Much of the world’s attention has focused on the trade spat between the U.S. and China. But another trade war is brewing in Asia: between the U.S. and India.
In New Delhi Wednesday, Secretary of State Mike Pompeo talked up U.S.–India ties and called for “a new age of ambition” between the two democracies. But in a tweet late that night President Trump called high Indian tariffs on U.S. exports, imposed earlier this month, “unacceptable.” Mr. Trump is scheduled to meet with Prime Minister Narendra Modi at the Group of 20 summit in Osaka, Japan, Friday.
Mr. Trump’s approach is shortsighted. It pays far too much attention to tariffs and a small and declining bilateral trade deficit. By supplying ammunition to his Indian critics, the president needlessly jeopardizes a deepening strategic partnership centered on defense and counterterrorism. And though many U.S. complaints about Indian economic policies are well-founded, airing them on Twitter only makes it harder for Mr. Modi to address them without being seen as kowtowing.
Economic friction between the U.S. and India isn’t new. U.S. trade negotiators have long battled to increase market access, lower tariffs, and strengthen protection for intellectual property. But what was once a sideshow risks becoming the main event. According to media reports, the U.S. is considering launching a broader investigation into Indian trade practices, which could kick off a full-blown trade war.
U.S. officials complain about the Indian price caps on medical devices such as stents and knee implants, an Indian proposal to force companies such as Visa and Mastercard to store data on local servers, and capricious changes to e-commerce rules that affect large investments in India by Amazon and Walmart .
Indians chafe at not getting a waiver—unlike Australia, Mexico and Canada—after the U.S. imposed tariffs on imported steel and aluminum last year citing national-security concerns. Earlier this month, Washington also scrapped trade preferences that in 2018 gave $6.3 billion worth of Indian exports—including tableware, auto parts and chemicals—duty-free access to the U.S. market. India in turn raised tariffs on 28 U.S. items, including apples, almonds, walnuts and chemical products.
At the same time, under threat of sanctions, India’s state-owned oil companies have halted imports of Iranian oil. (Washington is encouraging India to import more of its energy from U.S. allies such as Saudi Arabia.) Should India go ahead with the deal Mr. Modi signed last fall to purchase a sophisticated antimissile system from Russia, it faces sanctions mandated by Congress. Mr. Trump has the authority to grant India a waiver, but it isn’t clear that he will.
Many U.S. grievances are legitimate. Compared with the U.S., India remains a closed economy. Average Indian tariffs are 13.8%, vs. 3.4% in the U.S. On Mr. Modi’s watch, India has taken a protectionist turn, reversing more than two decades of trade liberalization by raising tariffs on electronics, mobile phones and components, auto parts and toys. It has also unilaterally terminated bilateral investment treaties with dozens of countries.
Unlike their counterparts in Japan and Australia, Indian trade officials have shown little flair when dealing with Mr. Trump. For instance, New Delhi could have easily eliminated tariffs on a small number of Harley-Davidson motorcycles, an issue Mr. Trump has repeatedly brought up in speeches. Indians bought a mere 3,413 Harleys in 2017, most of which were assembled in India and attracted no duties anyway. Instead, Indian trade mandarins reduced duties on high-end motorcycles from 100% to a still high 50%, a gesture the president dismissed as “not a favor.”
Irritants notwithstanding, the U.S. shouldn’t lose sight of the larger picture. Many economists criticize Mr. Trump for caring too much about trade deficits. In India’s case, the difference isn’t only small but shrinking. Last year the deficit was $24.2 billion, down 18% from two years earlier. To put this in perspective, this is less than 7% of the $378.6 billion U.S. deficit with China. Overall U.S.–India trade has more than doubled over the past decade to $142.1 billion.
During the past two decades, successive U.S. presidents have courted India as a potential counterweight to China. The Pentagon’s Indo-Pacific Strategy Report, released earlier this month, mentions India 35 times. Unlike with established allies such as Japan and Canada, the U.S. can’t be confident that economic tensions won’t mar strategic ties with India, where much of the commentariat remains skeptical about drawing too close to Washington.
Instead of fussing over the deficit or expecting strict reciprocity in every minor dispute, Washington ought to work on boosting bilateral trade to $500 billion and encouraging India’s continued evolution from a planned economy to a market economy. For its part, New Delhi should recognize that protectionism could hurt not only its economy but also its most important strategic relationship. If both sides are smart, they’ll pull back from the brink of a trade war that will only hurt them both.
