Let’s Talk India
December 19, 2018
SCOTT MILLER: I’m Scott.
WILLIAM ALAN REINSCH: I’m Bill.
MR. MILLER and MR. REINSCH: (Together.) And we’re The Trade Guys.
H. ANDREW SCHWARTZ: You’re listening to The Trade Guys, a podcast produced by CSIS, where we talk about trade in terms that everyone can understand. I’m H. Andrew Schwartz. And I’m here with Scott Miller and Bill Reinsch, the CSIS Trade Guys.
In this episode we welcome a very special guest, Rick Rossow. Rick is CSIS’s senior advisor on U.S.-India policy studies, and he was the deputy director of the U.S.-India Business Council from 1998 to 2008. We brought Rick on because India is very much in the mix on trade. We want to know what’s the president’s beef with India on Harley-Davidson. Is there a tariff war going on with India, too? We discuss that and more, all on this episode of The Trade Guys.
Today on The Trade Guys we have the super amazing, very important Rick Rossow here, who is looking very dapper, I must say, in his three-piece suit. Rick is our India expert here at CSIS. He’s the only person in the building that knows anything about India. That’s why we brought him here to The Trade Guys to see Trade Guy Bill Reinsch, Trade Guy Scott Miller.
But I want to start this out because I have a question, OK, and this is my question to you – all of you.
MR. REINSCH: What’s the best restaurant in the – best Indian restaurant? (Laughs.)
MR. SCHWARTZ: Close. Close, close. OK. The question is, is: Rick, do you know why all the Jews are flocking to India?
RICK ROSSOW: I do not. They left 40 years ago, 50 years ago. They’re coming back now?
MR. SCHWARTZ: They heard there’s a new deli.
MR. ROSSOW: Oh no. Oh no. (Laughter.) Oh boy.
MR. REINSCH: Please. Bud-um-bum. Yes.
MR. SCHWARTZ: OK. We had to start somehow.
MR. MILLER: We’ll retroactively take away your Hanukkah presents. (Laughter.)
MR. REINSCH: This is a new low for –
MR. SCHWARTZ: Don’t take them away! My dad was so good to me this year. (Laughter.)
MR. REINSCH: A new low for Trade Guys, I think. (Laughs.)
MR. SCHWARTZ: OK. So but we are talking about India because India is important. How does India fit into President Trump’s trade policy?
MR. ROSSOW: Well, I think the first year India mostly survived unscathed with a couple of glancing blows. You know, for instance, when President Trump announced the withdrawal from the Paris Climate Accords, he pointed to India and the fact that India and China had sort of tricked the West out of billions of dollars. But otherwise, there wasn’t very much noise on the anti-India trade front. Again, the buy American, hire American executive order sort of put a threat overhead that they may look at visa restrictions, but nothing substantive.
But in the last year we really have seen a little bit more attention turned to India; you know, not to the level of China or something like that. But, you know, the 232 steel tariffs, India actually exports a relatively high amount of steel. They’re in the top 10 steel exporters to the United States. Added to the currency manipulation watchlist, which is a new thing; hadn’t been on for quite some time. And also, the United States initiated a review of India’s Generalized System of Preferences benefits and is threatening to revoke that, and India is a major beneficiary of that system. So a little bit more attention on very specific programs that we’ve seen in the last year.
MR. SCHWARTZ: Bill Reinsch, on Monday India yet again deferred enforcing retaliatory tariffs by 45 days against 29 U.S. products worth 235 million. Why do you think India did that?
MR. REINSCH: Well, I think Rick probably would know better than I do, but it sounds to me like they’re trying to maintain a cooperative relationship in the hope of getting the steel tariffs taken away.
MR. SCHWARTZ: Is that your take, Rick?
MR. ROSSOW: Yeah, and the GSP threat too. That’s very serious. India doesn’t want to lose that.
MR. REINSCH: That’s right.
MR. ROSSOW: They don’t want – they don’t want to see it revoked. India has –
MR. REINSCH: What’s our argument on GSP? Why do we – why are we threatening to take it away from them?
MR. SCHWARTZ: Well, wait, time out. What is GSP?
MR. MILLER: Let’s go for what is GSP.
MR. SCHWARTZ: Yeah, yeah. Scott Miller, what is GSP?
