India escalates trade fight with US

Economists question effectiveness of tariffs

By Rishi Iyengar, CNN Business
Sean Gallup/Getty Images

Indian Prime Minister Narendra Modi

NEW DELHI - India's decision to slap new tariffs on American goods over the weekend escalates a trade battle with the United States that may not be worth fighting and could backfire.

The Indian tariffs on 28 US products including almonds, apples and some chemicals went into effect Sunday. While New Delhi says the heightened duties are in retaliation for US tariffs on steel and aluminum imposed last year, it has a lot more to lose.

"India's decision to retaliate with higher tariffs ... is a strategic miscalculation," Priyanka Kishore, India head at Oxford Economics, wrote in a note Monday. "Such a hardline stance in India's trade negotiations with the US may do more harm than good," she added.

 

A much bigger target

 

Like China, which is locked in a full-blown trade war with the United States, India sells a lot more to America than it buys. It imported US goods worth $33 billion last year, while exporting goods worth $54 billion. Trade in services between the two countries — worth $54.6 billion last year — is also slightly skewed in India's favor thanks to IT companies like Tata Consultancy Services, Infosys and Wipro.

That gives Washington a much bigger target, should it choose to hit India back.

"If the US chose to respond with retaliatory tariffs on labour-intensive exports such as gems, jewellery and textiles, [or] more pushback on IT services, it would cause far more damage to [India's] economic outlook," Kishore said.

President Donald Trump has repeatedly slammed the US trade deficit with India, as well as India's high tariffs on products like motorcycles and alcohol. The Trump administration recently removed India from a preferential trade program that exempted Indian goods worth over $6 billion from tariffs, citing complaints from the American medical and dairy industries.

 

India takes a tougher line

 

The limited nature of the retaliation — India has said the goods targeted are worth around $240 million — means the new tariffs are largely symbolic.

"I think it's a signal that is going out from India ... that we are going to act, if not tough, we're going to be firm in our response," said Rajat Kathuria, director of the Indian Council for Research on International Economic Relations, a New Delhi-based think tank.

It also represents a significant change of approach by Prime Minister Narendra Modi, who was recently elected for a second term by a thumping majority. Modi's government first announced the tariffs a year ago, during his first term, but repeatedly delayed imposing them as the two sides held a series of talks to try and find a resolution.

"This is a big deal — not as much because of the value of the goods soon to be taxed, which is relatively modest — but more so because until now, Delhi's reaction to Washington's moves had been strikingly restrained," tweeted Michael Kugelman, deputy director of the Asia Program at Washington-based think tank The Wilson Center.

 

A slumping economy

 

India has some cards to play. American businesses would love a bigger slice of India's vast market, especially its huge retail industry and 600 million-strong internet user base that companies like Amazon, Walmart, Google and Facebook have poured billions into already.

But it doesn't have the same firepower as neighboring China, the world's second largest economy, which has targeted US goods worth $110 billion and threatened to blacklist foreign companies within its borders.

"If this thing escalates, then we won't have that negotiating position that China enjoys," Kathuria said. "We always have the opportunity to backtrack if it's going to affect our interests more in the future."

The last thing India's economy needs is a damaging trade fight.

GDP growth slumped to 5.8% in the quarter ended March — the slowest rate in two years — meaning India lost the title of world's fastest growing major economy to China.

And things may be even worse than official figures indicate. A former government adviser warned earlier this month that growth in recent years may have been "a significant overestimation" because of a change in the way it was calculated. The 7% average growth rate reported by India between 2011 and 2017 was actually closer to 4.5%, Arvind Subramanian said in a research paper.

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