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International relations

Modi summit with Trump falls short of expectations

Too much divergence of interests on key economic issues

Despite great expectations, Indian Prime Minister Narendra Modi's summit meeting with U.S. President Donald Trump in Washington on June 26 fell short on trade and investment issues. Indian information technology companies are particularly disappointed about the lack of discussion of their concerns regarding the increasingly restrictive U.S. visa regime. Modi and Trump did find common ground on security and counter-terrorism, but both were elected to revive economic growth and create jobs for their respective constituencies. Both want to rely on protectionist trade policies to achieve those objectives, and that could create further complications.

To be fair to Modi, the interests of India and the U.S do not converge much on key economic issues. The talks avoided controversial topics, but it is safe to assume that the road ahead will be bumpier, given the transactional orientation of Trump, who demands reciprocity in relationships, and Modi's poor record of delivering on issues of interest to the U.S such as market access for American products and services and the protection of intellectual property rights.

Among the victories for India was a joint declaration on countering terrorism. The designation of Syed Salahuddin, head of the Pakistan-based Hizbul Mujahideen, as a terrorist is music to Indian ears. However, India should be realistic enough to understand that the U.S. will not go beyond rhetoric to stop Pakistan aiding and abetting cross-border terrorism. Pakistan has a protective shield in the form of China, and the U.S. will not want to push China too far. Thus, India remains alone in its war against Pakistan-based terrorism.

The major failure of the meeting was the absence of discussion on the resolution of a visa row that has been troubling India's $200 billion IT sector, which is struggling with the onslaught of disruptive technological changes and slowing sales and profits. Top Indian IT companies rely heavily on labor cost arbitrage, sending large numbers of relatively inexpensive technical specialists to the U.S. -- by far the sector's biggest export market -- rather than hiring more expensive locals. Most were hoping that Modi would do something to help them deal with their visa woes. However, given Trump's views on immigration, it was wise for Modi to drop this topic from his agenda for the talks.

India-U.S. bilateral trade in goods and services totaled $115 billion in 2016, with India enjoying a surplus of $31 billion. But the statement issued by the two leaders after their meeting made clear that Trump wants to reduce the U.S. deficit. As the president put it: "I look forward to working with you ... to create a trading relationship that is fair and reciprocal. It is important that barriers be removed to the exports of U.S. goods into your market, that we reduce our trade deficit with your country."

Luckily, Modi had something to offer, in the form of an order from India's SpiceJet Airlines  for 100 planes from Boeing. India also signed an agreement to purchase 22 unarmed Guardian drones, and could help further by buying other high technology defense equipment items. In addition, the U.S. is trying to negotiate a slightly higher price for a long-term contract to sell natural gas to India, which has been purchasing from three American shale gas companies.

Stark differences

However, there are many issues of interest to American corporations that will be difficult to resolve because of stark differences between the two countries. The U.S. wants India to introduce tighter protection for intellectual property rights by allowing "ever-greening" -- the patenting of incremental changes in existing medicines -- and incorporating data exclusivity and patent linkages that would make life more difficult for Indian manufacturers of generic medicines. Moreover, recent Indian moves to control the prices of some medicines and medical equipment are strongly disliked by big U.S. pharmaceutical companies. India, on the other hand, wants to avoid commitments that go beyond its obligations under the World Trade Organization's Agreement on Trade-Related Aspects of Intellectual Property Rights.

 <blockquote class="twitter-video" data-lang="en"><p lang="en" dir="ltr"><a href="https://twitter.com/hashtag/ICYMI?src=hash">#ICYMI</a>- on Monday, I had the great honor of welcoming India's Prime Minister <a href="https://twitter.com/narendramodi">@narendramodi</a> to the WH. Full Remarks: <a href="https://t.co/FK03YMKWCy">https://t.co/FK03YMKWCy</a> <a href="https://t.co/T9l3ggNX3T">pic.twitter.com/T9l3ggNX3T</a></p>&mdash; Donald J. Trump (@realDonaldTrump) <a href="https://twitter.com/realDonaldTrump/status/880158771762286592">June 28, 2017</a></blockquote> <script async src="//platform.twitter.com/widgets.js" charset="utf-8"></script>

Both leaders want to advance their economies by promoting manufacturing, under the slogans Make in India and America First, in ways that are likely to bring their countries into conflict. These approaches are likely to widen differences between the two. For example, India's rules on local sourcing of solar cells and modules are at odds with the U.S. goal of pushing solar exports -- now a matter of WTO dispute. The U.S. said in its complaint to the global trade body that India discriminates against U.S. products by subsidizing the use of locally produced goods. More broadly, American companies from Apple to Wal-Mart Stores are uncomfortable with India's rules on local sourcing and are lobbying hard to get them relaxed. India expects the rules will support indigenous manufacturers and create local jobs.

The U.S. also wants improved market access in agricultural commodities. However, given an ongoing agrarian crisis and subdued produce prices for farmers, India will hesitate to open its market to substantial imports. Besides, peak U.S. import duties on most farm products including dairy, fruit, vegetables and oilseeds, are higher than those of India. India will not agree to any cuts in duties, except possibly on a reciprocal basis.

India is yet to make any serious progress in the conclusion of a bilateral investment treaty with the U.S., although negotiations started in 2008. After a meeting with former U.S. President Barack Obama in New Delhi in January 2015, Modi said the two countries would soon start talks on a treaty. Little progress has been made, however.

India has strong reservations on investment treaties, arguing that the U.S. has been trying to broaden the scope of investment protection by incorporating noncore items such as pre-establishment national treatment -- which imposes limits on policymaking that favors indigenous suppliers and manufacturers -- and tighter intellectual property protection.

In contrast, India wants to narrow the debate through its model investment treaty, which excludes taxation matters and warrants that aggrieved companies must exhaust domestic legal remedies before seeking international arbitration. India has cancelled existing investment pacts that do not conform to the model treaty, including those with Germany and the Netherlands. New Delhi justifies its approach by arguing that the U.S. is using bilateral investment treaties to get around consensus-based WTO rules.

Given all these outstanding issues, Modi's meeting with Trump was at best a modest success, focused on securing American cooperation on security and cross-border terrorism. As expected, it has not led to any major breakthroughs on trade and investment issues. That does not mean that things will not improve, but progress will require concerted diplomatic engagement, together with give and take on both sides. That is easier said than done, at least while the inward-focused and transactionally motivated Trump remains in office.

Ritesh Kumar Singh is a corporate economist in Mumbai and a former assistant director of the Finance Commission of India.

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