Working Papers in

Trade and Development

Trump’s Trade War: An Indian Perspective

Prema-chandra Athukorala

January 2020
Working Paper No. 2020/02

Arndt-Corden Department of Economics

Crawford School of Public Policy
ANU College of Asia and the Pacific
This Working Paper series provides a vehicle for preliminary circulation of research results in the
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development.
Trump’s trade war: An Indian perspective

Prema-chandra Athukorala

Arndt-Corden Department of Economics

Crawford Scholl of Public Policy
Australian National University
Canberra, ACT 2601
AUSTRALIA
[email protected]

Abstract

This paper examines the implications of the Trump administration’s U.S. trade policy on U.S.-India
relations and the Indian economy against the backdrop of strengthening political and strategic ties
between the two countries, which have been strong since the beginning of this century. Trump’s
strategy of using tariffs as the bargaining chip in bilateral economic relations with India, while
ignoring mutual geopolitical interests, has coincided with new protectionist tendencies in India under
the Make in India strategy of the Modi government, setting the stage for a protracted bilateral trade
dispute. U.S. safeguard duties on steel and aluminum has taken a toll on India’s exports of these
products to the United States, but these products account for a tiny share of India’s total exports to
the United States. The hard hit was Trump’s termination of India’s designation as a beneficiary
developing nation under the Generalized System of Preferences (GSP). The GSP abolition is likely
to have a much more significant effect on the Indian economy as exports under the program are
heavily concentrated in the traditional labor-intensive industries. However, given the handsome
mandate received by the Modi government at the May 2019 election and that the next election is
almost four years away, GSP abolition is unlikely to receive much weight in determining India’s
position in trade negotiations compared to the new protectionist policy stance stemming from the
Make in India strategy. The WTO verdict on the U.S. complaint on India’s manufacturing export
subsidies, if upheld by the WTO Appellate body, would strengthen the U.S. position in negotiating
a trade deal with India.

Key world: India, U.S. trade policy, U.S.-China trade conflict

JEL Codes: F13, F14, O19, O53

Forthcoming in Asian Economic Papers, 19(1), 2020

1
Trump’s Trade War: An Indian Perspective1

Prema-chandra Athukorala

Abstract
This paper examines the implications of the Trump administration’s U.S. trade policy on
U.S.-India relations and the Indian economy against the backdrop of strengthening political
and strategic ties between the two countries, which have been strong since the beginning of
this century. Trump’s strategy of using tariffs as the bargaining chip in bilateral economic
relations with India, while ignoring mutual geopolitical interests, has coincided with new
protectionist tendencies in India under the Make in India strategy of the Modi government,
setting the stage for a protracted bilateral trade dispute. U.S. safeguard duties on steel and
aluminum has taken a toll on India’s exports of these products to the United States, but these
products account for a tiny share of India’s total exports to the United States. The hard hit
was Trump’s termination of India’s designation as a beneficiary developing nation under the
Generalized System of Preferences (GSP). The GSP abolition is likely to have a much more
significant effect on the Indian economy as exports under the program are heavily
concentrated in the traditional labor-intensive industries. However, given the handsome
mandate received by the Modi government at the May 2019 election and that the next
election is almost four years away, GSP abolition is unlikely to receive much weight in
determining India’s position in trade negotiations compared to the new protectionist policy
stance stemming from the Make in India strategy. The WTO verdict on the U.S. complaint
on India’s manufacturing export subsidies, if upheld by the WTO Appellate body, would
strengthen the U.S. position in negotiating a trade deal with India.

1 Revised version of a paper presented at the Asian Economic Panel Meeting, The Global Trade System in

Disarray: Fixing Design Flaws and Adjusting to a Multi-Polar War, held at Sunway University, Kuala

Lumpur, 29-30 March 2019. The paper has greatly benefitted from comments made by the two discussants,

Sungbae An and Noor Aini Khalifah, and the other participants.

2
1. Introduction

During the first one-and-one half years of Trump’s presidency, there was growing fear in
policy circles of an impending global trade war. The fear seems to have dissipated during
the ensuing months. Following the tariffs imposed on washing machines and solar panels in
January and on steel and aluminium in March 2018, the subsequent rounds of tariff hikes
have specifically focused on China in a much deeper strategic competition between the two
countries. Even in the case of the U.S.-China trade dispute, the indications, following the
meeting of Presidents Trump and Xi in December 2018 at the G20 meeting in Buenos Aires,
are that both sides now want to restrain further tariff escalation. Notwithstanding Trump’s
early threat to terminate the North American Free Trade Agreement (NAFTA), the U.S.
administration ultimately agreed to a negotiated agreement without major changes and has
done the same with the free trade agreement (FTA) with South Korea (Irvin 2019). In
September 2018, Trump even hinted that the United States might re-join the Trans-Pacific
Partnership in response to the China-U.S. trade dispute (Swanson 2018). Three years into
the Trump’s presidency, so far only about 13 percent of total U.S. imports and 8 percent of
U.S. exports (based on 2017 export value) have come under the U.S. tariff hikes and partner-
country retaliatory tariffs, respectively (Amiti et al. 2019).

Although the fear of a trade war seems to have dissipated, Trump’s ‘America First’ strategy
has added fuel to the growing nationalistic and protectionist sentiment around the world. It
has set precedence to other countries to raise their own trade barriers to retaliate or to use
the Trump threat as an excuse for pursuing their own protectionist policies. Trump’s
professed goal to ‘get a better trade deal’ in trade negotiations and his repeated disdain of
the World Trade Organization (WTO) inflict considerable damage to the post-World War
international order in global trade that the United States has long worked to establish (Brown
and Irvin 2019). The policy bargain with China on deep changes in the Chinese economy,
including reduction of subsidies and other industrial policies facing domestic firms, have
implications for reshaping global investment and trade patterns. There are already early signs
of diversion of foreign direct investment (FDI) from China to the other countries. The

3
possible contractionary effect of the trade war on the Chinese economy will have adverse
impact on exports from other countries to China.

