On September 6th, US Secretary of State Mike Pompeo and Defense Secretary Jim Mattis will engage in the first of its kind, 2+2 dialogue with their Indian counter parts, Sushma Swaraj and Nirmala Sitharaman. The dialogue will cover issues such as security cooperation , defense deals, trade, and the Communications, Compatibility, and Security Agreement (COMCASA). While the dialogue seeks to bolster the strength of the US-India relationship and cooperation in the Indo Pacific, the impending trade issues between the two countries and how they are resolved will be an important factor in determining the trajectory of the dialogue. The trade issues between the US and India, as seen today, fall under three categories--products, defense deals and oil.
In March 2018, President Trump announced a 25% increase in steel import tariffs and 10% increase in aluminum tariffs. While few countries were exempted from these tariffs, India was not. India exports steel worth 1.5 billion dollars to the US every year. The increased duty will effect Indian steel exports by $198 million and aluminum exports by $42.4 million, meaning a net implication of $241 million on India. In response, affected countries, including India decided to increase their tariffs on US imports. China increased tariffs on 659 US imports by 25% while the EU increased tariffs between 10%-50%, depending on the product. India increased tariffs on 29 different products imported from the US such as lentils, chickpeas, almonds, walnuts, shrimp, apples, chemicals and metal products by 25%. It has also proposed to increase the duty on Harley Davidson Motorcycle. The estimated cost incurred by the US from India’s increased tariffs will level the implications faced by India.
The US has also expressed its dissatisfaction with the prevailing trade imbalance with India. The US Census Bureau report on US-India trade however indicates that since January 2018, India’s trade surplus has been steadily decreasing. The total trade balance from January 2018 to June 2018 has been $11.2 million, with June 2018 touching a low of just $1.1 million. A key factor that has the potential to further reduce India’s trade surplus with the US in the coming years is increased defense purchases from the US.
Furthermore, the Trump administration is also unhappy with the “protectionist” tendencies of the Indian market, specifically in areas related to the pharmaceutical industry. India is the biggest supplier of generic medicine supplies to the US. The US is pushing for a change in the Intellectual Property Rights law in India to allow patented US drug products to enter the market with exclusive marketing rights.
While India has proposed these retaliatory tariffs to the WTO, it has decided to postpone their implementation by 45 days, with the 2+2 dialogue serving as an opportunity to discuss India’s exemption from the steel and aluminum tariffs and the other issues pertaining trade between the US and India.
Another bone of contention between the US and India is India’s decision to procure S-400 air Defense systems from Russia. In 2017, President Trump signed the CATSA (Countering America’s Adversaries through Sanctions Act), which allows the imposition of sanctions on any country that buys significant amounts of military equipment from Russia. Russia has been India’s largest supplier of military equipment for years and has seen little or no opposition from the United States in recent years as its own military sales to India have increased exponentially. However, under guidelines of CAATSA, the S-400 deal costing India approximately $4.5 billion is considered a ‘significant’ military purchase and the US has indicated the possibility of imposing sanctions on India if the deal were to go through. The new modified version of the National Defense Authorization Act allows the US president to waive these sanctions against India, however, if the 2+2 Dialogue fails to generate a mutually acceptable solution, this issue will add further strain to a promising and robust strategic partnership that has seen some turbulence in recent months.
India’s ongoing $10 billion oil deal with Iran is another area where disagreements have surfaced following the US’s withdrawal from the Iran Nuclear Deal and President Trump’s imposed sanctions on Iran that seek to stop all oil imports from Iran by November. In doing so, the US has urged its allies and partners across the world to do the same. However, with Iran being India’s biggest energy supplier and the joint developments of a strategic port called Chabahar gaining traction, there is much to lose both strategically and economically if the 2+2 dialogue does not result in a diplomatic solution that caters to India’s regional and national compulsions.
The Indo-US Strategic Partnership has taken years to nurture and is among the few international partnerships that currently enjoys bi-partisan support within the US. These trade issues and how they are resolved are at the heart of the 2+2 dialogue as the inability to reach mutually acceptable solutions will reflect a lack of convergence and collective decision making, two factors that are essential for the success of any partnership.
The 2+2 dialogue serves as the perfect opportunity to resolve the present imbroglio and offers an opportunity for the US to nurture its relationship with India, with the longterm vision of securing a sustainable strategic and economic partnership in the Indo-Pacific constantly in mind.