US trade war further upsets Washington’s ties with India

Author

Michael Kugelman June 06, 2019

Trump’s hard line on China and Mexico suggest he will be in no hurry to soften his stance toward India, meaning that the pressure will be on Narendra Modi’s government to ease up on the country’s own protectionist policies. (Reuters)

Throughout his turbulent term in office, President Donald Trump has repeatedly vowed to make US foreign policy more muscular and nationalistic. In some cases, such as building a wall on the US-Mexico border, he has suffered repeated setbacks. In others, such as his decision to hold direct talks with North Korean President Kim Jong Un after earlier threatening to use military force against Pyongyang, he has changed course dramatically.

There is one case, however, where he has held firm and made major progress: Trade policy. Trump’s America is now embroiled in a full-blown trade war with China, and it is fast approaching one with Mexico — a particularly surprising development given the importance and robustness of the US-Mexico trade relationship.

It is unclear how slapping increasingly higher tariffs on Mexican goods will decrease the number of Mexican migrants entering America, which is Trump’s stated reason for imposing new tariffs. It is also unclear why Trump, with just over a year to go until the next US presidential election, would want to take a drastic step fraught with such great economic risks for the American people. Indeed, it seems like every economist out there is warning that US consumers, not Mexico, will bear the costs of these new tariffs.

The question now is what the Trump-triggered global trade war portends for Washington’s commercial relations with other key countries — and particularly those where trade ties are already strained.

Michael Kugelman

The question now is what the Trump-triggered global trade war portends for Washington’s commercial relations with other key countries — and particularly those where trade ties are already strained. It is a question that is particularly worth asking with regards to the US-India partnership.

This is a relationship that has enjoyed impressive growth on the defense side, with a series of agreements in recent years that enable the two countries’ militaries to work closer together. The deepening US-India partnership is impelled in great part by shared concerns about the threat of an increasingly powerful China, and also about extremism and terrorism in South Asia.

US-India economic ties have, however, long lagged behind the fast-growing defense side. In recent years, despite differences over a variety of economic issues — from barriers to US investment in India to spats over tariffs and intellectual property rights — the bilateral relationship has remained sound, with the strength of the defense relationship enabling the overall partnership to withstand the blows on the commercial side.

And yet, thanks in great part to Trump’s increasingly hard-line trade policies, issues that had previously been mere nuisances in the bilateral relationship could soon become serious tensions.

In effect, defense ties represent the sweet spot of the US-India partnership, while economic relations are the Achilles’ heel. And the tendon in that Achilles’ heel is now in danger of rupturing.

Consider the current state of play. Trump has reimposed harsh sanctions on Iran, a key Indian energy supplier. New Delhi is being obliged to significantly reduce its Iranian oil imports. This won’t be easy, given that it imports about 80 percent of its oil needs and given that Iran, even after India reduced its imports from Tehran in recent years due to earlier sanctions, has remained a top energy supplierfor India.

Then there is the White House’s decision to remove India from the list of countries receiving preferential trade benefits. To be sure, this move won’t torpedo India’s economy. The value of Indian goods coming under the Generalized System of Preferences (GSP) program is about $6 billion, according to the Congressional Research Service. Still, the timing is troubling for India, where unemployment has reached a 45-year high and economic growth has fallen to a five-year low. Additionally, the optics of yanking GSP benefits away from a key US partner are suboptimal, to say the least.

These two big-ticket tension points come on top of growing tensions around tariffs, including Trump’s decision to impose import tariffs on steel and aluminum products. He has also frequently voiced criticism(some of it warranted) about India’s own high tariffs and protectionist measures.

Trump’s hard line on China and Mexico suggest he will be in no hurry to soften his stance toward India, meaning that the pressure will be on Indian Prime Minister Narendra Modi’s new government to ease up on the country’s own protectionist policies. Yet Modi, like Trump, is a nationalist — and he just won a new term with a sky-high electoral mandate. A politically embattled Trump, meanwhile, faces his own election in the coming months. Rallying his conservative base will be a priority, which suggests that relenting on his hard line on trade is not likely to be on the cards.

Prolonged trade tensions bring into question the idea of a true US-India strategic partnership. After all, one rarely hears about prolonged tariff tensions or other economic obstacles in the context of Washington’s relations with Australia, Israel or the UK — some of America’s tried and trusted strategic partners. Consequently, US-India relations face a big test in the coming weeks.

  • Michael Kugelman is deputy director of the Asia Program and senior associate for South Asia at the Woodrow Wilson International Center for Scholars. Twitter: @michaelkugelman

The article appeared in the Arab News on 8 June 2019

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