As 2018 drew to a close, the United States and China seemed to have paused the escalation of the trade war between the two largest economies. Whether this is a mere reprieve or a substantial recalibration of their economic relationship remains to be seen. Yet the underlying sources of tension continue to bubble up. The detention in Canada of the Chief Financial Officer of the Chinese mobile giant Huawei on charges of violating US sanctions on Iran was a reminder of the growing intensity of the rivalry in the US-China relationship. 

Srinath Raghavan
Srinath Raghavan is a senior fellow at Carnegie India. His primary research focus is on the contemporary and historical aspects of India’s foreign and security policies.
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India has so far been relatively insulated from US President Donald Trump’s mercurial trade and foreign policies. But it would be unwise for New Delhi to assume that against the backdrop of a mounting US-China rivalry, Washington will continue to regard India as an important partner worthy of special treatment. Even if the Trump administration cuts some slack to India, the larger problems posed by his approach to global politics will inevitably impinge on ties with India. Take the fallout of Trump’s decision to tear up the nuclear agreement with Iran and reimpose sanctions on that country.

In early November 2018, the United States imposed a new set of sanctions on Iran but offered waivers to eight countries, including India to buy Iranian crude. India is one of the largest buyers of Iranian oil. Beyond oil imports, India has other significant interests in its ties with Iran: not least in accessing landlocked Afghanistan and Central Asia through the port of Chabahar that India is helping develop. Here, too, the Trump administration has given an exemption to India’s investments in the port and the rail link connecting Chabahar and Zahedan on the Iran-Afghanistan border.1 While the Indian government is relieved to have got these waivers, it can hardly assume that the challenges presented by U.S. sanctions on Iran have receded. 

President Trump has said that the waivers were given to prevent oil markets from being roiled by a drastic curtailment of Iranian crude. Further, India and other exempted countries will have to pay Iran through an escrow account in their own countries and allow the Iranians to use these credits to purchase goods and services from them. 

Prior to the 2015 agreement on Iran’s nuclear programme and the lifting of sanctions, India and Iran had worked out a bilateral arrangement similar to the one proposed now. India paid for 45 per cent of its oil imports in Indian currency in an account held by Iran in an Indian bank.2 At one point, Iran held over $4 billion in Indian currency.3 Yet the Indian government was rather cautious in promoting exports or projects in Iran – primarily due to the fear of U.S. sanctions spilling over to its firms or financial intermediaries dealing directly or indirectly with that country.

Such concerns are likely to be stronger now. President Trump has been clear on several occasions that he expects India to support U.S. policies and interests as a quid pro quo. In his South Asia strategy of August 2017, Trump called on India to play a greater role in Afghanistan, especially in economic development. But he pointedly added that ‘India makes billions of dollars in trade with the United States, and we want them to help us more with Afghanistan.’4 The US president also criticized India for its duties on U.S. imports such as Harley Davidson motorcycles and ridiculed Prime Minister Narendra Modi’s willingness to reduce them.5 Describing India as the ‘tariff king’, Trump has said that negotiations to redress U.S. trade deficit with India will commence soon.6

More significantly, the Trump administration has imposed tariffs of 25 per cent on steel and 10 per cent on aluminium imports. Although India exports only about $1.5 billion of steel and aluminium to the United States every year,7  New Delhi is worried about the prospect of mounting tariffs on higher value exports such as pharmaceuticals. The Indian government has so far refrained responding with tariffs of its own, hoping to negotiate a deal that would address mutual concerns. Such negotiations will be difficult and may require India to give in on issues like increased market access and investment protection, where it had previously managed to hold its own. This is a historically unprecedented situation for India.

The United States and India have for decades disagreed on trade, investment, and economic policy more broadly. Yet the United States has seldom treated these differences as acute or demanded reciprocity from India. Most administrations have been content to support India’s economic choices and development trajectory because they saw wider geopolitical interests in play. 

The first US merchant ship, the United States, touched the shores of India in December 1784. The subsequent story of US-India interactions could well be told as a tale of commercial ambitions continually thwarted – initially by the East India Company’s monopoly and later by British India’s trade policies. The First World War led to a reorientation of India’s external trade away from the British empire: Japan and the United States emerged as significant trading partners. With onset of the Great Depression, however, Britain pulled India into an imperial trading bloc ringed by high tariff walls against countries outside the British Commonwealth. 

The Americans regarded the fracturing of the global economy into autarkic zones, led by Germany, Japan and Britain, as the one of the main drivers of the Second World War. Even before the United States formally entered the war, the Roosevelt administration was determined to ensure the restoration of a global economy in its aftermath. A key American objective during these years was to prise open Britain’s imperial trading bloc of which India was so central a part. 

