Moneycontrol
Apr 21, 2017 03:35 PM IST | Source: Moneycontrol.com

India has few arrows in its quiver to fight a trade war with the US

At the receiving end of the protectionism are countries like India and China, the latter being the shopfloor of the world. India is hit on another front as it is the largest outsourcing play in the IT space.

India has few arrows in its quiver to fight a trade war with the US
Shishir Asthana

Moneycontrol Research

A global slowdown has led to a rise in unemployment in various countries. This in turn is leading to populist measures with political parties the world over seeking to protect jobs at home; this is especially true in the developed world. Right-wing parties have capitalised on the move by coming to power stoking fears of job losses.

The Brexit vote was all about jobs on account of immigration and so was Donald Trump’s winning the US presidency.

At the receiving end of the protectionism are countries like India and China, the latter being the shopfloor  of the world. India is hit on another front as it is the largest outsourcing play in the information technology space.

President Trump’s move to put hurdles in issuance of H1-B visas was the first step that directly hit Indian IT companies. However, the original stance has been somewhat diluted after companies in the US realised that that are few in-house talents in place to take over from Indian professionals, at least at the same price point.

Not happy protecting employment in the United States, Trump has also raised the issue of protectionism in India. He pointed out that Harley Davidson bikes have to pay an import duty of 100 percent to be sold in India. The reality, as this article points out is that Harley pays an import duty of only 10 percent.

India has finally raised its voice and issued a veiled threat that it can also retaliate. Commerce and Industry minister Nirmala Sitharaman said that it would be submitting a proposal to the World Trade Organisation (WTO) seeking an agreement on trade facilitation in services. The proposal is aimed at liberalising rules for movement of professionals and other steps to reduce transaction costs to boost services growth.

Sitharaman makes a valid point when she says that America has committed a certain number of these visas to India and it should honour that commitment. India has been the only country that thwarted attempts by the United States and other developed countries to skew WTO trade talks in their favour.

Apart from the United States, Australia and New Zealand have also taken steps to prevent immigration and job losses.  Sitharaman said she always protests when movement of skilled professionals is being equated with asylum-seeking migrants.

Trump, like a true protectionist, wants American people to use goods manufactured by American companies and also wants other countries to do the same by removing tariff barriers. Trump has repeatedly pointed that companies from other countries make huge profits in the United States while American companies are given unfair treatment globally on account of tariff and other barriers.

Countering this Sitharaman has said, "Let us also understand that not just Indian companies in the US, several big US companies are in India too. They are also here, they are earning their margins, they are earning their profits which go to the US economy.”

Though Indian minister has taken an laudable tough stance against the Americans, there is little that India can do. For Indian companies, especially in pharmaceuticals and IT, the US is a big part of their revenues but for US companies India is just one of the markets, though among the faster growing ones.

Most American companies in India outsource their manufacturing to Indian companies. Companies like PepsiCo, Coke and pharma majors like Pfizer get their goods manufactured from other companies. Some of the bigger players are in the services sectors, especially finance. The few who have set up manufacturing bases have just about enough capacity to cater to India and smaller neighboring countries.

India exports USD 40 billion worth of goods and services to the United States but imports only USD 20 billion worth. US accounts for 15 percent of India’s exports while India accounts for only 1.7 percent of US exports. India clearly has more to lose. But this does not mean we should not retaliate.

The problem is India has few weapons in its armory to hit America where it hurts. Most US companies in India are established players with deep penetration and do not rely much on imports. These companies make good profits from their Indian market. The only way to hit them is to increase taxes on the money that is repatriated.

Taxing dividend selectively only to foreign promoters will not be possible, thus the only option left is to tax royalties. Or the other way to do is to use Trump’s strategy of starting a silent campaign for Be Indian, Buy Indian.
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