Indo-US Trade Relations in Times of Deficient Demand

Britain, as the leading capitalist country in the world, had a current account deficit vis-à-vis the newly emerging countries, such as Continental Europe and the United States, in the late 19th and early 20th centuries. In fact, it is the nature of the leading country to have such a deficit, since it provides the scope to others to grow within the international currency arrangement presided over by the leading country.

The US, likewise, has a current account deficit vis-à-vis today’s emerging countries. The difference between the two lies in the fact that Britain not only met its current deficit but even made capital exports to the same countries with which it had a current account deficit, and offset it by the engineered current account surplus that it ran up vis-à-vis its colonies, to whom it made “de-industrialising” exports, and whose export surplus it additionally appropriated gratis to settle its payments. Britain, in short, had not faced any balance of payments problems despite having substantial current and capital account deficits vis-à-vis the newly emerging countries of that time.

The US does not have this possibility open to it. Though there are still surpluses appropriated from the former “colonies” on account of intellectual property rights and other such exactions, these are nothing compared with what is needed for balancing the US payments. Political decolonisation has made it impossible for the metropolitan powers to impose upon their former “colonies” a system of gratuitous transfers. The US, therefore, expanded its external debt for a long time for meeting its balance of payments obligations, creating for the first time in the history of capitalism a situation where the world’s mightiest capitalist power was also the most externally indebted. But now it wishes to rein in its external indebtedness.

Besides, it cannot even maintain its domestic level of activity by making “de-industrialising” exports. Such exports could be made earlier because Britain, the strongest colonial power then, had these colonial markets “on tap”; it could access them at will. But the US has no colonial markets “on tap”.

Faced with a decline in domestic activity and an increase in external indebtedness, the US has embarked on a new strategy, of being protectionist, and yet of “persuading” newly emerging countries to voluntarily accept its protectionist policies. It tried to persuade China to accept its unilateral protectionism. This way it hopes to make other countries bear the burden of adjustment while it increases both its level of domestic activity and also closes its balance of payments deficit. But it did not succeed vis-à-vis China, since the Chinese government has now slapped higher tariffs on a whole range of US exports.

And now it is trying to persuade India to accept its protectionism without retaliating, and to lower if possible its own duties, so that American exports can have an easier time entering the Indian market, and displacing Asian exports, towards which India had been increasingly moving over the last decade or so. An American team is coming to India soon that would try to persuade India to accept US protectionism voluntarily and to reduce the magnitude of American deficit vis-à-vis India.

The two basic problems that the US has vis-à-vis India are: first, the substantial merchandise balance in favour of India, and second, the intellectual property rights regime of India that, despite being TRIPS (Trade Related Intellectual Property Rights)-compatible, does not aid the United States.

The merchandise trade balance in India’s favour was as much as $27.3 billion in 2017; it is supposed to have come down a little, by $4 billion in 2018 owing to increased Indian demand for a range of American goods, in particular civilian aircraft and energy. But it remains nonetheless a sizeable figure. A closure of the yawning gap in the balance of payments is what the US would like.

About a decade ago, the share of the US in India’s imports was 8.5%; now it has gone down to 5.7%. Over the same period, the share of China has increased from less than11% to over 16%. India, in short, has been moving from American sources to Asian sources for its imports and the US would like to change this.

Over the last decade, the US has forced India to shift its attitude towards commodities, such as apples and almonds, which have been imported into India. Likewise, there is taking off of a number of items of Indian exports from the Generalised System of Preferences. Besides, there is also likely to be a shift in India’s oil imports from Iran, partly at least to the US, owing to American pressure on India to boycott Iranian oil.

The Narendra Modi government, unlike China, has completely fallen in line with the American demand not to buy from Iran notwithstanding the fact that Iranian oil is cheaper and the US has made it clear that it would not be selling at any cheaper price to India. In the matter of oil therefore India has simply abandoned its position of not being arm-twisted into buying at a higher price. All these areas, however, though of some importance from the Indian perspective, do not yet amount to much from the US point of view.

The other area where the US will put pressure on India is with regard to agriculture, where the US has argued for long that India has been giving subsidies on rice and wheat that are greater than what is permitted under the World Trade Organisation (WTO). Even though the US itself has increased its subsidies from $61 billon when the WTO was formed in 1995, to $135 billion in 2016, this is supposed to be “acceptable”, while India’s subsidies, which are given to a large mass of poor destitute peasants, are not, because they are “price distorting”. Since in the US there are very few producers in the agricultural sector, they can be given subsidies directly without causing any “price distortions”, even though these “subsidies” are used for capturing the global market. But in India, where there are millions of peasants, direct subsidies cannot be given in the form of income support; subsidies have to be given in the form of price support, and it is this precisely which has been objected to by the US.

The patent law enacted in conformity with TRIPS in India was a blow to the generic medicines sector. Prior to that, the Indian Patents Act had been a model piece of legislation that broke to an extent the monopoly of the advanced countries on technology. But that had to be abandoned to make it TRIPS-compatible, by increasing the length of the patents, and by extending patents from process to product patents. Even this, however, was not enough for the US which has been systematically putting pressure on India since then to discourage generic firms. This pressure will continue to be exerted by the visiting American trade delegation.

What the American position demonstrates is that the argument for free trade is dependent on the existence of colonialism. When colonialism reigned supreme, one could be sanctimonious about free trade, since the colonies could take the unsold commodities. Free trade appeared a good thing since no advanced country was made any worse by it. Not that there ever was completely free trade; but the leading country could practice free trade without being inconvenienced by it. And the colonies themselves to which the surplus was exported did not count. But when there is no colonialism, even this argument collapses. And this is what the world has been coping with for the last several years.  

Voluntary acceptance of US protectionism by countries like China and India would amount to their accepting the burden of boosting aggregate demand in the world economy. But since they cannot even use their respective States for this purpose, as fiscal deficits will not be allowed beyond a point, they can only use monetary policy; but monetary policy will be inadequate for boosting aggregate demand in a situation of overall deficiency of demand. As a result, the deficiency of aggregate demand will continue, and hence the struggle over grabbing as large a market as possible. The American effort to make its protectionism acceptable to others will simply not succeed.