USA – India BTA and scenario of possible outcomes

The US faces the problem of ‘twin deficit’ that is fiscal deficit and trade deficit. The policy of free trade or liberal import – intended to support consumers – has resulted in trade deficit.

Over the years, many countries like China, Japan and Vietnam have benefited from the US’ liberal import policy and have enriched themselves by maximizing their export to the US. At the same time, many countries have erected tariff and non-tariff barriers to US goods.

Evidently, the US President Donald Trump perceives the situation as grossly unjust, uneven and iniquitous; and is keen to take steps bring back some kind of equity, fairness and parity in trading relationships.

Early April Trump set the cat amongst the pigeons by announcing stiff tariffs on goods imports into the US and retaliatory tariffs on countries that impose tariffs on US goods. He was particularly harsh on China by imposing a whopping 145 percent tariff. To be sure, China enjoys a US$ 270 Billion trade surplus with the US. By the way, there are incipient signs that Trump may soften his rigid stand.

Tariffs have created huge uncertainty in the global markets. A looming trade war can potentially hurt global growth, elevate inflation, lead to supply chain disruptions and hurt consumer interest. Mercifully, the US President has suspended the tariffs for 90 days. The tariffs are due for review early July.

How will countries respond? There could be three general approaches to retaliation. One, direct retaliation - like China has done by imposing tariffs on US origin goods. China is targeting US origin agri-commodities including sorghum, soybean, pork, beef, chicken, wheat, corn, cotton and so on.

Two, threatened retaliation like what the European Union is proposing; and third, negotiation to avoid retaliation. Japan and Vietnam are examples of this kind.

One can add a fourth category – tactical accommodation. This is what I believe India is doing in its own self-interest.

May and June will be crucial months for retaliation and / or negotiation strategies.

What will be the potential fallout of the tariff war? Tariffs are sure to hit global growth.

In particular, the US GDP growth is set to fall below 2 percent. There will be substantial slowdown, but no recession likely as of now. Inflation in the US is likely to stay at elevated levels. This would make the Federal Reserve cautious on rate cuts.

Europe is already in a weak spot and is facing its own challenges. China’s growth may fall below 4 percent, from the target of 5 percent. This may encourage the Chinese policymakers to announce stimulus packages while the yuan may depreciate to absorb a part of the tariff shock.

US – INDIA BTA: The US and India are currently negotiating a Bilateral Trade Agreement (BTA). India runs a $ 45 Billion goods trade surplus with the US. This may embolden the US to arm twist India by targeting India’s textiles, seafood and gem and jewelry exports. As these are labour intensive, India can ill-afford US tariffs on these goods, which may result in lower exports and consequential impact on jobs and export earnings.

I believe, the US will force open India’s agricultural markets. As said earlier, China has tariffed US export of commodities like soybean and cotton. China will import less of US goods. So, the US will try to find other markets. India is an easy target.

The US will force open the Indian market by ensuring tariffs are reduced or eliminated on a range of US commodities (lentils, dry fruits, cotton for example) and non-tariff barriers lifted to allow import of genetically modified crops like soybean and corn.

Soybean: There is a possibility India may be forced to allow import of genetically modified US soybean. Current Indian policy does not encourage import of GM crops / GM seeds. But import of GM soybean per se on a limited scale should actually benefit India.

Look at the facts. India imports about 3.5 million tons of degummed soybean oil (a semi-finished product) annually valued at US$ 3.5 - 4.0 Billion. A part of soybean oil import should be replaced with soybean (raw material) import.

The move will deliver multiple benefits. The huge idle capacity India carries in soybean crushing industry can be utilized. It will generate income and employment. Crushing will result in soybean oil and soybean meal. In any case, we need oil for domestic consumption while soymeal can be used as animal feed for the growing livestock and poultry industry. Any excess meal may be exported.

For example, import of 5 million tons of soybean will give roughly one million tons of oil and four million tons of meal. Import should be regulated and monitored. As India itself is a producer of soybean (about 12 million tons) and there is a minimum support price, a rate of customs duty on imported soybean may be applied so that the landed cost of imported soybean is not less than the specified MSP.

On import of 5 million tons soybean, our soybean oil import will reduce correspondingly, by one million tons.

Cotton: Indian cotton market fundamentals have tightened last two years. India has turned from being a net exporter to becoming a net importer of cotton. Cotton import attracts 10 percent customs duty. The US may force India to import more of US origin cotton, possibly duty-free.

Chicken legs: For many years, the US has been trying to sell chicken legs to India, but India has resisted. India has a strong and growing poultry sector. But this time, the US may succeed in cracking open the Indian market.

Similarly, the US would seek to sell to India animal health products as well as corn and wheat whenever needed.

Indian business houses have to brace themselves to face competition from US products.