The purpose of this paper is to assess the implications for India of the protectionist policy
stance of the Trump administration. India is an ideal case study of the subject for two
reasons. First, India faces the new U.S. protectionist threat against the backdrop of
strengthening political and strategic ties between the two countries since the early years of
this century. For over four decades from the time India achieved its independence in 1947,
in American calculations, India assumed at best a second place in its foreign relations, with
a series of ‘ups and downs’ (Kux 1993). However, the past two decades, starting with the
George W. Bush’s administration, have seen a transformation of the Indo-U.S. relationship
from estrangement to strategic partnership driven by the two countries’ shared concern about
China’s growing geopolitical ambitions across both the Pcific and Indian oceans (Blackwill
and Tellis 2019; Ladwig and Mukherjee 2019; Singh 2019). During this period, the United
States specifically focused on forging a strategic alliance with India, without expecting India
to reciprocate by consistently aligning its trade and investment policies with its own
preferences. The United States pursued forging an alliance with India, without intervening
in India’s domestic trade and investment policy and without attempting to influence India’s
standing in relation to global trade policy issues. In bilateral trade with the United States,
India continued to benefit from preferential market access under the U.S. GSP scheme and
other ‘special and differential’ treatments accorded developing countries. In an article
published ahead of Trump’s visit to India in June 2017, Prime Minister Modi emphasized
that he was ‘confident in the growing convergence between our two nations’ (Modi 2017).
The ongoing trade dispute between the two countries, therefore, helps shed light on the
nature of the U.S. international relation-trade policy interface under the Trump
administration. There are concerns in policy circles about whether the Trump
administration’s obsession with bilateral trade deficits would disturb evolving strategic
partnership between the two nations (Blackwill and Tellis 2019).

Second, unlike China and the other major trading nations, India faces Trump-triggered
protectionism amidst domestic nationalistic tendencies for raising its own trade barriers, a

4
process that started well before Trump’s inauguration. India’s trade policy, which had been
highly protectionist for three decades from the mid 1950s, became much more open after the
advent of economic reforms in the early 1990s. However, there has been a notable reversal
in the trade liberalization process under the ‘Make in India’ policy of the Modi
administration. India, therefore, seems to hold lessons relating to the nature of the
protectionist trade policy stance of a given country in its tariff bargain with the United
States.

The paper has five sections. The next two sections set the stage for the ensuing analysis by
providing an overview of the patterns of India-U.S.-China trade and recent policy trends in
India. Sections 3 discusses trade policy shifts under the Trump administration as they relate
to India and India’s policy posture. Section 4 examines the implications of the U.S. tariff
hikes for India. The key findings are summarised in the final section.

2. India – U.S. trade

For more than two decades, the United States has consistently been India’s largest export
market. On the import side, China has been by far the largest source county, with the United
States occupying 2nd or 3rd position. In 2018, total India exports to the United States
amounted to US$42.2 billion compared to imports from the United States of US$ 22.3
billion, The comparable figures for China were US$10.2 billion and US$62.3 billion,
respectively.2.

Data reported in Table 1 compare the U.S.-India trade deficit with selected countries during
2000-18. The U.S.-India deficit recorded a three-fold increase. from about US$ 7 billion
in the early 2000s to over US$ 20 (from 1.5 percent to 3.6 percent of the total deficit),
during the past five years. The deficit with India still accounts for only about 8 percent of
the massive deficit with China. However, in recent years, India’s share in the total US trade

2 Data reported in this paragraph are from Government of India (2019), Statistical Appendix. The data are

based on the Indian financial year (April – March).

5
deficit has exceeded that of South Korea and Taiwan with which the US had run significant
trade deficits during previous decades. Presumably, these developments on the trade front
have underpinned ‘deficit-obsessed’ Trump’s emphasis on market access issues relating to
trade with India.

Table 1 about here

Traditional labor-intensive products such as cut-and-polished diamond, jewelry, wood

product, porcelain wear, apparel and some foodstuffs dominate the commodity composition
of exports from India to the United States (Table 2). The palpable shift in the composition
of world manufacturing trade away from such traditional products (products based on
‘horizontal specialisation’ produced within national boundaries of a given country) and
towards products (parts and components, and final assembly) exchanged within global
production networks has not (yet) been reflected in India’s export mix (Athukorala 2018).
In other words, unlike the Japan, China and the other dynamic East Asian countries, Indian
manufacturing is not closely interlinked with the U.S. economy through global production
sharing. This could perhaps make India an easy target of Trump’s penchant for protection
because there would not be a strong domestic lobby against such protectionist threats.3

Table 2 about here

3 There are indeed indications that ongoing process of global production sharing plays a significant role

in the trajectory of the trade war. A major reason for retreating from the proposed threat to dismantle the
NAFTA was that U.S. manufacturing was to incur losses because of the intertwined nature of auto supply
chain. (U.S. automotive imports from Mexico contain 40 percent U.S. content, and imports from Canada
25 percent U.S. content (Gereffi 2018). The same reason could explain Trump’s lack of audacity to go
ahead with the 25 percent duty on autos and auto part (Ghemawat 2017; Irvin 2019). In a context where
an ever increasing share of world manufacturing production and trade takes place within global
production networks, state borders define less and less the boundaries of corporate thinking or practice
that influence national trade and investment policy.

