India Under Pressure from the U.S. on Trade Policy

India has not escaped the scrutiny of the Trump administration when it comes to the two countries’ trade balance. India’s trade surplus in goods and services with the U.S. fell from USD 31 billion in 2016 to USD 28 billion in 2017. Although this was welcome news for the U.S., which wants to improve its overall trade balance with India, the reduction was not seen as large enough.

In recent months, the U.S. has put pressure on India over its trade policy, which it considers unfairly benefits Indian exporters at the expense of foreign producers. This comes at a time when the Indian external sector, which has benefited for years from supportive trade policy, is already under strain. India’s merchandise trade balance, for example, is expected to deteriorate to a record low this fiscal year, largely due to rising oil prices boosting imports. Moreover, delayed tax refunds and tighter trade credit standards are seen hitting exports.

On 28 May, a dispute commenced at the World Trade Organization (WTO)—the body responsible for the legal underpinning of international trade—between the U.S. and India. This is because the two countries failed to reach an understanding during the consultations that the U.S. requested in March over India’s export subsidy programs. Under WTO law, countries are permitted to subsidize exports until they reach a certain level of economic development. India surpassed that level in 2015, but the U.S. accused India of continuing those programs. Moreover, in May, the U.S. notified the WTO’s Committee on Agriculture that India appears to have illegally over-subsidized its rice and wheat farmers. Together, these cases point to an assertive U.S. stance against India.

Meanwhile, the U.S. pressured India in other ways in April. First, it announced that it was reviewing the low import tariffs granted to India under its Generalized System of Preferences scheme. Second, it continued to place India on its annual watchlist of countries with concerning standards of intellectual property protection. And, finally, it announced that it would begin monitoring India for possible currency manipulation practices. Furthermore, when the U.S. imposed its global steel and aluminum import tariffs in March, India, like most countries, was not exempt.

All in all, the U.S. appears to be turning up the heat on India over its trade policy practices, mainly to help reduce the large trade deficit it has with the Asian giant. Although this is unlikely to hit the competitiveness of Indian exporters in the short term, the greater concern for them lies in the longer-term consequences of potentially decreased government support and more competition from abroad. The overall effect on the already-poor trade balance is a concern for the broader economy.

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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Edward Gardner, Economist

Date: June 5, 2018

Twitter @FocusEconomics

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