MR. MILLER: It’s the initials for – the acronym for the Generalized System of Preferences, and it’s one of the oldest – maybe the oldest preference program in U.S. law. Preference programs are basically one-way reductions in tariffs. We grant a zero-tariff status to a specific set of goods from specific countries, and it was done with the – with the idea of helping countries develop through exports to the United States. So the GSP, I’m fairly certain, was in the Trade Act of 1974.
MR. REINSCH: Yes.
MR. MILLER: May have been before that. But at least it’s been around for 40 years, and it has – it has been used by many countries over the – over the years. Now India is one of the largest users of GSP, what remains of the program. But it’s basically – it’s a – it’s a one-way tariff-preference program.
MR. SCHWARTZ: So let me ask you all this, and maybe we start with you, Rick Rossow. The U.S. exported 25.7 billion (dollars) in goods and 23.7 billion (dollars) in services to India in 2017. Goods exports were up almost 19 percent compared to 2016 and over 71 percent from 2017. The U.S. imported 48.6 billion (dollars) in goods and 4.4 billion (dollars) in services from India in 2017. What’s wrong with that? Why do both countries want to fool with that?
MR. ROSSOW: Well, like you mentioned, we do have a trade surplus.
MR. SCHWARTZ: Yeah.
MR. ROSSOW: Any country with which we have a trade surplus is going to be under the scanner in this administration. And quietly, India, you know, has crept into becoming one of our 10 largest trading partners. So a top-10 trading partner, trade deficit that’s almost two to one, and then on top of that the services trade deficit as well – India, major exporter of services – IT services, things like that – to the United States.
MR. REINSCH: Which is very unusual. We don’t really have a services deficit with very many countries.
MR. ROSSOW: Yeah.
MR. SCHWARTZ: Right, we don’t import services.
MR. REINSCH: Not very much. But in India we do.
MR. MILLER: We do import Indian services.
MR. SCHWARTZ: Why do we do that, Bill Reinsch? Why do we import India’s services?
MR. REINSCH: The Indians have proven to be very efficient at high-tech services, primarily. Rick would – software, software development, processing, back office things.
MR. MILLER: Back office. The sort of call center was the classic – how it started, at least.
MR. SCHWARTZ: Right. We outsource, right, Scott Miller?
MR. MILLER: Well, basically, what we do is when you call your Visa card issuer and you have a question about your bill, that phone is answered somewhere, and often it’s in India.
MR. SCHWARTZ: My wife usually calls me and has a question about our bill – (laughter) – because of something I purchased.
MR. MILLER: Well, that’s a different –
MR. SCHWARTZ: What did you do here?
MR. MILLER: That’s a different problem.
MR. SCHWARTZ: Yeah, that is a different –
MR. MILLER: But that –
MR. SCHWARTZ: India cannot solve that problem for me.
MR. MILLER: That turns out to be an international services transaction, and it’s one of the reasons we have a services deficit with India.
MR. SCHWARTZ: OK, Rick, so India’s one of our top trading partners. Why do we have a problem with anything that’s going on with India?
MR. ROSSOW: Well, apart from the trade deficit itself, as I just mentioned, India has taken a number of anti-trade steps. I mean, overall, if you were to boil down Prime Minister Modi’s economic policy four-and-a-half years after coming into office in a quick elevator pitch, he’s pro-investment and anti-trade. He’s stepped back from pending trade agreements, reopened the Model Investment Treaty and renegotiated the existing treaties, but also dramatically hiked customs duties in a wide range of products. So, apart from the fact that we have a trade deficit, India’s actually taken steps deeper than anything President Trump has done on trade against India. India’s actually taken bigger steps to create higher tariff barriers against American goods in the last year.
MR. SCHWARTZ: So this is really interesting, Rick Rossow. There’s actually something called the Make in India Program.
MR. ROSSOW: Yeah.
MR. SCHWARTZ: Is this like a make India great again type program?
MR. ROSSOW: Sort of is. You know, they wanted to try to reformat the economy a bit. It’s a big imbalance in India. You’ve got about 50 percent of the workforce producing about 15 percent of GDP in agriculture. You’ve got about 15 percent of the workforce producing about 60 percent of GDP in services. And then manufacturing, you know, not much employment and not much GDP by comparison. So they’re trying to rebalance a little bit, shift some productivity out of services and agriculture and into manufacturing, hopefully creating good jobs, low-skilled jobs, you know, for folks to move out of agriculture. But it’s a painful process. You’ve seen them deregulate to allow more foreign investment in different areas; to simplify licensing; some good work in terms of creating a national tax system for production, which they didn’t have before. So a lot of things to try to stimulate a stronger manufacturing economy.