6
3. Indian trade policy

Economic liberalization reforms initiated in India in 1991 marked a clear departure from the
country’s state-led inward-oriented developed strategy pursued over three decades after
gaining independence in 1947. Over the next one-and-half decades, gradual opening of the
economy to trade and investment was a continuous process under successive governments
(Ahluwalia 2018). By the early 2000s, India had eliminated quantitative restrictions on
imports, retaining only a few items on the prohibited or under licensing list for health and
strategic reasons. The trade-weighted average tariffs has come down to 6.3 percent from
over 45 percent in the early 1990s.

There has been a notable departure from this policy stance under the Modi government’s
‘Make in India’ program launched on 25 September 2014 with the aim of ‘making India a
global hub for manufacturing, research and innovation and integral part of the global supply
chain’ (Government of India 2018, p. 126). In contrast to the economy-wide focus of the
liberalization reforms initiated in the early 1990s, the development strategy under this
program involves targeting trade protection and government subsidies to specific
sectors/industries. The sectors that have been earmarked for specific focus include capital
goods, auto and auto components, biotechnology, pharmaceuticals and medical devices,
chemicals, electronic systems design and manufacturing, leather and footwear, textiles and
apparel, food processing, gems and jewellery, new and renewable energy, construction, and
shipping and railways. The proposed policies include production subsidy schemes for textile
and apparel, leather, and gems and jewellery sectors and infrastructure relating to trade
logistics.

The past three years have seen some tariff increases and introduction of financial incentives
to support selected industries that are mostly domestic-market oriented (Sharma, 2015;
Khanderia, 2018). In December 2017, a special package for promoting employment
generation in leather, footwear and jewellery, and credit guarantee and credit-linked capital
subsidy schemes for several other sectors was introduced. The other initiatives taken during

7
the past two years to support selected sectors/industries included tax concessions for
exporters, a self-ratification based duty rebate scheme for export-producing firms, abolishing
import duties on second hand goods imported for the purpose of repair and refurbishment,
and new e-commerce rules restricting operations of internet-based trading companies.

The Union Budget 2018 proposed increase in import duties by 5 percent to 15 percent on a
wide range of manufactured products including mobile phones, parts and accessories of
mobile phones, TV parts, processed foods, silk fabrics, footwear and footwear parts,
automobile and automobile parts, diamonds, precious stones and jewellery.

On the international front, in 2017 the government of India decided to withdraw from the
on-going WTO negotiations to broaden the coverage and scope of the International
Technology Agreement (ITA)4. The communique issued by the Department of Commerce
announcing the GOI’s decision to opt-out for ACT-2 stated that, India’s experience with the
ITA has been most discouraging, which almost wiped out the IT industry from India. The
real gainer from the agreement has been China, which raised its world market share from 2
percent to 14 percent between 2000 and 2011. … In light of the recent measures taken by
the government to build a sound manufacturing environment in the field of electronics and
information technology, this is the time for us to incubate our industry rather than expose it
to undue pressure of competition.5

4 The ITA was concluded at the WTO ministerial meeting in Singapore in 1996, and came into effect on 1 July

1967 with India as one of the founding signatories. Tariff cuts under the agreement has so far covered over 90

percent of designated information technology products in world trade. The decision to renegotiate the ITA, in

the form of ITA-2, was made at the WTO Ministerial Conference in Nairobi in July 2015 in order to bring

under the agreement new products emerged after the ITA-1 was negotiated (Jung & Hufbauer, 2015)

5 http://commerce.gov.in/PageContent.aspx?Id=64 (Accessed 17 June 2018)

8
India has already imposed customs duties on some products covered by the ITA-1. At a
recent meeting of the WTO Council for Traded Goods (3-4 July 2018) the United States,
China, the EU, Japan and Norway expressed concerns about these duty increases ICT (WTO
2018).

India’s current MFN average tariff rate (17.1 percent) is the highest among countries that
have so far appeared in the list of Trump’s tariff concerns (Table 3). At the individual product
level, India has kept bound tariffs throughout at much higher levels compared to the MFN
rates. This reflects the ample policy space India has for reversing liberalization selectively
without violating its WTO commitments.

Table 3 about here

4. Trump’s tariffs and India’s response

Trump’s first move on the tariff front was the proclamation issued on 23 January 2018
imposing safeguard tariffs on U.S. imports of solar cells and panels, and washing machines
and parts under Section 201 of the Trade Act of 1974, effective 7 February 2018 (Brown and
Kolb 2019). These two products groups covered $8.5bn and $1.8 billion, respectively, of
U.S. imports in 2017. These tariffs were in accordance with the WTO Agreement on
Safeguards, and therefore had no effect on imports from India. Under the WTO Agreement
on Safeguard Measures, these tariffs do not apply to a products originating in a developing-
country WTO member as long as its share of a given product does not exceed 3 percent and
total imports from developing country members do not collectively account for more than 9
percent of the total US imports of the product concerned.

On 8 March 2018, the U.S. administration announced a 25 percent tariff on all U.S. steel
imports and 10 percent tariffs on all US aluminium imports under Section 232 of the Trade
Expansion Act of 1962 (on national security concern), effective 23 March 2018 (Brown and
Kolb 2019). Unlike the safeguard tariffs, these tariffs apply to all countries unless exempted
by presidential order. In the process of tariff bargaining during the next two months some

9
other countries were excluded from, and some others were brought back, under the coverage
of the new tariffs. Imparts of both products from India have been subject to the new tariffs
from the beginning.

