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India walks a tightrope in trade row with Trump

Modi should give some ground on liberalization, notably in tech, or disputes will worsen

| India

At first sight, U.S. President Donald Trump's administration decision to exclude India from its unilateral tariff preference scheme for developing countries may not look very significant.

After all, the benefits under the Generalized System of Preferences, or GSP, are worth a mere $190 million on Indian exports totaling $5.6 billion. The numbers pale in comparison with the much larger amounts involved in Trump's trade war with China.

However, the move comes at a time when Indian trade with the U.S. has been hit by other measures, such as Trump's global aluminum and steel duties, and tightening immigration rules for skilled workers, that have hurt Indian software engineering companies. Meanwhile, exports to other markets, including the EU and China, have come under pressure from the global economic slow down. So, for India, every penny counts.

Even more importantly, the U.S. move on GSP is only part of a broader American attack on its trading partners, in which India is a target. In particular, the U.S. Trade Representative is working with the World Trade Organization, the trade body, to prevent emerging economies such as India from taking advantage of the Special and Differential (S&D) treatment that grants concessions to developing countries over commitments to full reciprocity, for example in opening markets.

The U.S. argues that many of the GSP beneficiaries such as India are now part of the Group of 20 club of leading economies and should no longer be considered poor. These countries should not be getting GSP benefits. If indeed India were to lose the S&D concessions, the maximum rate at which it could subsidize farm products under so-called market price support rules would be cut from 10% of output value to 5%.

Trump's demand for increased reciprocity already has India on the backfoot. To placate Washington, India has, for example, reduced import duty on Harley Davidson motorbikes to 50% from 75%. However, that does not seem to be enough for Trump.

Many Indian observers think he is irked by the Narendra Modi government's attempt to raise import duties to cut India's ballooning current-account deficit and support its struggling Make-in-India initiative to increase local manufacturing.

It is not only import duty hikes but a web of complicated and old-established market-distorting Indian regulations that makes American companies and Washington uneasy. For example, there are price caps on medical devices which put American manufacturers such as Abbott Laboratories, Boston Scientific and Medtronic at a disadvantage to local companies in the fast-growing Indian market.

New Delhi has banned imports of dairy products from the U.S. on religious grounds. The U.S. declined Indian certification rules that other exporters, such as the EU, have accepted. It has been tweaking its e-commerce rules to restrict American majors such as Amazon and Walmart, which acquired a presence in India by buying Flipkart, from keeping inventories at their Indian operations.

These measures are supposedly aimed to protect small retailers but in fact help well-connected large Indian retailers, mostly offline, which cannot compete easily with the deep-pocketed global giants.

New Delhi's overzealous attempt to push data localization through its proposed data privacy law is worrying international groups such as Facebook and Google, as well as India's own export-driven IT companies.

Indian regulators also want to check cross border data flows and demand that companies disclose their source code in technology transfers and the algorithms of AI-based systems. For the Modi govement this is all about protecting India's interests in the vast digital marketplace. For Washington it looks like protectionism.

The draft policy defines e-commerce as "buying, selling, marketing or distribution of goods, including digital products and services, through electronic network." Accepting this very broad definition would mean classifying video streaming companies such as Netflix, Hot Star and Amazon Prime Video as e-commerce companies and subjecting them to the same controversial discriminatory ownership and control regime that India applies to foreign-funded online retailers.

New Delhi is also trying to block a plurilateral e-commerce agreement being pushed by the EU, Japan, China and the U.S. and others on the pretext that it would oblige India to permanently accept the current moratorium on customs duties on electronic transactions and drop plans to impose taxes. India also fears that if it accepts global discipline on e-commerce, the freedom to grant preferential treatment to locally-created digital products may be lost.

While these newer differences between India and the U.S. have cropped up, older arguments remain unresolved. For instance, New Delhi has not shown much inclination to tighten its lax intellectual property rights regime beyond the WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights, or TRIPS, despite American pressure to allow what is called "ever-greening" -- patenting of incremental changes in existing medicines -- a move opposed by India's pharmaceutical lobby.

The U.S. dislikes India's "model" investment treaty that excludes taxation from its purview and warrants that aggrieved investors must exhaust domestic legal remedies before seeking international arbitration. The Modi government's emphasis on protectionist local sourcing norms for major industries such as solar energy and electronics nag American companies.

For its part, New Delhi is unhappy that the U.S. administration's tightening of immigration rules is hurting having India's IT companies.

Miffed by the hikes in U.S. steel and aluminum duties, New Delhi has been threatening to impose punitive duties on 29 U.S. products unless the Trump's administration exempts India from its duty hikes.

Though, India has postponed action for now hopes for a mutually-acceptable deal appear distant, especially as Washington has separate gripes with New Delhi over its cozy commercial ties hit by U.S. economic sanctions -- Russia and Iran.

With both Trump and Modi acting as strongman leaders who like to play to their galleries, the bilateral disputes are likely to worsen rather than ease. One possible conciliatory action -- Indian airlines ordering a mass of Boeing planes to boost U.S. imports -- now faces a new problem with the crash of the two Boeing 737 MAX8 aircraft.

As the economically weaker party, India has to walk a tightrope. While it should not give in on ever-greening as its intellectual property rights regime is fully compliant with WTO's TRIPS, New Delhi could be a bit flexible on market-distorting price caps on medical devices.

It must resist domestic lobby pressure on e-commerce regulations and keep the playing field open for all kinds of retailers -- online or offline. Nor should New Delhi be too rigid about data localization, as this could drive unnecessary wedges between India and other countries in a key future-oriented industry.

Modi has his political position to maintain. But he needs to acknowledge that, especially in tech, market-liberalizing moves are not just a matter of placating Trump but of serving the interests of Indian consumers and economic efficiency.

Ritesh Kumar Singh is chief economist of Indonomics Consulting and a former assistant director of the Finance Commission of India.

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