In November 1941, President Franklin D. Roosevelt decided that India could directly receive Lend-Lease supplies from America. When negotiations began for a Lend-Lease agreement between Washington and India, the Americans pressed for the inclusion of a provision identical to that agreed with the British. Article VII explicitly committed both sides ‘to the elimination of all forms of discriminatory treatment in international commerce, and to the reduction of tariffs and other trade barriers.’ This sought at once to knock down the system of imperial preferences and prevent the raising of similar barriers in the future by independent India.

As the negotiations got underway, Indian capitalists grew alarmed. The president of the Federation of Indian Chambers of Commerce and Industry (and future ambassador to the United States), G.L. Mehta, insisted that owing to its nascent industrial status, India could not agree to the removal of tariffs. The FICCI adopted in early 1943 a resolution urging the Indian government to hold firm on the issue of tariffs to ensure India’s industrial development as well as its fiscal independence. In the viceroy’s Executive Council, the Indian member for commerce argued strenuously that it would be detrimental to India’s fledgling industries.

Nevertheless, Assistant Secretary of State Dean Acheson bluntly told India’s Agent-General in Washington, G.S. Bajpai, that eliminating the controversial article ‘would not be feasible.’ Nothing in the article, he claimed ‘impaired the sovereign power of any government to enact any legislation.’ It set out ‘certain principles… to work out post-war arrangements.’ Making any exceptions would ‘destroy the whole purpose of the article.’ Indeed, the article ‘was most important from our point of view.’8 Eventually, the negotiations for direct lend-lease had to be shelved; though the United States reluctantly agreed to continue with existing arrangements. India was regarded as crucial to the Allied war effort against Japan in Southeast Asia and against Italy and Germany in the Middle East and North Africa. So, the Roosevelt administration set aside its economic interests owing to the geopolitical context of the war and India’s perceived importance therein.’

After India’s independence, successive American administrations attempted to negotiate trade and investment agreements – but were rebuffed by an India committed to building an autarkic industrial economy. Indian and America representatives clashed during the formulation of the Havana Charter for the International Trade Organization – the precursor to the negotiations on the General Agreement on Trade and Tariffs. The Indians defended the right of the developing countries to take protectionist measures to safeguard their national industries and to implement discriminatory measures against foreign capital.

While the Americans could put up with moderate tariffs, they strongly objected to the barriers to investment. Jawaharlal Nehru tends to take the rap for these policies, but it is worth recalling that there was a wide consensus on them. In fact, when the Nehru government sought to dilute its policies, especially on forming joint ventures, with a view to encourage the inflow of scarce American dollars, the FICCI held the government’s feet to the fire by insisting on a strict adherence to the industrial policy resolutions previously adopted.

The Americans found these conditions rather unattractive. ‘Speaking for the capitalists of my own country,’ observed Ambassador Henry Grady, ‘I can say that while under proper terms and conditions they are willing to lend money to this country and to other countries, they are not prepared to beg that their capital be received.’ And yet the Truman administration was prepared to facilitate India’s access to financing from the World Bank and IMF as well as providing food aid to India. All this was aimed to ensuring that economic differences between the United States and India did not end up forcing the latter to turn towards the Soviet Union for its developmental needs.

These considerations were accentuated during the Eisenhower administration. India’s strongly negative reaction to the US-Pakistan alliance as well as the growing India-Soviet relationship under Khrushchev, led the fiscally conservative Dwight Eisenhower to be supportive of India’s planned economic development policies. In late 1957, India faced a severe foreign exchange crunch that threatened to derail the economy. Indian planners had projected a manageable balance of payments deficit of about $550 million for the five-year period, but the aggregate deficit had already touched $400 million in the first two years of the Second Five Year Plan. In January 1958, the Eisenhower administration announced the immediate provision of $225 million for India, with promise of more to come. Indeed, American grants and loans to India – less the EXIM Bank loan of 1957 – grew from $89.8 million in 1958 to $137 million in 1959 and $194 million in 1960. In May 1960, the administration also concluded a four-year $1.276 billion PL480 accord with India – the largest by far of such agreements under the act.

Such a major shift in policy was obviously not uncontroversial in the Republican administration. In an NSC meeting in January 1957, Secretary of Commerce Sinclair Weeks pointed to the need for greater private investment – rather than government aid – to India. The president ‘stated firmly that if in our dealings with other nations the United States tries to impose its own economic system, the result would shortly be self-defeating.’ The United States ‘cannot argue with friendly nations about the wisdom of their form of government.’ Furthermore, every country in the world ‘not excluding the United States itself, has certain elements of Socialism in its government and in its economy.’ In a country like India where per capita income was less $200 a year, it was ‘obvious’ that ‘only government credit could do much to achieve the economic benefits that the country required. In point of fact, it was fatuous to imagine that private enterprise alone could achieve India’s economic objectives.’