Six countries - Canada, China, EU, Mexico, Russia and Turkey- introduced retaliatory tariffs
on imports from the United States worth $121 billion during the next three months (Amity
et al. 2019). Japan notified the WTO of its intention to impose retaliatory tariffs, but so far,
it has not provided specific information regarding the scope or timing of its retaliatory
measures (USITC 2019). On 1 April 2018, India notified to the WTO of imposing retaliatory
tariffs on 29 products (at the 8-digit level of the Harmonised System, HS) worth $1395
million of imports from the United States6 with effect from 17 December 2018. Proposed
tariff increases were within the bound rates India had declared under its WTO
commandments (WTO 2018). The increases ranged from 10 percent to 20 percent, with the
majority clustering at the lower end. Overall, the retaliatory tariffs declared by India were
mere symbolic: the products amounted to a mere 6.3 percent of total India’s imports from
the United States (0.3 percent of India’s total imports) in 2017. At the individual commodity
level, only almonds, which accounted for 42 percent of the listed products, had any economic
significance for the United States. India is the biggest market for U.S. almonds exports. In
2017, India accounted for 54 percent of $1079 million almond exported from the United
States.7

On 4 March 2018, Trump announced his intention to end GSP to India under Section
502(f)(2) of the Trade Act of 1974. In the letter to the Speaker announcing this decision, the

6 The full list of products with the proposed tariff rates is available at

https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-
DP.aspx?language=E&CatalogueIdList=246009,245254,241636,241147,233546,233468,231809,230637,228
542,228498&CurrentCatalogueIdIndex=0&FullTextHash=&HasEnglishRecord=True&HasFrenchRecord=F
alse&HasSpanishRecord=False

7 Calculated from data extracted available at https://dataweb.usitc.gov/trade/

10
President stated that ‘after intensive engagement between the United States and the
Government of India, I have determined that India has not assured the United States that it
will provide equitable and reasonable access to the markets of India’. 8 As a developing
country, India has been eligible to U.S. GSP concessions since the program came into effect
in 1972. The GSP programs are unilateral initiatives of individual developed countries. The
government of each country determines the eligibility of a country for trade concessions and
exclusion of certain products from the GSP list. The U.S. decision takes 60 days to become
effective after notification to the congress and the representative governments.

In the lead-up to making this announcement, Trump had repeatedly called out India for its
high tariffs, and labeled India ‘the tariff king’. He made the decision to remove India from
the GSP eligibility list based on a review undertaken by the of Office of the U.S. Trade
Representative based on Trump administration’s new SPS country eligibility assessment
process and two GSP country eligibility petitions submitted to the USTR (USTR 2008). The
two petitions, which according to the USTR report propelled the review, came from
representative of the U.S. dairy industry and medical device industry that they face a wide
array of trade barriers in accessing the Indian market. Subsequently, other concerns were
added to the list, including India’s allegedly lax local content rules, rules mandating data
localization, and India’ changes to FDI rules relating to e-commerce (Dobush 2019).

On 14 March 2019, the U.S. Trade Representative requested the WTO for dispute settlement
consultations with the Government of India on export subsidies granted to firms under the
incentive schemes (discussed in the previous section) introduced by the Modi government
as part of the Make in India program. This is the first complaint of this nature filed by the
United States with the WTO against India since 2013. The communique issued requesting
consultation stated that ‘These export subsidy programs harm American workers by creating
an uneven playing field on which they must compete’ and that ‘according to Indian
Government documents, thousands of Indian companies are receiving benefits totaling over
$7 billion annually from these programs’ (USTR 2019). Consultations are the first step in

8 (https://publicpool.kinja.com/subject-text-of-a-letter-to-the-speaker-of-the-house-o-1833048872)

11
the WTO dispute settlement process. As the United States and India failed to reach a
mutually agreed solution through consultations, the United States may request the WTO to
establishment a dispute settlement panel.

The new steel and aluminum tariffs and termination of GSP concessions, dashed India’s
expectation that it would be treated favorably in the trade war because of the ‘strategic
partnership’ between the two countries. 9 After many delays in searching a negotiated
settlement on these issues, on 15 June 2019 India introduced the proposed retaliatory tariffs
on 28 products imported from the United States (all products on the original list other than
artemia (HS 5119911)).

Following the meeting of Trump and Modi at the G-20 Summit in Osaka in June 2019, the
two countries have begun discussions on what Trump called ‘a very big trade deal’. There
was speculation in the media that an agreement could be signed during Modi’s visit to the
United States in late September 2019, but this did not materialize. After the meeting with
Modi on 24 September in New York, Trump announced that a ‘mini-deal’ would be signed
very soon pending a ‘large deal’ to be negotiated later (Chowdhury and Sunega 2019). The
contents of the upcoming trade deals remain unclear, but according to the policy debate so
far, the main items on India’s list are exemption from steel and aluminum tariffs and
restoration of GSP concessions. India is also concerned about the widening of eligibility
criteria recently imposed by the United States on issuing H1-B visa, which creates
difficulties for Indian nationals to take specialized jobs in the United States. The United
States, for its part, wants India to address a range of issues relating to US access to the Indian
market. These include removing tariffs introduced by the Modi government on manufactured
good as part of the ‘Make in India’ strategy, reducing tariffs and other barriers to agricultural
trade, removing price controls on medical devices, removing restriction on foreign

9 In an article published in preparation of Trump’s visit to India in June 2017, Modi emphasized that he

was ‘confident in the growing convergence between our two nations’ (Modi 2017). Trump had assigned

a central role to India in his vision for advancing a ‘Free-and Open Indo-Pacific’ region (USDS 2018).

12
companies involved in e-commerce. Relating to the broader issue of tariff reforms, Wilbur
Ross, The U.S. Commerce Secretary, emphasized at the India Economic Summit organized
by the World Economic Forum (3-4 October 2019): ‘ India is one of the most protectionist
countries … [and the U.S. is ] … looking to level the playing field’ (Seth 2019). So far, the
Indian government has not stated its position on these issues. Given the handsome mandate
received by the Modi government at the May 2019 election and the next election is almost
four years away, GSP abolition and steel and aluminum tariffs is unlikely to receive much
weight in determining Indian government’s position in trade negotiations compared to the
new protectionist policy stance stemming from the ‘Make in India’ program.

