the ‘make in India’ initiative into higher exports.

The US is also a major destination for India’s IT, ITeS and BPO services exports. Together, these accounted for US$ 82 billion-worth of exports in the financial year ending in March 2015, according to the Reserve Bank of India (RBI) data. If Trump, again as per the campaign rhetoric against immigrants, decides to adopt a restrictive H-1B visa regime, India’s existing comparative advantage in the services sector would be diluted.

The pull- out from the mega regional trade agreement, the TPP, may have multiple effects on the Asia Pacific trade architecture. It is likely that the Regional Comprehensive Economic Partnership (RCEP) agreement, which is seen as an alternative trade configuration to the TPP for the Asian economies, including India, may now emerge as the main trade agreement for regional economies. The higher trade standards (WTO plus) of the TPP, it is possible, will now be sought in the RCEP by those economies that are members of both the RCEP and TPP.

India, with its persistent stance of differentiated tariff liberalization offers to the RCEP economies, may then find negotiations more difficult. In the absence of the US-led agreement from the region, there may even be the possibility of China acquiring a pre-eminent position not just in the RCEP but also in the Asia Pacific region, to the extent of pushing forward its own proposal of a Free Trade Area of the Asia Pacific (FTAAP). In fact, in the absence of the US counter, the China-led FTAAP – first proposed in the 2014 APEC meeting -may even become the lead trade configuration in the Asia Pacific region. India may have to rethink its strategy for participation in the regional trade architecture if this APEC members’ configuration gains traction in the near term. India is not yet a member of the APEC.

A possible alternative, though, to accepting Chinese leadership in global and/or regional trade deals, would be a return to the multilateral system and the rise of the WTO, where it may be difficult for China to emerge as the dominant player. This may even be a favorable outcome for India, a longstanding WTO loyalist. But for this, the WTO needs to reassert itself as the international body that deals with trade issues in a more inclusive manner. Given the dragging of the Doha Development Agenda (DDA) now for a decade and a half, this seems like a humongous task. But if developing country coalitions comprising the more dynamic economies could pave the way, this may just be the time for a resurrection of the WTO and the DDA. And, India could actually take the lead in this process.

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