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The Trade War has Come to India. Is it Ready for It?

India and the United States have now resumed discussions on what President Donald Trump is calling a “very big trade deal” after his meeting with Prime Minister Narendra Modi at the G-20 Summit in June. U.S. trade officials were in India in mid-July for the first “round” of talks between both countries after general elections in India. Indian Commerce Minister Piyush Goyal is now supposed to travel to Washington in mid-September to meet U.S. Trade Representative Robert Lighthizer to hammer out a mutually-acceptable trade package.

Both sides have been engaged in trade negotiations over the past year without making much headway and not much seems to have changed since the elections. The second Modi government, after winning a handsome mandate in May of this year, has not clearly articulated a coherent policy on international trade yet and rather seems to be reacting to demands from other countries.

In fact, citing national security and sovereignty, Goyal suggested in the Indian Parliament recently that the government will not compromise on many of the major issues that the U.S. wants India to address, such as data localization, e-commerce, agricultural and ICT market access. Subsequently, at the G-7 Summit in Biarritz, France in August, Modi met Trump again where he suggested that India would listen to U.S. concerns on trade issues. There has been no official indication of any change in the Indian government’s position, which has only increased the confusion for investors and companies, who prize business certainty in international trade policies.

It is no secret that the U.S. wants India on the table for a free trade agreement (FTA), but since recent FTAs have not led to expected benefits, both the Indian government and private sector are naturally reluctant to go down this road again. If trade negotiations with the U.S. go nowhere, as they have over the past year, the U.S. can then decide to escalate the dispute to force concessions from India.

There are many ways this could happen, but the most likely scenario would be for Washington to initiate a Section 301 investigation against India – the same tool that the U.S. is now using to raise tariffs on all Chinese imports. As it has done with China and has threatened to do with France, the U.S. government can punitively raise tariffs on all Indian exports to the U.S. on the pretext that India’s “unfair” trade practices and policies harm U.S. companies, an allegation it has made many times before.

There is one school of thought which suggests that the fast-growing security and defense relationship will outweigh any disagreements on the trade front. Therefore, the U.S. will not escalate the trade dispute in order to safeguard the defense relationship. But this ignores recent U.S. behavior where it has threatened to raise tariffs on several long-standing U.S. allies with whom it has strong defense ties, such as Canada, Mexico, South Korea, Japan, and the EU. The United States threatened to levy tariffs on automotive imports to bring Japan and South Korea to the negotiating table and is trying the same approach with the EU. Moreover, this argument completely discounts the fact that Trump is a transactional leader who views another country’s gain as the United States’ loss, particularly on trade. It is a no-brainer that he will apply the same approach to India. It is not a matter of if, but when.

The only question then remains is how India should prepare for and then respond to any escalation of the trade dispute by the United States. Both the government and the private sector will have to play important, but different roles here. Each industry, be it apparel, electronics, steel, or automobiles, needs to clearly articulate to the government what concessions it needs from the United States and what concessions India can provide to it.

This will obviously result in many differing approaches, and the government will then have to prioritize industry demands and identify possible trade-offs. Moreover, in consultation with industry, the government will have to establish “red lines” on issues where no concessions can be made. Finally, civil society organizations can provide insights on how proposed trade-offs and related policy changes would have an impact on wider societal considerations.

Make no mistake, there is an intense global trade war going on. India is already caught in the crossfire, and sooner rather than later, it is going to be much more directly involved. Apart from the United States, India also has significant trade issues with other key partners such as China, Japan, and the EU. It is time the government also gets its act together and comes up with a pro-active strategy to deal with these complex global challenges, rather than simply reacting to threats and escalations by the United States and other countries.