MR. MILLER: But it’s – look, it’s a very interesting policy contrast between these two sort of billion-plus-person nations. India is sort of happy with its internal market and they want to develop the internal market. And in some ways, from a policy standpoint, they could(n’t) care less about the rest of the world. They like – they like our investment or things like that, but they don’t really – they’re not really bothered by that. Whereas China has been for 40 years now on a path of export-led development, OK? And they’ve chosen different paths. The policy differences are stark.
And what’s funny is for years American, you know, multinationals whined about India because it was so hard to get in there and do business, OK? And now many of them may be thanking their lucky stars that we don’t have two billion-plus-person export-led – (laughs) – growth economies to deal with. One is enough, it turns out, so.
MR. ROSSOW: Well, and there is a bit of transition – which you mentioned, Scott – in terms of India, of course, welcoming investment. That even wasn’t the case a few years ago.
MR. MILLER: Right. That’s correct.
MR. ROSSOW: You know, my 20 years of working on U.S.-India commercial, previous prime ministers, they’d sneak up to New York for the U.N. General Assembly. They’d call down to the trade association and say, hey, can you sneak 20 CEOs through the back door of the hotel at midnight and maybe I’ll talk to them? You know, whereas Prime Minister Modi is openly embracing. He loves coming here, engaging companies. So at least in terms –
MR. SCHWARTZ: He stops in Silicon Valley on the way to Washington, I guess, right?
MR. ROSSOW: And loves doing public stuff. He loves being seen with foreign CEOs. So at least in terms of the investment encouragement side, too, it is sort of new that they’re even actively approaching it. They secretly wanted it before, but now they’re a lot more comfortable, yeah.
MR. REINSCH: No, you’re right. In the ’90s I happened to meet a really smart guy from India who was a former government official. I said, well, what did you do? He said, well, I managed the investment desk, the foreign investment desk for the U.S.-India relationship. I said, oh, that’s cool; what was your job? And he says, my job was to say no. (Laughter.) That was it.
MR. ROSSOW: Nyet.
MR. REINSCH: That was the job. (Laughs.)
MR. SCHWARTZ: Is “nyet” an Indian expression?
MR. MILLER: You know what it means.
MR. ROSSOW: So much that, you know, a lot of Indians studied in Russia back when the Soviet Union had an open door. So my terrible Russian still gets me a little bit of distance whenever I’m in India.
MR. SCHWARTZ: I just don’t want our listeners to worry that The Trade Guys are being hacked. (Laughter.)
Bill Reinsch, you look like you’ve got something ingenious to say here.
MR. REINSCH: No, I was just – well, I was just going to say, I think the other reason that the relationship is a little rocky is because they’ve been such a big problem in the World Trade Organization.
MR. SCHWARTZ: That’s what I was going to ask you.
MR. REINSCH: They have consistently opposed virtually everything that anybody wanted to do – and not just us. And right now, as the United States and most everybody else wants to move beyond the Doha Round of negotiations, which was not successful, it’s the Indians – they’re not the only ones, but they’re the lead in saying: Wait a minute. We can’t do anything new until we finish this old thing, even though it’s been 10 years since we’ve made any progress on the old thing. And they aren’t giving up.
MR. SCHWARTZ: Well, what’s the old thing? I mean, how has the United States dealt with India at the WTO?
MR. MILLER: Well, for years we grandfathered them because India was a founding member of the GATT –
MR. SCHWARTZ: So meaning what, we grandfathered them?
MR. MILLER: Well, we basically gave them access without any – them taking on any obligations.
MR. REINSCH: Didn’t force them to meet obligations other had to meet.
MR. MILLER: Basically.
MR. REINSCH: I mean, we treat them like other developing countries. It’s not unique for India.