Eisenhower went on to insist that ‘Nehru had on his hands a population of some 350 million people, many of whom were living on the verge of starvation. No government in India could stand aside and ignore such a situation.’ Finally, the president pulled out his trump card: ‘If we ourselves did not aid countries like India, we could be sure that Soviet Russia would do so.’

The end of the Cold War coincided with India’s embrace of reforms, yet economic relations with the United States retained an edge. India’s restrictions on foreign equity investments and its policy on intellectual property rights led the George H.W. Bush administration to place it on the ‘Super 301’ watch-list – a reference to paragraph 301 of the Omnibus Trade Competitiveness Act of 1998 that required the president to take retaliatory steps against countries that restricted US commerce. Washington had cited three specific complaints against India: India’s foreign investment policy, which restricted foreign equity participation to 40 per cent; the nationalization of India’s insurance market and denial of access to American companies; and India’s policy on intellectual property rights (IPR), which limited patents to five years and hurt American pharmaceutical companies’ business prospects in India.

New Delhi initially refused to talk to the Americans about these issues. By late 1992, India changed tack and told US Trade Representative, Carla Hill, that ‘the very process of economic reforms and liberalization in India could get stymied if the US assumed a confrontationist, all-or-nothing, posture vis-à-vis India.’ Subsequent Indian reforms assuaged American concerns on the first two issues, though IPR remained a continuing point of friction between the two sides.

These issues, as well as others such as India’s stance at the WTO, remained areas of serious disagreement down to the Obama administration. Yet, they were subsumed under the larger American desire to gain India’s support in the maintenance of its hegemony in Asia and beyond. The George W. Bush administration saw China as a potential challenger on the horizon and sought to head off such a possibility. Given the interdependence between American and Chinese economies, it was no longer possible to limit China’s access to American and western markets. Instead, the Bush administration sought to create countervailing partnerships with important countries in China’s periphery by propelling their growth.9 The Obama administration built on and extended this strategy for dealing with an emerging China.

It would be incorrect to regard recent developments as merely continuous with older problems. Since the early 1940s, economic friction between the two countries has been smoothened by the larger strategic objectives that the United States sought to pursue: the war against Japan and Germany; the Cold War against the Soviet Union; the expansion of globalization thereafter; and, most recently, preserving American hegemony in Asia against potential challenges from a rising China.

Trump’s policies underscore the discontent with the globalism of previous decades and a turn towards emphasizing America’s narrower national interests rather than its hegemonic role with all the attendant costs. The problem for India lies in the fact that the Trump administration has no wider strategic horizons that could subsume differences over economic issues. In an earlier stage of the U.S.-India relationship, the challenge was to find a model that fit the peculiarities of India’s history as an international actor – one that was rather different from that of other American allies such as Britain, France and Japan.10 The problem for India’s relations with the United States is now to adopt a model of engagement that accords better with the peculiar turn taken by America under Donald Trump.

This article was originally published in the Seminar.

Footnotes:

1. https://www.reuters.com/article/us-irannuclear-afghanistan/pompeo-allows-sanctions-exception-for-iran-port-development-idUSKCN1NB2HW

2. https://www.ndtv.com/business/india-iranagree-toclear-6-4-billion-in-oil-paymentsdharmendra-pradhan-1403461

3. https://www.thehindubusinessline.com/todays-paper/tp-news/India-to-use-Iran%E2%80%99s-rupee-account-to-finance-projectexports/article20882733.ece

4. https://www.whitehouse.gov/briefingsstatements/remarks-president-trump-strategy-afghanistan-south-asia/

5. https://timesofindia.indiatimes.com/business/india-business/harley-davidson-trumpsays-getting-nothing-after-india-reduces-tariffson-motorcycles/articleshow/63090599.cms

6. https://www.ndtv.com/india-news/donaldtrump-says-india-wants-to-start-trade-talkswith-us-immediately-news-agency-afp-1925242

7. https://www.ft.com/content/901f2bf6-7533-11e8-aa31-31da4279a601

8. All historical references are from Srinath Raghavan, The Most Dangerous Place: A History of the United States in South Asia. Penguin Allen Lane, Gurugram, 2018.

9. Ashley Tellis, ‘Protecting American Hegemony’, in Ashley Tellis and C. Raja Mohan, The Strategic Rationale for Deeper US-Indian Economic Ties. Carnegie Endowment, Washington DC, 2015, pp. 15-24.

10. Srinath Raghavan and Mahesh Rangarajan, ‘Engagement sans Entanglement’, Seminar 605, January 2010, pp. 61-66.