The South Asia Channel

Why the U.S. and India Are Trading Fewer Goods and More Insults

As U.S. Assistant Secretary of State Nisha Biswal made the rounds in New Delhi in early March, one could hardly be surprised by her public lauding of the U.S.-India trade relationship and the enormous potential that it holds for both countries. After all, being positive in public is a primary aspect of Biswal's job description.

What is striking, though, is how disjointed her message has become from what everyone else is saying about the trade relationship these days. From voices no less authoritative than United States Trade Representative Michael Froman to Indian Commerce Minister Anand Sharma, officials on both sides seem to be competing to heap the most scorn on the trade practices of the other country.

The frustrations on display stem from a number of recent clashes. In February, Washington filed a second case against New Delhi at the WTO over domestic content requirements in India's solar industry. Washington alleges that India's requirements, which mandate that at least 50% of solar energy technology components come from domestic sources, break WTO rules and discriminate against U.S. exports, thereby damaging the U.S. solar panel manufacturing industry. The suit is designed to force India to change its policies.

At the same time, Froman's office has threatened sanctions against India over its intellectual property rights enforcement, which the United States believes is not strong enough to protect the patent rights of foreign technology firms investing in India, particularly in the pharmaceutical industry. The United States also claims that India's preference for its domestic defense producers is unfair, and that other trade barriers such as restrictive import licensing and customs regulations are excessive.

In response, New Delhi has blocked investigations by the United States into these issues, and has hardened its negotiating stance at the WTO, where the two countries still disagree about the proper level of subsidies for domestic agricultural producers. In late March, several WTO members asked India to remove export subsidies for sugar, a move that India resists. In fact, India is now pushing to permanently protect its subsidy program from WTO penalties. The situation has deteriorated to the point that some now fear an all-out trade war between India and the United States.

For long-time India watchers, this spectacle is depressing. There was a time not many years ago when both countries could not say enough nice things about each other. Back in 2008-2010, fresh from the successful conclusion of the U.S.-India nuclear deal, the United States and India were seemingly on the fast track to a close, collaborative partnership. Prime Minister Manmohan Singh and President Barack Obama traded official state visits, and everyone was talking about the bilateral relationship with optimism. So, less than four years on, what has happened?

To be fair, trade was not a strong pillar of the euphoria in 2008-2010, and it has never figured prominently into the bilateral relationship. Both sides would give trade lip service by announcing their mutual interest in trade negotiations or by making small progress on fringe issues. But the kinds of large structural reforms under discussion today, which form the foundations of successful free trade, have long been deferred in favor of security-related pacts on such subjects as nuclear cooperation and counterterrorism. In such a policy environment, the lack of timely progress on trade issues was somewhat predictable.

Consequently, it was only a matter of time until trade-related issues bubbled to the surface. As two countries like India and the United States intensified their relationship and wiped away irritants, ignoring trade issues would, at some point, become unsustainable. In fact, negotiators on both sides now deserve credit for their willingness to even engage on these issues - an engagement that signifies how close the countries and their economies have become.

The real test now is if India and the United States can overcome these prickly issues and move beyond them. With such public sniping, can the trade relationship be salvaged? Fortunately, history tells us the answer is "yes." The two countries have negotiated much thornier issues in the past (for example, the nuclear deal) and emerged not only unscathed, but stronger for them. Getting there, though, will take patience and commitment. And both sides should take steps to let tempers cool.

If it wants to achieve success, the United States should alter its trade negotiating posture with India in some subtle yet important ways:

  • Refrain from negotiating in public. Public pressure on the Indian government often elicits the opposite response from what is hoped. In India's domestic political environment, negotiators receive accolades for standing up to America's "bullying." The United States airing its grievances in public feeds right into this sentiment.
  • Treat India as an equal partner. When it comes to India, the United States often slips into the mentality that it is helping a lesser country - that India should be grateful for U.S. assistance. This mentality irritates India and reinforces perceptions of a condescending America. A spirit of equality and open-mindedness is needed to sustain positive negotiations.
  • Recognize that Indian interests are India's top priority. This may seem like a tautology, but U.S. negotiators often forget this important fact. India will not agree to a deal just because the United States asks it to. India will not sign on just for the sake of opening markets or even just to strengthen the bilateral relationship. Those interests will always be secondary to its domestic interests. Particularly on trade issues, which affect large swathes of the Indian electorate, the United States needs to make the case that trade reform is good for India, not just for itself.
  • Keep expectations in check. The United States thinks in timelines of two or four years. India thinks much longer term, and as a result often moves much slower than the United States. (Even the nuclear deal was on hold for a whole year, with the clock ticking in the waning days of the Bush Administration, while India sorted out its domestic politics.) In Indian mentality, there will be plenty of time to conclude a deal later, so failing to complete one now carries little domestic consequence. No amount of pushing and persuading from the United States will change that.

However, the burden to improve the trade-negotiating environment does not lie with the United States alone. For its part, India should also make some adjustments in its approach:

  • Explain the benefits of trade reform to the public. To date, the Indian government has not made the case domestically that trade is beneficial to the overall Indian economy. If the government truly believes that trade agreements are worth pursuing, it needs to defend them publicly. If it always portrays itself as being bullied by western powers, public sentiment will never be strong enough to support serious trade agreements.
  • Avoid linking issues that are not directly related. In response to the filing of a WTO case against India on trade in solar products, Indian Ambassador S. Jaishankar implied that lack of movement by the United States on social security tax transfers could be a contributing factor. These two issues are unrelated: While they both nominally concern tax payments, the relevant disagreements and their potential resolutions fundamentally differ. Linking issues like this exasperates the United States and only brings  negotiations to a halt.
  • Recognize that the United States does not engage in "revenge" diplomacy. Following the latest spat, Indian officials openly surmised that the United States was exhibiting lingering resentment for previous irritants, such as India's decision not to award a fighter jet contract to an American company,* and India's response to U.S. treatment of Devyani Khobragade, the Indian consular general who was arrested and strip-searched in New York in December. But this is not how the United States conducts international diplomacy. Such public accusations only lead the United States to believe that India is not serious about trade negotiations.
  • Live up to existing trade commitments. With the proliferation of trade cases being lodged against India, the perception is forming that India cannot be trusted to live up to its obligations. To combat this, India needs to either demonstrate that the cases are unfounded or make the reforms necessary to achieve compliance. Either way, India should refrain from making retaliatory accusations. Such conduct is not becoming of a self-proclaimed global power.

Above all, India and the United States both need to negotiate in good faith and approach talks with mutual respect. While the two sides may be coming to blows over trade right now, all hope is not lost. With such important consequences riding on the outcomes, there is no doubt that the two sides will eventually work things out. When they do, the reality of the U.S.-India trade relationship will finally catch up with Assistant Secretary Biswal's eloquent language.

Anish Goel is a senior South Asia fellow at the New America Foundation. He previously served in the White House's National Security Council as senior director for South Asia.

*Disclosure: The author's current employer is The Boeing Company, which previously bid on India's fighter jet contract.