MR. MILLER: And for many years, probably up until 1994 and the conclusion of the last trade round, the so-called Uruguay Round, the basic practice for the big traders – which were mostly industrial democracies – to make all the negotiations all happen among those parties. You had all the head-knocking there. And then whatever the big traders got – decided to do, they would basically just allow everybody else to not take on new obligations. And so that practice – since India was a founding member of the GATT – has been there all along. They got used to it and never really changed.
MR. SCHWARTZ: And what’s happening now?
MR. REINSCH: They continue to oppose moving forward. The United States, both in this administration and the last one, has really tried to get the organization to move onto some new topics. For the U.S. and further developed countries, digital trade, intellectual property issues, sort of electronic issues, things like that, are much more important than they used to be, because of the changing nature of our economy. And we have wanted the WTO to look into these issues and deal with issues like forced data localization, you know, requiring you to keep your data in country, and countries that restrict or prohibit the transmission of data across borders. These are big issues for American financial services companies. They are big issues for, actually, American manufacturers as well.
And when we – and there’s a lot of support in the WTO for getting into these issues. I mean, this is – this is going to be a long negotiation. They’re complicated issues. And what – all we’re trying to do is start. And the Indians stand in the way of starting. So you can’t start until you finish this other stuff. And for them, the other stuff means getting what they want on agriculture.
MR. MILLER: And keep in mind, the Doha development agenda was agreed to in November 2001, and was probably a balanced agreement at that point. But, you know, by 2005 or so it was no longer a balanced agreement, and no one’s made a serious effort probably since about 2008. Here we are, 10 years past that last serious effort, and the thing sits there like a lump. And nobody – everybody knows, but nobody can move beyond.
MR. SCHWARTZ: Well, I want to ask you, Scott Miller. Does President Trump – is his criticism of India’s trade policy justified?
MR. MILLER: He’s probably raising fair points. The point is, everybody’s trade policy has its sore points and its absurdities, including the United States. Don’t get me started on sugar.
MR. REINSCH: OK. (Laughter.)
MR. MILLER: But, you know, we all have our warts. And President Trump is actually pretty good at identifying other people’s warts and masking our own. So it’s not that his criticisms are unfair. It’s that because of our own inadequacies in that space and our own actions recently it’s not getting us anywhere.
MR. SCHWARTZ: Rick Rossow, what’s behind President Trump’s obsession with Harley-Davidson and India? Isn’t there something going on there that we should know about?
MR. ROSSOW: Well, it’s a real issue, the fact that India has ridiculously high customs duties, over 100 percent, on heavy motorcycles. Did somebody from Harley, you know, get a message into the White House, and that became the talking point that day when a microphone was put in front of the president? I mean, you never exactly know what it is that drives him to hone into one point and stay on it so fast. So –
MR. SCHWARTZ: But we should be able to sell motorcycles in India.
MR. ROSSOW: We do.
MR. SCHWARTZ: We make the best damn motorcycles in the world.
MR. ROSSOW: Well, and Harley does. I mean, heavy motorcycle isn’t really – it’s not really a big market for heavy motorcycles. So – but still, I mean, if 100 percent customs duty stops them from selling a few bikes, it’s a perfect issue for this president to take on.
MR. SCHWARTZ: Well, if I was looking for a new deli in India, I would be wanting to be on a Harley if that was my favorite mode of –
MR. ROSSOW: Oh, no. After the new deli, yeah. (Laughs.)
MR. SCHWARTZ: Yeah. Well, it’s all I got, you know? What can I tell you? (Laughs.)
MR. MILLER: Well, look, the point is, Harley-Davidson, as a manufacturer, makes excellent motorcycles.
MR. SCHWARTZ: Yes, they do.
MR. MILLER: But they are large, heavy, expensive motorcycles. And that –
MR. SCHWARTZ: They don’t fit through traffic in India’s busy –
MR. MILLER: Well, even without the tariffs, that’s not the bulk of their market. There was an interesting article in today’s Wall Street Journal about Apple’s struggle in India. And Apple started off very strong and his having difficulty in the market now because they mostly sell at the high end. So it’s the high end of the market is not as robust, given India’s development. And you need to sell to all market segments. I remember this from my days in the razor blade business. You know, we sold high-end razors, but it was the five blades for five rupees which were where the volume was. And so while Harley would definitely like the tariff to be lower, ultimately success in the market would take a broader range of products. And you’d have to address the actual development interests and the market itself in India, which may not be the market in the United States. In fact, it isn’t.
