Understanding the Indo-US trade wars: An introduction

India and the United States were once looked upon as 'natural allies'. How did things go so terribly wrong?
Written by Rajiv Rao, Contributing Writer

In 2006, the US-India Civil Nuclear Agreement, signed between then-US president George W Bush and Indian Prime Minister Manmohan Singh quickly became the then-high point in Indo-US relations — and indeed was supposed to signal a new glorious dawn in economic and business cooperation between the two countries. The agreement finally legitimised India's nuclear aspirations, and gave a green light to transfer technology and fuel for India's already well-established nuclear program.

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Alas, that dawn turned out to be a false one. India's nuclear liability legislation sought to make the suppliers of nuclear equipment liable for any accidents that could take place, something that US equipment providers balked at. This impasse ended up freezing the pact and preventing it from coming to life in terms of actual on-ground operations. While the Act was just one cog in the relationship between these two countries, which were once looked upon as "natural allies", it soon proved to be an apt metaphor for the state of affairs between them over the last eight years — one that oscillated intermittently between frosty and toxic.

When Indian Premier Narendra Modi made the first move towards rapprochement by visiting the US a few weeks ago, it was lauded as a positive and significant step in mending things and putting salve on still-festering wounds. Yet, it will prove to be a long road towards building a thriving and healthy relationship between these two nations. There still remains a number of rancorous, often complex issues to sort out that will require more than just a goodwill mission as a cure-all.

One of the biggest thorns in the side of a potentially flourishing relationship between the US and India is the Immigration Reform Bill (S744), passed by the Senate last year and expected to be passed by the House in the upcoming months. India is enraged about a whole string of onerous restrictions, from severe limitations that cap the number of H-1 and L-1 visas issued to temporary Indian tech workers who are outsourced by large American firms to a corresponding large spike in fees for the same. This is a big deal for India, as Indian tech companies depend on over $30 billion in business from the US. On the other hand, those who speak for the interests of the American tech worker say that a big loophole in the Act actually makes it easier to employ Indians, thereby putting more American techies out of jobs. (More on that in the next article in this series.)

The US, for its part, is enraged about India's mandate to protect domestic solar manufacturers by implementing a domestic content requirement clause that insists on 50 percent of solar panels to be sourced from local Indian companies. So much so that the US has filed two cases against the country at the Geneva-based World Trade Organization (WTO). India's stance is that that not only is the policy compliant with WTO rules, but that the US has a long track record in becoming protectionist when it chooses to, including in the solar arena, and most visibly in its "Buy American Act" that forces the US government to give first preference to US-made products before it considers anyone else. So how can it be logically possible, or even morally so, for a country to indict another one for the very same things it does on its own turf?

The US has also been extremely concerned about India's recent decisions in the lucrative business of pharmaceuticals — specifically the denial of a patent for Novartis' cancer drug Gleevec, on the basis that the company is "Evergreening" (more on that in this series). Another alarming instance of the failure of an intellectual property rights regime, according to the US pharma lobby, is awarding a "compulsory licence" by the Indian government to a local Indian company for a Bayer-manufactured cancer drug that would have cost Indian cancer sufferers thousands of dollars a month, but now only a little over $100.

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India says that it is not only compliant with the TRIPS section of the WTO (which the US insisted the country sign), but that it is also morally and ethically obligated to provide its poor population with affordable remedies for life-threatening diseases. But that shouldn't jeopardise the entire system of intellectual property and patents that incentivises drug companies to put more money into R&D to come up with important drug breakthroughs, says the US.

There are other issues — a tax policy in India that many Western nations consider regressive; a Preferential Market Access (PMA) policy that has copped a lot of flak, and was subsequently revised to exclude private firms; and other regulatory and bureaucratic barriers that need reform. But the ones listed above are the immediate flashpoints that will threaten to further embroil the two countries into disputations.

The fact is, India will soon turn out to be one of its most important trading partners in the world, never mind Asia. Bilateral trade, despite the many shrill confrontations that have taken place, has grown fourfold since 2006 to around $100 billion (compared to US-China's $560 billion bilateral trade figure), which means that enormous headroom to grow trade still exists for both India and the US.

For the US, the Indian market will turn out to be next-most important only to China's. Boeing already sells around $13 billion worth of planes in India, which has one of the largest and fastest-growing aviation markets in the world. Westinghouse will sell six nuclear reactors worth about $14 billion for a project in Gujarat, one of the two sites given to American companies as part of the Act. Many of the world's largest technology-driven companies — from Microsoft to GE, to Boeing — have their largest R&D centres situated in India. Clearly, India is not just a font of low-cost tech labour. Many large US companies and their workers depend on jobs generated in the US by the seemingly insatiable Indian appetite for goods and services that range from planes to power plants, to fast-food outlets.

Devyani Khobragade, the consular general in New York, was arrested and strip searched last year for allegedly paying her help a salary that was below the minimum wage.

And as India has emerged out of the shroud of socialism, and its companies have started to look overseas to grow their wings, the US too has emerged as an important market for certain Indian industries. Indian generic pharmaceuticals depend on the US as a huge market for its medicines. Ditto Indian software companies that would evaporate without North American business. Equally importantly, India depends on US technology and capital to fuel the growth and expertise of its rapidly growing, home-grown sectors such as e-commerce. If it wants to be competitive with other major economies of the world, it needs to continue doing so.

Then there is the large, visible Indian expatriate population who call the US home. Many of them, like Pepsi's Indira Nooyi and Microsoft's Satya Nadella, now run US companies. Thousands more populate the leading investment banks, consulting firms, technology giants, and a third of Silicon Valley's startups and software startups in the US.

So, it was with a profound sense of shock that India woke up one day last year to learn that its consular general in New York (the effective number two) Devyani Khobragade was arrested and then strip searched upon suspicion of paying her Indian staff below the minimum wage. Nothing could have served as a more perfect metaphor for how things had atrophied between these two countries than the Khobragade affair.

Still, there is hope that in the interests of mutually beneficial business and closer political ties in an increasingly fractious world, the countries will have to thrash things out and seek closure on the pivotal issues that plague both of them. This three-part series delves into these, all of them in the technology realm — from the software-outsourcing debate to the great Solar battle, to the tussle over Pharma — in an attempt to unravel the complex situations and perhaps even dispel some myths and underline some realities along the way.

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