India’s Government Protects its Trade

US companies are up in arms in the wake of a December announcement by India of higher import taxes on electronics products such as mobile phones and television, followed by 40 more items including sunglasses, juices and auto components in the government’s February budget. Experts say the tiff over tariffs, which has sharpened with US President Donald Trump's transactional approach to diplomacy, may spill over to affect bilateral ties.

Ford and European carmaker Volkswagen have written to Indian Finance Minister Arun Jaitley saying the new tariffs will likely impact the auto sector and should be reviewed. A higher import tax on electronics products is also a gnawing worry for Apple Inc that dearer iPhones will hurt the company's yields in the price-sensitive US$10 billion Indian smartphone market.

"We see it as the return of protectionism,” a senior official at Amway, an American company that sells health, beauty and home care products told AS, requesting confidentiality. "India's sudden and sporadic tax hikes are increasingly making it a challenge to invest and operate in the country."

The issue is reverbrating in Washington as well as the US buys close to a fifth of India's goods and services exports. The US Trade Representative's office is "fairly negative" on India at this point and is analyzing the impact of the customs trade tariffs on various American companies, Reuters reported.US House Republicans have also raised the issue of the new round of duties with New Delhi.

Twice this year, US President Donald Trump called out India for its hike in import duties on Harley-Davidson motorcycles, prompting Prime Minister Narendra Modi to whittle down the levy to 50 percent from 75 percent for high-end bikes. But it still failed to appease Trump, who pointed to zero duties for Indian bikes sold in the United States, saying he would push for a “reciprocal tax” against countries, including US allies, that levy tariffs on American products.

"When Harley Davidson sends a motorcycle to India, as an example, they have to pay 100 percent tax," Trump said, adding, "Now, the Prime Minister, who I think is a fantastic man, called me the other day and he said we are lowering it to 50 percent. I said okay, but so far we're getting nothing. So we get nothing, he gets 50 [percent], and they think like they're doing us a favor. That's not a favor."

Saving India from Harley Hogs

Referring to Trump’s comments on motorbikes, a State Department spokesperson was quoted in an interview as saying that it is important that India make greater efforts to lower barriers to trade, including tariff and non-tariff barriers, which would lower prices to consumers and promote development of value chains in India.

America has long taken exception to India’s relatively high tariff rates, ineffective intellectual property rights protection and the frequent intransigence of Indian negotiators at the World Trade Organization. Worse, the Indian government’s Foreign Trade Policy 2015-2020 makes things more complex for foreign companies seeking to enter or operate in the Indian market. A World Bank report states that there are over 150 different contract formats used by the state-owned Public-Sector Units, each with different qualification criteria, selection processes, and financial requirements.

In addition, the Indian government also provides preferences to Indian micro, small, and medium enterprises and to state owned enterprises over foreign ones. Equity restrictions and other trade-related investment measures also skew things in favour of domestic companies over foreign ones. US stakeholders have often voiced their dissatisfaction over new rules and regulations slapped by the trade department with no or inadequate public notice and consultation or without WTO notification.

However, Indian government officials emphasize that apart from maintaining bilateral trade ties with the US, New Delhi also must balance the competing imperative of giving local industry a leg up through raised import levies. This is part of Modi government's broader plan to lift the share manufacturing makes up of GDP to a quarter, from around 15 percent, and create the tens of thousands of jobs needed for a young workforce.

Modi's critics are watching keenly to see how he will balance creating a conducive ecosystem at home for multinationals to invest in the country while fulfilling his commitment to generate more jobs for millions of unemployed youth. According to a McKinsey Report, India needs to create 115 million new non-farm jobs by 2022. The latter is especially crucial as general elections loom next year and the PM pulls out all stops to improve his image that has taken a severe battering from corruption scams currently roiling his government

Be that as it may, Washington still feels that trade barriers are preventing US-India trade ties from reaching their potential. Trade friction is also casting a shadow on bilateral relations neutralizing much of the goodwill generated by a good personal rapport between Modi and Trump. The two leaders are keen to build on US-India political and commercial convergences, especially to keep China in check.

India, already perceived as one of the world's most protected major economies, levies one of the highest (13.5 percent) average tariff rates. In comparison, the US imposes an average tariff rate of 3.4 percent on imported goods while China sticks to 9.9 percent, according to the World Trade Organization.

Not that India doesn't have its set of grouses with the US. The most contentious one is access for Indian nationals to H1B visas. Indian tech companies have long expressed their displeasure at Washington increasingly tightening its policy norms to allow highly qualified Indian techies work in US companies.

The H-1B visa, a highly sought-after work permit, has thousands of top-notch professionals vying for the program’s 85,000 visas each year. Valid for three years and extendable for another three, it is the most common visa route for highly skilled foreigners to find work in US companies. In the run-up to the 2016 election, US President Donald Trump claimed that Americans were living through what he called the “greatest jobs theft in the history of the world” as US companies outsourced jobs to countries like India, China, Mexico and Singapore.

Given the rising number of differences over trade-related matters, experts advocate that US and India quickly establish a joint mechanism to tide over these issues lest they impact the very kinship the world's two largest democracies are seeking to cultivate in an increasingly fraught global geopolitical scenario.