MR. ROSSOW: Looking back, I mean, 1991 is generally the year that people pinpoint when India began to really open up its economy. They ran out of foreign currency. The Gulf War, oil prices spiked, et cetera. Generally, you know, India has been opening up to trade unilaterally since then. Pretty steady. Slow, but steady. The last two years is really when you’ve seen for the first time in a big way India stepping away from that. The budget that India released in January of this year increased customs duties in almost 50 products.
Some things, like cosmetics, like automobiles, they’ve been increasing customs duties in areas of telecom and IT. You’ve actually seen compulsory local manufacturing rules in a lot of sectors as well. You’ve got to build locally to sell to the government. And in some instances, they’ve hinted that they may expand into the private sector. So Harleys is the one thing that caught the president’s eye, but, you know, the reason that we’re taking India to task on trade is a lot of things – price controls, local content mandates, and expanding customs duties in a way that we really hadn’t seen since liberalization began.
MR. MILLER: Making it even harder to do business there.
MR. ROSSOW: Right.
MR. REINSCH: And not all of this is against the rules. If their bound tariff is higher than the tariff they had been applying, then they can raise it. And they can raise it. And nobody has any rights to do anything about it.
MR. ROSSOW: There’s a couple of instances on telecom and IT. They are a signatory to the Information Technology Agreement of the WTO, where you agree to zero tariffs in a wide range. And, you know, that was written at a time that merging of products together – so is it a phone, is it a computer –
MR. SCHWARTZ: Sure.
MR. ROSSOW: You know, so India can claim that there’s some middle ground there. They’re playing in new areas. So when they increase customs duties, it’s not really exactly what was meant under the ITA, although I think a reasonable person would probably sit back and say: That’s exactly – just because you took two products from the ITA list, merged it together, it should still be covered.
MR. MILLER: Right.
MR. ROSSOW: But they’re trying to make the case that it – that it won’t be. Also, they have a local content mandate on solar panels. And this was an interesting time for Modi and President Obama. You know, President Obama supporting the clean energy agenda, India wanting to take some advantage of that by committing to this huge renewable power target but saying that renewable companies had to buy a certain amount of content locally. So the United States pressed India to adopt a serious solar commitment, and then sued them for this local content mandate because that could hurt American exports. So sometimes they feel too that – I mean, certainly we can sit here and understand why these two things happened simultaneously. But for India, they felt that they were being pulled in kind of two directions. Go green, but don’t buy from yourself, make sure that it’s American content is kind of what they were feeling during that period.
MR. SCHWARTZ: OK. So given that India’s GDP is 2.6 trillion (dollars), its population is 1.3 billion, GDP per capita is almost $2,000. And as you mentioned before, India is the ninth-largest trading partner of the United States Given India’s population and the growth of its economy, should the Trump administration, and future U.S. administrations, increase the attention they spend on the trade relationship?
MR. ROSSOW: Well, I think they should. You know, even in a bad year India’s growing – I mean, when you had the previous government really forcefully trying to take the economy into the rocks, taking terrible decisions day after day, the worst they could do was bring economic growth down to 4 ½-5 percent. So if you’re looking for countries to bet on where you’re going to see positive growth, sustainable growth, India certainly has that. But it’s not going to be a wide range. You know, there are sectors – like defense, like energy exports – where there’s a real opportunity and appetite to grow. And other sectors, where maybe a little bit less so.
So, you know, companies themselves have to take the decisions here and determine whether or not that’s a place that they want to export to, if they want to manufacture in. But it’s market that can’t be ignored, and hopefully the administration will keep its eye on the ball and look for those opportunities to make progress. You know, for instance, India has a national election coming up in five months. The days after an election is usually one of the better opportunities for India to step up and take a look at new liberalizations and open the market a bit. So you got to take advantage of those opportunities when you can.
MR. SCHWARTZ: Scott Miller, what do you think about that?
MR. MILLER: Look, India has some of the most favorable demographics in the world. Despite its massive size, it is a very young population. It is – there are components of the population that are very well-educated. The Indian education system is surprisingly effective. And they do a great job. So I think that there are – there’s no reason, if you are in a mind to look at the world as an economic unit, and you want to grow faster than you do in developing countries – or, developed countries, that India would be high on the list for almost any international company.
