India and China: Two Contrasting Models of Dealing With Trump’s US

On Buddha Purnima, a temporary truce between US and China on their trade war was announced. On the same day, prime minister Narendra Modi, in his address to the nation, talking of the 'ceasefire’ announced two days earlier, enunciated a doctrine regarding terrorism. But he was silent on US’s role in brokering the ceasefire. President Trump has reiterated several times that the US had played a key role but Indian officials have denied this. 

If so, how come Trump announced that a ceasefire had been worked out before the Indian spokesperson announced it? Officially it is said, the DGMOs of the two countries worked it out. But, a ceasefire is a political decision and it came most unexpectedly and suddenly. A credible explanation is not forthcoming. 

Further, the US claims that India and Pakistan will meet at a neutral venue to sort out their differences. The PM without denying it has said, if there is talk between the two nations it would be about PoK and terrorism. Sounds like third party mediation – crossing India’s red line.

These are the two models – China confronting the US and India prevaricating.

US pressures

India, the closest allies of the US and China have been subject to US pressures since Trump has become president. While others have not buckled under Trump’s threats, India seems to have at every step.

Even before Trump’s announcement of tariffs on trading partners, India in the Union Budget announced cuts in tariffs on certain imports from the US. Further, unlike others, India has not taken a stand against the threatened exorbitant tariffs. It has said, it is negotiating a trade deal. India has not argued that the tariffs proposed are unfair. After all, the existing tariffs are based on negotiations and commitments in the WTO which were helmed by the USA. There was give and take with the developing countries receiving concession in return for concessions to the advanced countries on intellectual property rights, trade in services, and so on.

Trump’s strategy

Trump repeatedly says that US’s trade deficit is a subsidy to other countries. Actually, it is the rest of the world that is subsidising the US by providing low price wage goods and thereby enabling the US to live beyond its means. Developing countries compete with each other and that keeps the prices in shops in the US low. To compete, they squeeze the wages of their workers. In effect, developing world workers subsidise US citizens.

High tariffs will reduce trade all around. Tariffs are indirect taxes that are factored into the price paid by the consumer. So, high tariffs will lead to high prices for US consumers even if exporters cut their profit margins a little. So, Trump saying that foreigners will pay the tariff and make America rich is incorrect. If he cuts direct taxes, it will benefit the rich and not the vast majority.

Standing up to Trump

Trump realised that his strategy is flawed and postponed the application of high tariffs by 90 days, except for China. Soon, he backtracked on tariffs on electronic equipment. China retaliated and the tariffs shot up to 145% and 125% leading to freezing of trade between the two nations. China’s tough stand forced Trump to negotiate which has led to a 115% reduction of tariffs by both parties.  

Most of the trading partners of the US realised that Trump’s strategy is flawed and that he will be forced to retreat if they stand firm. China was the worst-hit but the most bold. It has been threatened since 2018; from Trump’s first term. Then too, tariffs were increased but US’s trade deficit and its imports from China did not decline.

The reality is that the US wants to check China’s economic and technological rise. It even embargoed export of high technology items to China. It blacklisted Huawei. China has not only retaliated, but anticipating these moves, it has been reducing its share of trade with the US, accelerated technology development and reduced its dollar holding.

UK is the first nation to negotiate a trade deal with the US but the details are not yet worked out. While the US will lower duties on less than 100 items, UK has agreed to slash tariffs on 2,500 items. So, bargaining from a position of weakness has been detrimental.

India’s dilemma

Trump is threatening to extract concessions from India. Repeatedly he has called it the ‘tariff king’. He wants India to open up its agriculture, buy expensive defence equipment, energy, etc. While taking credit for intermediating the ceasefire, he talked of increased trade. If he succeeds in prying open Indian agriculture, millions of farmers will pay a heavy price. Its position would be strengthened if it teams up with the other big trading partners of the US.

US intermediation to bring about the ceasefire has imposed cost. To divert national attention from this, PM Modi has expounded a new dangerous and destabilising doctrine. Any terrorist act could lead to a conflagration between India and Pakistan. There would also be public pressure for it. To prevent the situation from slipping out of control, as has happened now, again third party mediation may be required. 

India’s weakness stems from internal and external causes. Internationally, China is firmly allied to Pakistan. Russia is firmly allied to China. US is transactional and its support will be limited, as witnessed during the Doklam and Ladakh episodes. So, India has to go it alone. That requires overcoming internal weaknesses, especially the accentuation of the divide among its people. Technological development and education are crucial. Only a strong India would be able to take an independent stand to protect its global economic and political interests. Something, it is at present unable to do as negotiations with the US highlight. 

Arun Kumar is a retired professor of economics at JNU. He is the author of Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead, 2020.

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