On 31 October 2019, the WTO dispute settlement panel, which was set up to investigate the
U.S. complaint on unfair industry assistance, decided in the U.S.’s favor. The dispute panel
rejected India’s claim that it is exempted from the prohibition on export subsidies under the
Special and Differential Treatment provision of the WTO Agreement on Subsidies and
Countervailing Measures. Based on this verdict, the panel called on India to withdraw within
a period of 90 to 180 days export subsidies (amounting to about US$7 billion) granted to
manufacturers in the form of exemptions from customs duties and national taxes. India is
likely to appeal the ruling before the WTO Appellate body (Financial Times 2019). If the
appeal were unsuccessful, this WTO verdict would strengthen the U.S. position in
negotiating the trade deal with India.

Finally, what has been India’s response to possible import-competition threat from China
following the tariff introduced by the United States on Chinese imports?

Alleged unfair competition from ‘cheap’ Chinese imports was a major concern expressed by
Indian manufactures in the national trade policy debate ever since the emergence of China
as an export powerhouse. According to media reports, this concern has gained force
following the onset of Trump’s trade war against China.

The Government of India has often resorted to anti-dumping provisions under the WTO to
address such complains. India tops the list of anti-dumping cases reported to the WTO during

13
1995-2016: of a total of 5286 case, India accounted for 839 followed by the United States
(606) and EU (493). China was the sole or one of the complainants of over two-thirds of the
Indian cases. On 9 August 2018, India initiated countervailing investigation on imports of
welded stainless-steel pipes and tubes from China and Vietnam. This was followed by
imposing anti-dumping duties ranging from $ 44.89 to $185.51 per ton for a period of up to
five years on a much wider range than before of Chinese steel products (WTO 2018). While
there is no specific evidence to link this duty increase with the trade war, the coincidence of
the timing and the wider product coverage suggest a retaliatory response to possible
diversion of Chinese exports from the U.S. to Indian markets.

5. Economic implications

Data on U.S. imports of product subject to 23 March 2018 tariff increases are summarised
for total imports, imports from India and selected major source countries in Table 4. The
Table covers data for the last two quarters of 2016, 2017 and 2018 to allow for the timing of
tariff hike, possible time lag involved in importers response, and seasonal effects. The data
clearly indicate contractionary impact of the tariff hike, even though there is no indication
of full pass-through of tariffs into trade flows.

Table 4 about here

The growth rate of U.S. steel imports contracted from 20.1 percent between 2016 July-Dec,
to 6.7 percent in 2017 July-Dec. The comparable figures for articles of iron and steel are
20.6 percent to 8.0 percent. In the case of aluminium, the rate of increase between 2017 July
– December and 2018 July – Dec. was negative (-0.2) compared to a rate of increment of
22.4 percent between 2016 July – Dec. and 2017 July-Dec. However, at the individual
country level, the degree of changes in import flows varies notably reflecting country-
specific factors, presumably including long-term contractual obligations among trading
firms and possible ‘pricing-to-market’ effect (absorption of part of tariff increases into profit
margins by exporters). Interestingly, articles of steel imports from China increased at a faster
rate (18.9 percent) between 2017 July-Dec. and 2018 July-Dec. compared to the same period

14
in the previous two years (8.0 percent), and the rate of decrease in growth rates of the other
two products is much smaller compared to imports from the other countries. Imports from
Australia, the only country remained exempted from new tariffs, has consistently shown
much higher rates of increase compared to that of total imports.

India is one of the worst affected countries. Imports of steel from India contracted by 33.7
percent between 2017July-Dec and 2018July-Dec. compared to a 21.4 percent in the
previous year. For articles of steel, the contraction was from 52.0 percent to -11.1 percent.
In the case of aluminum and aluminum products, the rate of increase in imports plummeted
from 167.9 percent to 20.4 percent. This point is consistent with the findings of Brown et al.
(2019) that smaller exporting nations are generally more susceptible to the tariff war
compared to the larger counterparts, presumably because contractual obligations between
importing and exporting firms are much weaker.

What would be the impact on India of GSP abolition by the U.S. administration? Overall,
Imports under the GSP scheme accounts for only tiny share of total merchandise imports for
the United States, and even that share has continuously declined over time (0.9 percent in
2018 compared to about 1.3 in the previous decade) (Table 5 ). However, the GSP scheme
covers a significant share of imports from India (about 12 percent), even though the share is
now almost half of what it was during the previous decade. India is by far the largest
recipients of the U.S. GSP concessions, accounting for more than a fourth of total imports
under the GSP program.

Table 5 about here

These figures suggest that GSP abolition is likely to have a much more significant effect on
Indian exports to the United States compared to import duty increases (Thakker 2018;
Dobush 2019). Of course, further analysis using firm level data on actual utilisation rates is
needed to precisely estimate the actual trade effect because not all exporters of products
classified under the GSP program may actually depend on GSP concession for their
competitiveness in the U.S. market. Some exporters of these products may not utilise the

15
program because of the administrative costs/delays involved in obtaining the required rules
of origin certification given that GSP concession rates not large enough to cover even the
cost.10

The disaggregated data reported in Table 6 show that the GSP coverage is much larger for
traditional labor-intensive products such as prepared food and vegetable, ceramics and glass
wear, wood products, leather goods, plastic products and jewellery. 11 Some of these
products have a strong rural base. Most of these products belong to industries identified by
the Indian government for employment promotion.

Table 6 about here

Have the U.S. tariffs on China had any impact of India’s trade with China? The required
data are not yet available to address this issue. However, as discussed, there is growing
concern in India that this could add to the competition Indian manufacturers had already
been facing from imports from China.