MR. SCHWARTZ: Bill Reinsch, as the author of a column this week called “No Country for Old Men,” Scott just mentioned – (laughter) – that, you know, India’s a young country. What do you think about the U.S.-India relationship in that light?
MR. REINSCH: It’s hard for me to get over the WTO problem because it hold so many things back that don’t have anything to do with India. I mean, one of the things that India is famous for in multilateral institutions is hostage taking. They want what they want, and they’re prepared to block everybody else from getting what they want until the Indians get what they want. It drives people crazy. So it’s hard for me to get beyond that. The column was about, you know, the world’s got a lot of workers. They’re just not all in the right place. And we’ve got a shortage. Japan has a bigger shortage. We’ve got countries in Europe with declining populations. And, you know, you can’t grow when your population’s declining. And we’ve got other countries – India is an example, but the Middle East, Africa is also examples, Southeast Asia – that have got lots and lots of people. And they’re young people. And they want to work.
And the American solution to that problem – historically it’s been controversial – but the American solution has been immigration. You bring these people in and, you know, there’s the occasional crook, but for the most part you bring in a lot of workers. And they, in turn, have children, and they become productive citizens, and they become artists, poets, musicians, scientists, engineers. And we gain - -we get all of that. And we’re in the process now of turning all these people away, which is a mistake that we make. It also is a safety valve for other countries that we’re turning off.
Now, India is not a migrant country in the world because it’s growing, and it’s developing, and there are opportunities in India. So it doesn’t quite – it doesn’t fit the model, but it’s an example of an economy that if the government will let it could be much more vibrant and could grow much faster, I think.
MR. MILLER: Now, the South Asians who do wind up in the United States are, I think, still the most successful ethnic group. So it’s an amazing success story for Indians in the United States. So – but you’re right, they don’t have the pressure to export people. But I agree with Bill that, you know, at some point India is going to figure out that liberalizing its economy and building a set of durable rules that are – that are neutral and help the economy grow will be in their interest. When they figure that out, we can – growth rates will probably take off.
MR. ROSSOW: Well, and domestic liberalization. You know, there is a distinction. There’s not much debate anymore in India about the benefits of domestic liberalization. But trade integration is really where the dividing line happens. So trade integration, they’re staring at one main factor that is a primary policy driver for the Indian government. They have a trade deficit that makes ours look paltry, right? I mean, India’s goods trade deficit with the world is equivalent to about eight percent of GDP, which is about three times higher than the United States trade deficit with the world, highest among G-20 by a magnitude. And with China alone, you know, the China trade deficit that India faces is about 3 percent of their GDP. So, you know, they look at that.
And I know that people a lot smarter than me can say that you can’t just look at the number, but every leader does. If it’s on a bumper sticker, et cetera. So you know, with a trade deficit that big – unless Make in India works, because the ag – you know, the excess number of employees in basic agriculture, they can’t leave the field. There’s no jobs waiting for them in the city. They’re sort of hoping –
MR. MILLER: And you can’t export your way to growth in agriculture.
MR. ROSSOW: Yeah, yeah.
MR. MILLER: And their manufacturers are not competitive in the global market.
MR. ROSSOW: Not competitive.
MR. MILLER: That’s the core problem with solving that trade deficit.
MR. ROSSOW: Yeah. Well, it’s – you know, in India a lot of the liberalization that has to happen at this point, it’s not Modi. It’s not Delhi. It’s the states.
MR. MILLER: Right. Yes.
MR. ROSSOW: Twenty-nine states. They’re the ones that have to provide electricity, most business licenses, tax compliance, environmental compliance. I mean, a lot of the stuff companies face now in terms of being productive, you know, as you mentioned, Scott, is state regulations. And states are only now just starting to kind of peek above the wall and see that, you know, there could be a bright, promising future if they take the right steps. But it’s early.
MR. SCHWARTZ: Hi, guys. This is Andrew. We’re taking a quick hiatus for the holidays, but we’ll be back again in the new year, don’t you worry. In the meantime, you can check out all things Trade Guys at tradeguys.csis.org. We’re also now on Spotify, so you can find us there when you’re listening to The Rolling Stones or you’re listening to Tom Petty, or whatever you’re listening to. Thanks again, and happy holidays from everyone here at The Trade Guys.
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