More than a simple trade spat
The tariff hammer that has been struck on India is ill suited as this is not only about trade tariffs, the whole thing is like a complex web comprising of trade, taxes and deep-seated geopolitical strategy. There have been long-standing disagreements on trade tariffs with the United States complaining that they charge a very small percentage in taxes as compared to India which levies high taxes on US imports particularly on automobiles and spirits.
GSP and unequal playing field
Under the Generalized System of Preferences (GSP) agreement, Indian exporters had free access to the US markets till mid-June 2019, till it was scrapped. There has been a contrasting comparison between the two economies. The United States is a $28 trillion economy, while India's is a developing $4.5 trillion economy. For India, tariffs are a way to shield its domestic industries like agriculture and manufacturing from facing competition from imported goods from other countries. This context is often overlooked when we talk about tariffs.
More than just trade - a complex web
Beyond traditional trade disputes, there are other major points of contention as well such as the digital services tax where the companies from the United States that do not have a physical presence in India are charged a 2% tax on the revenue. The US companies have long objected to this as taxes are not taken on profits but on revenue by the Indian government. From India’s perspective, the digital services tax is important in order to provide a level playing field to Indian companies who pay corporate taxes. Moreover, Indian digital consumers are a big market for the US companies, we cannot afford to sideline our domestic businesses and allow the foreign companies to walk away with the profits from our consumers.
The US has also been objecting to the data localization policies of the Indian government, where US tech giants like Amazon are required to store data of Indian consumers on the servers physically located within India. From India’s perspective, the move is important to safeguard the data of its citizens and at the same time, allows its authorities to access the data whenever required, such as in an investigation. The US companies on the other hand are raising the issue of rising costs to maintain servers in India for data storage and they often argue that a single, secure global network is more safe than having data stored in different data centres across countries.
Impact on Indian Industry
Given the complexity of issues that we have, the slap of 25% tariffs will be felt acutely across both sides. For an Indian manufacturer, their goods will become uncompetitive overnight. For example, a T-shirt/Garment exporter from Tirupur, or an automobile parts manufacturer from Pune may see their orders canceled which will in turn threaten jobs losses and business loss. However, they will hurt Americans too. The tariffs are more like a hidden tax which will be borne by the American consumer. Any retaliation from India will affect US companies as well and they will be deprived of selling their products in the world’s largest markets.
Strategic Partnerships - Risk To Quad & ICET
Not only economically, the current move will hurt strategically also. The tariffs will directly undermine the landmark partnerships like Quad and the Initiative on Critical and Emerging Technologies (ICET), where India and the US are co-developing defense and technology. What Washington fails to grasp here is that any friction with India is set to benefit its main competitor – China.
Way Forward
However, it is not like that the economic as well as strategic damage is inevitable. The United States, instead of announcing unilateral tariffs, could have handled the situation in a better way by indulging in a dialogue through the US-India trade policy forum and by approaching the WTO for digital tax and other legal issues.
Above all, these disputes demand a high-level diplomatic engagement, where security advisors and foreign ministers should weigh the minor trade frictions against the immense value of the strategic partnership the two countries can build. Their role is to ensure the bigger picture is never lost. Both governments should work to strengthen this partnership, rather than splintering it with a hammer. Most importantly, Washington must put the hammer down and should recognize that it needs to sit across the table and have diplomatic meaningful discussion with New Delhi. A partnership this consequential for the 21st century is too valuable to be splintered by a trade dispute. As of now, the recent tariffs and the ongoing threats, Trump has taken the US-India ties back to the drawing board.