Finally, does India have the potential to benefit from FDI diversion from China within global
production networks? Although the overall export performance has improved significantly
after the liberalization reforms initiated in 1991, India still accounts for only 2.2 percent of
world exports (China: 17 percent). India’s share of manufacturing exports from developing
countries increased from 2.5 percent in 1995 to 3.5 percent in 2010, but has since hovered
around this level for the ensuing years. There is evidence that by far the most important

10 Duty concessions varies between 1 percent to 4.5 percent among products at the HST 10-digit level.
11 Gems and jewelry industry employed about 2.1 million persons in 2011-12 (Government India
2008).

16
reason for India’s lacklustre export performance is its failure to cash in on the rapid
expansion of network trade and the dramatic shift in trade within production networks from
developed to developing countries. India comparative export performance has been
particularly weaker in electronics and electrical goods, which account the lion’s share of
total world network exports (Joshi 2017; Athukorala 2018).

On January 2019, Foxconn Technologies, the world’s largest contract manufacturer of

electronics and the biggest assembler of Apple products, announced to invest $356 million
dollars to renovate and expand its plant (which was assembling mobile phones for Nokia,
but has been closed down) in Sriperumbudur, Chennai to assemble high-end iPhone for
Apple (Volodzko 2019). The plant will be assembling high-end iPhone for Apple, including
Apple’s flagship phone, the iPhoneX. Another Taiwanese firm, Wistron, that assembles
lower-end Apple models such as iPhone 6S, has decided to build a plant in Bengaluru,
Chennai.

These new investment projects have sent out a glimmer of hope that shifting production
based out of China could help India to regain missed opportunities in reaping gains from
global production sharing. However, much depends on India’s ability to complete the
unfinished reform agenda, encompassing both trade and investment policy reforms and
‘behind-the-border’ reforms. Arguably, policies so far announced under the Make-in-India
mission, including the decision to opt-out of the on-going WTO negotiation on extending
the product coverage and scope of the Information Technology Agreement seem to hark
back to the old control regime, which served to marginalize India in the world economy for
over four decades (Ahluwalia 2019; Athukorala 2018).

17
6. Concluding remarks

India faces the new U.S. protectionism of the Trump administration against the backdrop of
strong political and strategic ties between the two countries driven by a shared concern about
China’s growing geopolitical ambitions across both the Pacific and Indian oceans. From the
early years of this century, successive US administrations focused on forging a strategic
alliance with India, while acknowledging India’s right to go its own way in relation to its
own trade and investment policy and without attempting to influence India’s standing in
relation to global trade policy issues. In bilateral trade with the United States, India continued
to benefit from preferential market access under the U.S. GSP scheme and other ‘special and
differential’ treatments accorded developing countries. Trade policy in the Trump
administration has made a clear departure from this pragmatic policy stance. It emphasizes
reciprocity in tariff bargain, focusing less on India’s potential as a strategic partner and its
‘developing-country statuses’ in the WTO-centred world trading system.

Trump’s strategy of using tariffs as the bargaining chip in bilateral economic relations has
coincided with new protectionist tendencies in India under the Make in India strategy of the
Modi government, setting the stage for a protracted bilateral trade dispute. The two countries
now face the arduous task of moving forward an agreement that reconciles Trump’s
‘America First’ tariff bargain and Modi’s ‘Make in India’ policy emphasis, while keeping
an eye on shared concern about China’s growing geopolitical ambitions across both the
Pacific and Indian Oceans.

U.S. safeguard duties on steel and aluminum have hit hard India’s exports of these products
to the United States, but these products account for a tiny share of India’s total exports to the
United States. GSP abolition announced in March 2019 is likely to have a much more
significant effect on India: India has been by far the largest beneficiary under the U.S. GSP
program; Indian exports under the program are heavily concentrated in the traditional labor
intensive products. Given the handsome mandate received by the Modi government at the
May 2019 election and the next election is almost four years away, GSP abolition is unlikely
to receive much weight in determining the Indian government’s position in trade

18
negotiations compared to the new protectionist policy stance stemming from the Make in
India strategy. The WTO decision on the U.S. complaint on unfair manufacturing export
subsidies of India, if upheld by the WTO Appellate body, would strengthen the U.S. position
in negotiating a trade deal with India.

FDI diversion from China triggered by the U.S.-China trade conflict and the wider strategic
dialogue had sent out a glimmer of hope for India to regain missed opportunities in reaping
gains from global production sharing. However, the outcome would depend on India’s
ability to complete the unfinished reform agenda, encompassing both trade and investment
policy reforms and ‘behind-the-border’ reforms. Unfortunately, the protectionist policy
stance of the Modi government under its Make in India strategy is not consistent with these
reform prerequisites.

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Table1: US trade deficit: bilateral deficits with selected countries and the total deficit, 2010-
2018 (US$ billion)
Korea China Japan Mexico Taiwan India Total
2000 -12.4 -83.8 -81.3 -24.2 -16.1 -7.0 -436.5
2001 -13.0 -83.0 -69.0 -29.9 -15.2 -6.0 -410.9
2002 -13.0 -103.1 -70.1 -37.2 -13.8 -7.7 -470.3
2003 -12.9 -124.0 -66.0 -40.6 -14.1 -8.1 -535.7
2004 -19.8 -162.0 -75.2 -45.1 -12.9 -9.5 -653.1
2005 -16.1 -201.6 -82.7 -50.1 -12.8 -10.8 -766.6
2006 -13.4 -232.5 -88.4 -64.1 -15.2 -11.7 -818.0
2007 -12.9 -256.3 -82.8 -74.3 -11.9 -6.4 -791.0
2008 -13.3 -266.3 -72.7 -64.4 -11.0 -7.1 -800.0
2009 -10.6 -226.8 -44.8 -47.5 -9.9 -4.7 -500.9
2010 -10.1 -273.0 -60.1 -66.3 -9.8 -10.3 -635.4
2011 -13.2 -295.2 -63.1 -64.6 -15.5 -14.6 -725.4
2012 -16.6 -315.1 -76.5 -61.7 -14.5 -18.4 -730.4
2013 -20.7 -318.7 -73.3 -54.6 -12.4 -20.0 -689.5
2014 -25.0 -344.8 -67.6 -54.7 -14.2 -23.9 -734.5
2015 -28.3 -367.3 -69.1 -60.0 -15.1 -23.3 -745.5
2016 -27.6 -347.0 -68.8 -63.9 -13.2 -24.4 -736.6
2017 -23.1 -375.6 -68.9 -71.0 -16.7 -22.9 -795.7
2018 -17.9 -419.2 -67.6 -81.5 -15.5 -21.3 -878.7
Compiled from US International Trade Centre (USITC) data base.
https://dataweb.usitc.gov/trade/

