Anyone who’s been paying attention knows by now that China has been playing the mercantilist aggressor, and Uncle Sam the sucker, in international trade for decades now, especially since China was unwisely let into the WTO in 2001 with promises – never kept – of playing by the rules and reforming in the direction of a free-market, rather than state-capitalist, economy. But under Pres. Trump, America has been waking up, and our government is finally taking steps to do something about the China problem.
Unfortunately, India is next.
While India is a democratic nation and not a geopolitical adversary of the U.S, indeed an ally against China, it is also starting to relentlessly build up trade surpluses against us – which need to be nipped in the bud before they get out of hand like China’s did before it. Over the past year, India has garnered more than $33 billion in trade surplus with the United States, according to the Bureau of Economic Analysis. And India-America trade has plenty of room to grow: China-America trade is six times the size. But it cannot be allowed to grow in the same unbalanced way that China’s did.
India has as many people as China and is also on a path of rapid economic growth, so it is quite possible for it to do us just as much economic damage to America if it is not politely nudged now onto the path of balanced trade, not endless chronic trade surpluses. The U.S. simply cannot afford to have two giant Asian nations, with a combined population eight times its own, driving up its trade deficit year after year.
Conversely, for India to set an example contrary to that of China by embracing balanced trade, especially in the context of America’s existing friendly geopolitical relationship with India, would set an extremely valuable precedent and serve as a standing rebuke to Beijing.
Unfortunately, India right now seems determined to head in the opposite direction. Although it is at least a decade behind China in its economic development and lacks China’s manufacturing prowess, it has seen (and feared) China’s rise and appears to be determined to adopt some of the same mercantilist strategies. Why? Quite honestly, because they worked.
The Trump administration needs to take steps right now to make clear that this is not going to be an option, at least not against the U.S, the world’s biggest market and the key prize in international trade. If the reader will forgive the pun, that boat has sailed: what China got away with was immensely profitable, but it must not be repeated by another nation in our lifetimes.
Consider India’s most significant recent trade initiative, spearheaded by Indian Prime Minister Narendra Modi: “Make in India.” This initiative, according to the Indian government, is “designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property, and build best-in-class manufacturing infrastructure.” What this description neglects to mention is that this entails the same kind mercantilism China has been practicing for decades. (There is a summary of the initiative here.)
The domestic, industrial-development aspects of this initiative are not an issue for the U.S. The trade aspects are. For example, the Indian government recently increased the basic customs duty on many consumer durables, including smartphones, television sets, TV panels, microwaves, LED lights, digital cameras, electricity meters, and lamps. Protectionism – choking off imports – is a cornerstone of mercantilist strategy.
Likewise, India currently has a 150 percent tariff on U.S.-made alcoholic beverages and similar tariffs on higher-priced items like American cars and motorcycles, which make them unaffordable to the vast majority of the Indian market.
The Make in India initiative also aims to take high-paying American manufacturing jobs. By tempting firms with its low labor costs, India is attempting to persuade American manufacturers to shift operations to India, just as they previously did to China.
India is also, like China, trying to extract technology from the U.S. Thus Boeing was required to build the military’s F/A 18 Super Hornet fighter, which India is buying, in India, rather than America. These jobs could easily be held by Americans, as seen by the fact that the new F/A 18 plant will mirror exactly the Super Hornet production line that currently exists in St. Louis, Missouri.
India’s national solar-power program discriminates against foreign producers by requiring the use of Indian-made solar cells, a point currently under litigation by the U.S. at the WTO. While environmentally admirable, two years after this program began in 2011, U.S. exports of solar cells to India had fallen by 90%. The WTO sided with the U.S. about this so-called “local content” requirement in 2016, but India has failed to comply with the remedies it agreed to and the U.S. has returned to the WTO to complain.
Thankfully, the U.S. has, at the present moment, leverage over India that can be used to influence New Delhi’s trade policies. India benefits from our Generalized System of Preferences (GSP) trade agreement, which is designed to provide “special assistance” to developing countries like India by providing preferential duty-free treatment for over 3,500 products. That agreement will expire at the end of this month, providing an opportune moment to apply pressure. The U.S. should not include India in any renewal until the aforementioned concerns are suitably addressed.
Earlier this year, Wilbur Ross, the U.S. Secretary of Commerce, said, “Annual bilateral trade between the US and India has doubled over the last decade and was $114 billion in 2016. Unfortunately, over the same period, the trade deficit tripled, now at $27 billion. We would naturally want to see growing and balanced trade.” “Balanced trade” is indeed exactly what our government ought to seek.
Giving India trade preferences and allowing Make in India to lure away good American manufacturing jobs is bad policy. If Pres. Trump wants to fulfill his campaign promise to identify and end foreign trade abuses, he should call on his trade representative to ensure that U.S. engagement with the “Make in India” initiative happens in accordance with the principles of fair trade.
None of this will deprive India of its fair shot at developing its economy. But the predatory, mercantilist China strategy has had its day, the U.S. and the EU are wising up, and India will have to develop on a basis of balanced trade with the rest of the world. This is certainly possible, though it does call for a different approach and different policy tools.
America’s annual trade deficit is the $500-billion-a-year elephant in the room. It costs us jobs, weakens our industrial base, stalls our technological progress, and forces us further into debt to foreigners. Contrary to some commentators who don’t believe America should defend its own interests in international trade, trade deficits are indeed real money, as I have explained at length here. American industry will never be healthy until policymakers address it.
During his campaign, President Trump consistently voiced his support for fixing America’s festering trade crisis. Trump promised to “direct the Secretary of Commerce and U.S. Trade Representative to identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately.”
While the Trump administration has done some work to further that end, it has yet to show firm steps to make sure that India doesn’t become the next China of America’s ongoing trade crisis. One China is surely enough—a proposition even Indians can agree with.