Trade and Security: The Two Sides of US-Indian Relations

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1 Trade and Security: The Two Sides of US-Indian Relations New Delhi is a valuable partner to Washington on one but not the other. Allison Fedirka August 13, 2018 Trade and Security: The Two Sides of US-Indian Relations The U.S. and India will have no shortage of topics to discuss during the first joint meeting of their foreign and defense ministers scheduled for Sept. 6 in New Delhi. Over the past year, the two countries have disagreed on several issues related to security and trade. India plays a key role in the United States current strategy for the Indo-Pacific region, but some of Washington s recent moves, including pulling back from its global commitments, placing sanctions on Russia and Iran, and levying new tariffs on a host of goods, are incompatible with India s interests. The U.S. doesn t want to risk alienating India, so it will try to find accommodations for New Delhi on security matters. But on trade, the two countries are more likely to be at odds. The U.S. has so much leverage over India that it doesn t really need to compromise. Security Cooperation For the U.S., India s strategic value in the Indo-Pacific stems from its proximity to China and its potential to take over some of the United States security responsibilities as it tries to decrease its commitments abroad. Washington has identified China as one of the biggest threats to the U.S. But it wants to be more selective with its global engagements and avoid being drawn into conflicts and disputes that can be dealt with regionally. Washington s strategy for managing China has long been to control sea lanes around China s littoral waters that are critical to Chinese trade and, by doing so, contain Chinese expansion. Given its position, India could help the U.S. apply this strategy on land and by sea. India and China have had an antagonistic relationship in the past, so containing Beijing is a goal of New Delhi as well. While India stands to benefit from cooperating with the U.S., it also wants to chart its own course. India has a history of pragmatism in its foreign relations and therefore has avoided committing itself too deeply to any security alliances. During the Cold War, for example, India was one of the original members of the Non-Aligned Movement, a

2 group of countries that refused to side with either the U.S. or the Soviet Union. Since then, it has similarly avoided getting too close to the U.S., either cooperating with Washington or keeping it distance as the situation warranted. The recently re-established Quad alliance is one example. Along with Australia, Japan and the United States, India joined the Quad to try to contain Chinese assertiveness in the Indo-Pacific. But it has also tried to limit its capabilities. In May, India s highest military commander, Adm. Sunil Lanba, said the Quad didn t need a military dimension because its focus was on maritime security and because India was the only member that shared a land border with China. India also declined to participate in an infrastructure initiative in Southeast Asia launched by Australia, the U.S. and Japan to counter China s One Belt, One Road initiative. New Delhi has instead focused on improving bilateral ties with Southeast Asian countries. It held its first joint naval exercises with Vietnam in May. Two months later, it agreed with Indonesia to develop the Sabang port in Aceh province and to conduct naval exercises in the Java Sea. New Delhi has also enhanced naval defense cooperation with Thailand and Singapore. And while the focus has been primarily on naval capabilities, India has also started to conduct land defense exercises, most notably with Thailand and Japan. (click to enlarge)

3 One issue that could cause friction in U.S.-India relations is U.S. sanctions on Iran and Russia. The sanctions on Iran set to be reimposed in November target the country s energy exports, and the U.S. could penalize countries that import them. India is one such country, dependent as it is on energy imports. Some 80 percent of India s oil supply comes from imports. In July, Iran surpassed Saudi Arabia to become India s second-largest supplier, accounting for about 18 percent of India s oil imports. Cutting off Iranian oil supplies overnight would severely disrupt India s economy. New Delhi and Washington have already discussed how they can work around the sanctions. Options include waivers and gradually reducing India s need for Iranian energy. No deal has been reached yet, but the U.S. plans to send 319,000 barrels of oil per day to India in August, more than double the 119,000 bpd it sent in July. This won t replace all of India s energy imports from Iran which totaled 768,000 bpd in July but it will surely help. (click to enlarge) U.S. sanctions could complicate India s plans to modernize its military, too, because India s defense industry depends so heavily on supplies from Moscow. Between 2013 and 2017, India was the world s leading importer of major arms, and Russia supplied nearly two-thirds of those arms, according to the Stockholm International Peace Research Institute. The U.S. has increased its arms sales to India over the past five years, but it s still a distant second to Russia, in part because it doesn t export many of the things India needs. India s military modernization and defense industry plans

4 prioritize joint development and technology transfer, and the U.S. wants to maintain its technological edge. Russia and India have plans to jointly develop and build various naval vessels, including submarines, as well as supersonic cruise missiles, among other high-end systems. India also agreed to purchase the S-400 air defense system, though this deal would violate a U.S. law that calls for sanctions on any country that buys this kind of equipment from Russia. Here the U.S. has been somewhat more flexible. Washington is considering granting India a waiver so that it will be exempt from the sanctions imposed on Russia. And far from distancing itself from India because of its defense ties with Moscow, Washington has actually intensified security cooperation with New Delhi. India was recently granted Strategic Trade Authorization-1 status, which allows it to procure high-tech weapons systems from the U.S. and gives it the same access to high-tech products as NATO allies despite the fact that it had only three of four export control regimes typically required for status holders. The U.S. and India are also expected to sign the Communications Compatibility and Security Agreement soon, after more than 15 years of negotiations. This agreement would open the door for defense equipment the U.S. sells to India to include highly secure, U.S. encrypted communication equipment. Disagreements on Trade On the trade front, the hurdles for the U.S. and India may prove harder to avoid. Many of the industries and products targeted by the U.S. trade war are key parts of the Indian economy. India was one of the countries affected by the U.S. tariffs on steel and aluminum products. Depending on the findings of the U.S. Trade Representative s investigation into the automotive industry, Washington could impose 25 percent tariffs on automobiles too. This would in no uncertain terms hurt India, where the auto sector accounts for 7 percent of India s GDP and employs 32 million people. India has a booming pharmaceutical industry, which could also be the subject of a future USTR investigation as the U.S. tries to protect its intellectual property rights. In fact, India has been put on the Priority Watch List for failing to sufficiently protect intellectual property, according to the U.S. There s also the issue of H1B visas. The U.S. wants to more tightly control these visas which would affect hundreds of thousands of Indians who have either received or applied for an H1B. The problem for India is that it s in a much weaker bargaining position on trade. The U.S. market matters far more to India s economy than vice versa. Last year, only 2.1 percent of imports to the U.S. came from India, and only 1.7 percent of U.S. exports were destined for India, according to Trade Map. The U.S., on the other hand, was India s top import supplier, accounting for 15.6 percent of imported goods, and its

5 second-largest export destination at 5.4 percent. India threatened to retaliate against U.S. tariffs, with duties on $241 million worth of U.S. exports to India a negligible amount for an economy as large as the United States. India has shown an interest in reforming its intellectual property practices but meeting U.S. standards could take several years. The U.S. has little incentive to make exceptions for India on trade. Where their interests align, as they frequently do on security, both countries have been willing to cooperate and work toward shared goals. But when it comes to trade, both know that Washington is willing to go it alone.