Table 2: Commodity composition of US imports from India, 2013-2018.

HS codes 2013 2014 2015 2016 2017 2018
01 to 05 Animal products 2.5 3.0 3.0 3.3 4.4 4.0
06 to 14 Vegetable products 2.0 1.8 1.9 1.6 1.7 1.4

23
25,26,27 Mineral products 9.5 10.2 6.1 5.4 5.6 6.0
28 to 38 Chemical products 18.1 17.7 19.7 22.2 19.2 18.3
50 to 63 Textiles and textile products 16.1 15.7 17.1 16.6 16.2 15.1
61 Apparel and clothing knitted 3.4 3.3 3.6 3.5 3.4 3.3
62 Apparel and clothing not knotted 4.5 4.3 4.7 4.5 4.2 3.8
63 Made up textile articles 5.1 4.8 5.3 5.1 5.1 4.7
64 to 67 Footwear and headgear 0.8 0.9 1.2 1.2 1.0 0.9
68,69,70 Ceramics and glass wear 1.2 1.2 1.4 1.3 1.4 1.4
71 Semiprecious stones and jewellery 21.5 20.6 20.4 23.1 21.1 20.5
7102 Cut and polished diamond 17.2 16.4 16.1 18.5 16.7 16.5
7103 Precious and semiprecious stone 0.5 0.7 0.5 0.5 0.5 0.5
7113 Jewellery and parts thereof 3.6 3.3 3.6 3.9 3.6 3.3
7117 Imitation jewellery 0.1 0.1 0.1 0.1 0.1 0.1
72 83 Base metal and articles of base metal 5.5 6.0 6.1 4.3 6.2 5.5
72 Iron and steel 1.2 1.8 1.4 0.6 0.9 0.6
73 Intron and steel products 2.9 2.8 2.9 2.1 2.9 2.4
76 Aluminium and aluminium products 0.3 0.4 0.5 0.4 1.0 1.3
84,85 Machinery and mechanical appliances 7.5 8.1 8.2 7.3 8.0 9.3
845090 Washing machine papers 0.0 0.0 0.0 0.0 0.0 0.0
85 Solar cells 0.0 0.1 0.0 0.0 0.1 0.0
86 to 89 Transport equipment and parts 2.5 2.8 3.5 3.0 3.2 5.6
90, 91, 92 Optical, photographic & measuring 0.7 0.8 0.9 0.9 0.9 1.0
equipment
93 Arms and ammunitions and parts 0.1 0.1 0.1 0.1 0.1 0.1
94 to 96 Miscellaneous manufacturing 1.6 1.7 2.0 2.1 2.2 2.2
97, 98 Work of art 0.2 0.1 0.2 0.2 0.2 0.1
Special classification provisions 1.2 1.1 1.3 1.3 1.6 1.4
Total 100 100 100 100 100 100
US$ billion 43219 47102 46669 47736 50573 56505

24
Compiled from US International Trade Centre (USITC) data base.
https://dataweb.usitc.gov/trade/

25
Table 3: India's Tariff profile, 2018
(a) India’s average MFN tariff rate compared to selected countries
Average final Average MFA applied
bound rate rate
India 50.8 17.1
China 10.0 9.8
Japan 4.7 4.4
South Korea 16.5 13.7
Mexico 36.2 7.0
Canada 6.5 4.0
Argentina 31.8 13.8
Brazil 31.4 13.4
Turkey 28.9 10.7

(B) India’s average MFN Tariffs by product groups

Product group Final bound rate Average MFA applied
rate
Animal products 104.5 32.5
Dairy products 63.8 34.8
Fruit and vegetables 101.1 32.4
Coffee, tea 133.1 56.3
Cereals & preparation 114.1 37.1
Oilseeds, fats & oils 165.1 54.1
Sugar and confectionary 126.2 51.5
Beverages & tobacco 120.4 74.7
Cotton 110.0 26
Other agricultural products 105.6 29
Fist & fish products 135.7 30
Minerals & metals 38.3 11
Petroleum 0 9.2

26
 Chemicals 39.6 10.1
Wood, paper etc. 36.4 10
Textiles 27.1 20.7
Clothing 37.7 20.5
Leather, footwear etc. 34.6 12.1
Non-electrical machinery 28.6 7.8
Electrical machinery 27.8 8.8
Transport equipment 35.7 31.1
Other manufactures 33.5 11.1
Source: WTO (2019)

