India-US trade deal: Legacy issues, political compulsions, complexity in policies prevent striking of even a 'limited' deal

Talks of an impending trade deal between India and the US had gained ground even before Donald Trump had joined Narendra Modi's bash at Houston on 24 September. The POTUS then fanned the flames during his speech at 'Howdy, Modi!' event, telling the crowd of 50,000 Indian Americans and the larger audience beyond that a trade deal is going to happen "very soon". There were murmurs that Modi could sign on the dotted line on the sidelines of the United Nations General Assembly. The bilateral between the two leaders further fueled the expectation.

All hopes and expectations were eventually belied. While the teams led by Union Commerce and Industry Minister Piyush Goyal and US Trade Representative Robert Lighthizer carried on with their "intense negotiations", a deal or "package" of any sort remained elusive even as the US managed to ink an "interim deal on tariffs and digital economy" with Japan on the sidelines of UNGA. Analysts say US-Japan "interim pact" could lead to a bilateral free-trade agreement (FTA)  but India and the US, who nurture one of the world's most consequential bilateral ties, remain unable not only to iron out the trade differences but to even come to some sort of an agreement over a "limited deal".

Conventional wisdom about India-US ties held that the strategic component of the relationship can independently grow, prosper and become the glue that binds bilateral ties and also underwrites the differences and frictions that long-stranding trade disputes have caused. It is becoming increasingly clear, however, that issues over trade are threatening to overlap and in turn affect the strategic ties between the two nations, and it would be unfair to lay this entirely on Trump's door.

File image of Prime Minister Narendra Modi with US President Donald Trump in Houston in September. Getty Images

Worldwide, the political shift away from globalisation, flow of talent, free movement of people and goods across borders has put the global supply chains under duress and endangered the institutions that were erected to ensure this transnational arrangement. This order, that was gradually arrived at post 1945, has come under even greater stress because the US has turned much more nationalistic, and is seemingly losing patience with its role as the minder of global institutions and the upholder of rules-based framework.

Part of this has to do with the rise of China, and the realisation in the US that China has gamed the rules-based trading system to its benefit and is now challenging its primacy in terms of both hard and soft power. As former RBI governor Raghuram Rajan writes in Project Syndicate, "…with China challenging the US both economically and militarily, the old hegemon no longer views China's growth as an unmitigated blessing. It has little incentive to benevolently guide the system that enables the emergence of a strategic rival. No wonder the system is collapsing."

Amid the popular backlash against globalisation, mercantilism and the unwillingness of the advanced economies to manage the rules-based framework, the biggest blow to the post-war order has been dealt by the US which is going through a state of flux.

As India's external affairs minister S Jaishankar put it recently during his talk at Council On Foreign Relations in New York, "…the 1945 world order is running out of gas, that there are changes which are happening which will really transform the relationships of major powers with each other, with the world as a whole-with the international order, and a large part of that is the changed posture of the US - much more nationalistic US, which has repositioned itself or is repositioning itself…"

Along with this churn, we now have a White House led by a leader who puts enormous salience on trade issues and tends to judge bilateral ties through the prism of trade equations. It is pointless for India to crib about the Trump White House and its propensity to pose as a trade bully - the important thing is to recognize that the US is an important trade partner with whom India still enjoys substantial numbers, and the complexity of the issues at hand should not deter either nations from further improving the figures.

According to latest figures from the Office of United States Trade Representative (USTR), bilateral goods and services trade stood at an estimated $142.1 billion in 2018 with India exporting goods and services worth $83.2 billion and enjoying a positive balance of $24.2 billion. US trade deficit (on goods) with India dipped from $21.3 billion in 2017-18 to $16.9 billion in 2018-19.

It is evident that the trade issues at hand that are creating friction are complex and cover the entire gamut from legacy to policymaking. To take just one example, at the recent World Economic Forum in New Delhi, Union minister Goyal and US secretary of commerce Wilbur Ross displayed open disagreement on India's e-commerce rules and the issues that guide those rules.

Recent tweaking of e-commerce rules in India have hit US e-commerce giants Amazon and Walmart (through Flipkart), upending their business models and putting several road bumps in their strategy of penetrating deep into the still largely unorganized Indian market. The US, which considers India as one of the world's most ferociously protectionist markets, have been balking at the regulatory changes. They consider the regulations as "deeply unfair" and have called for a "level playing field".

To wit, the changes in e-commerce rules have forced Amazon and Flipkart to suspend their strategy of providing deep discount to lure customers. The companies, moreover, can only serve as marketplace for sellers and buyers without directly selling goods to customers or holding inventories.

These changes were introduced by the Narendra Modi government primarily to protect the millions of small, family-run chains that constitute brick-and-mortar retailing in India and also to protect the interests of large traders who control the wholesale and distribution business. The Indian supply chain might be inefficient and splintered, but they also provide sustenance to millions.

Goyal, the Union minister for commerce, says that he can't let small retailers die, and that US e-commerce companies cannot be allowed to indulge in "predatory pricing" to finish Indian retailers.

"India is very clear, considering our domestic political compulsions and having about 120-130 million people dependent on small retail - this small retail is a very sensitive subject… The spirit of Indian law is protecting small retail, and I think every country in the world would like to protect employment, work and livelihoods of their people," he said at the forum.

To this, Ross replied that India must figure out whether in protecting the interests of small retailers, the government is giving a tough deal to Indian consumers, and whether the reduced investment in India by the likes of Amazon (that has cut its India investment by more than half in 2019 compared to a year earlier) puts ulterior costs on India.

"Amazon and the other e-commerce companies didn't get to be the world's biggest by any evil mechanism. They got there because they are extremely efficient," the US commerce secretary was quoted, as saying. He went on to add that "The question is for a country like India. How do you balance those economic benefits for your population as a whole versus the special interest of the retail segment or of domestic competitors?"

In a way, both Indian and US positions make sense in their own context, and that is a big reason why the negotiations have been frustratingly slow and fruitless. Add the tit-for-tat tariff policy into the mix and suddenly the issues seem intractable. That said, both nations will do well to remember that trade issues also provide an opportunity for both sides to add muscle to an increasingly cozy strategic partnership and may pave the way for greater economic integration. There are no shortcuts to that road, though. It will likely be a hard grind and a whole lot of give and take.

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Sreemoy Talukdar