Table 4: US imports of iron and steel, articles of iron and steel and aluminium and aluminium
products
Imports, US$ million Growth (%)
Product1/country 2016 July - 2017 July - 2018 July - 2016 July -Dec. to 2017 July -Dec. to
Dec. Dec Dec. 2017 July - Dec 2018 July - Dec
Steel (HS 72) 11,404.9 13,694.9 14,614.6 20.1 6.7
Argentina 19.0 13.6 7.4 -28.6 -45.6
Australia 136.5 208.4 246.6 52.6 18.4
Brazil 1,179.9 1,435.6 1,881.3 21.7 31.1
China 310.6 350.4 343.9 12.8 -1.9
India 157.2 190.9 126.6 21.4 -33.7
Japan 668.5 644.8 565.7 -3.5 -12.3
Korea 900.3 683.1 878.5 -24.1 28.6
Mexico 814.1 893.7 1,130.7 9.8 26.5
Article of steel (HS 73) 15,929.8 19,218.0 20,755.0 20.6 8.0
Argentina 61.6 138.2 122.7 124.4 -11.2
Australia 21.0 22.7 26.6 7.9 17.1

27
 Brazil 57.6 225.8 49.4 291.9 -78.1
China 5,704.5 6,161.9 7,324.5 8.0 18.9
India 504.0 770.2 684.7 52.8 -11.1
Japan 894.4 898.7 863.7 0.5 -3.9
Korea 901.7 1,401.4 771.4 55.4 -45.0
Mexico 2,038.1 2,345.6 2,719.0 15.1 15.9
Aluminium (HS 76) 9,351.4 11,449.5 11,429.8 22.4 -0.2
Argentina 199.6 383.7 245.4 92.2 -36.1
Australia 30.4 134.9 277.2 344.1 105.6
Brazil 68.8 108.3 132.9 57.2 22.8
China 1,630.2 1,749.8 1,411.3 7.3 -19.3
India 105.7 283.1 341.0 167.9 20.4
Japan 114.5 181.1 198.6 58.2 9.7
Korea 89.9 102.9 169.1 14.5 64.3
Mexico 455.4 514.1 613.8 12.9 19.4
Note: 1 Product code under the Harmonized System (HS) of trade classification is given
in brackets
Source: Compiled from US International Trade Centre (USITC) data base.
https://dataweb.usitc.gov/trade/

Table 5: U.S. imports under the Generalised System of Preferences (GSP) program
GSP imports, US$ million GSP GSP share in India’s
share in total imports share in
total US from India total GSP
imports imports of
USA
Total India
2000 14203 1251 1.1 11.1 8.8
2001 13854 1445 1.2 14.0 10.4

28
 2002 15241 2163 1.3 17.4 14.2
2003 17654 2798 1.4 20.3 15.8
2004 19754 3462 1.3 21.1 17.5
2005 22256 4409 1.3 22.2 19.8
2006 25100 5948 1.3 25.9 23.7
2007 23031 4959 1.1 19.7 21.5
2008 21812 4206 1.0 15.6 19.3
2009 14465 2990 0.9 13.6 20.7
2010 17994 3685 0.9 12.0 20.5
2011 18913 3965 0.8 10.6 21.0
2012 19829 4685 0.8 11.2 23.6
2013 18504 4450 0.8 10.3 24.0
2014 18755 4720 0.8 10.0 25.2
2015 18624 4876 0.8 10.4 26.2
2016 19802 4985 0.9 10.4 25.2
2017 21961 5973 0.9 11.8 27.2
2018 24020 6586 0.9 11.7 27.4
Source: Compiled from US International Trade Centre (USITC) data base.
https://dataweb.usitc.gov/trade/

Table 6: GSP coverage of US imports from India at product level (%)

HS codes 2013 2014 2015 2016 2017 2018
06 to 14 Vegetable products 16.3 15.9 16.9 22.4 21.0 27.2
15 Prepared animal oil and vexes 4.5 4.0 5.6 11.1 11.4 14.1
16 to 24 Prepared food 38.5 32.7 37.4 35.9 29.0 28.5
28 to 38 Chemical products 10.8 9.6 8.3 8.3 11.3 11.2
39,40 Plastic products 54.7 51.9 52.8 56.9 57.0 55.5
41,42,43 Leather products 12.0 11.8 12.3 13.6 20.3 50.3
44,45,46 Wood and wood products 74.9 73.5 72.9 78.4 81.2 77.6

29
50 to 63 Textiles and textile products 1.2 1.2 1.0 1.3 1.4 1.3
63 Made up textile articles 1.8 1.9 1.9 2.4 2.6 2.7
68,69,70 Ceramics and glass wear 39.2 36.2 36.7 40.9 44.5 40.5
71 Perl, semiprecious stones and jewellery 1.0 0.8 0.7 0.7 0.8 0.5
7103 Precious and semiprecious stone 0.2 0.1 0.4 0.5 0.9 0.6
7113 Articles of jewellery and parts thereof 1.7 1.4 1.1 1.3 1.6 1.1
7117 Imitation jewellery 81.0 71.3 71.1 77.7 73.7 65.3
72 83 Base metal and articles of base metal 36.4 33.0 35.4 44.2 38.0 36.2
72 Iron and steel 2.4 2.8 4.1 3.8 8.7 20.1
73 Iron and steel products 39.5 39.5 42.0 46.7 35.3 44.2
76 Aluminium and aluminium products 87.8 84.7 52.7 65.3 41.5 14.7
84,85 Machinery and mechanical appliances 29.4 28.8 27.4 27.8 26.9 23.0
85 Transport equipment and parts 30.3 28.3 29.2 31.8 34.8 22.3
86 to 89 Optical, photographic and measuring
17.3 15.1 14.2 20.6 16.0 10.4
equipment
90, 91, 92 Arms and ammunitions and parts 8.5 9.1 7.6 4.6 4.7 3.7
93 Miscellaneous manufacturing 22.0 21.8 21.1 19.9 19.4 18.1
Total 10.5 10.2 10.6 10.6 12.0 11.8
Source: Compiled from US International Trade Centre (USITC) debate base.
https://dataweb.usitc.gov/trade/

30