The Trump-Modi Deal: Trade As A Business Contract

“We're not treated very well by India, but I happen to like Prime Minister Modi a lot.” Therein lies a clue to what just happened.

U.S. President Donald Trump says the trade deal with India may be done after election.

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If ever there was an example of the shift in paradigms from Adam Smith - David Ricardo ‘free trade' to mercantilist-oriented ‘managed trade', and then to ‘business contracts', the February 2020 Trump-Modi agreement was it. Their deal was neither a free nor even a managed trade agreement. It was a contract—or set of contracts—signed by two CEOs with no global economic vision beyond the cheering crowds they could see, nor any international relations strategy beyond their hugs.

But for their seats atop the strongest and largest democracies in human history, the terms of their contract would not be newsworthy. What is newsworthy is what their contract says about paradigmatic shifts in international trade.

No longer is the purpose of trade agreements to create free trade as theorised by Adam Smith and David Ricardo.

No longer is the purpose to manage trade, as for example what President Barack Obama practiced in the Trans-Pacific Partnership negotiations and Prime Minister Manmohan Singh in Regional Comprehensive Economic Partnership talks. The Feb. 24-25, 2020, ‘Namaste Trump' spectacles, following the September 2019 ‘Howdy, Modi' rodeo, make clear ambitious free trade agreements are inconceivable and modest managed trade agreements are improbable. Trade talks yield nothing more than narrow business contracts.

What happened was two proud men shoved a promising big-chested economic relationship, a potential full-sized Free Trade Agreement, into not even a tapered Managed Trade Agreement, but rather a slim-fit shirt that even their trim predecessors would find too tight. 

What A Full-Sized Indo-American FTA Would Look Like…

An authentic ‘FTA' provides duty-free, quota-free or DFQF treatment right away to all 10,000 product lines, and covers all 12 service sectors and 161 sub-sectors classified in their services schedules. There are either few or no restrictions on supplying services cross-border, consuming them abroad or via foreign direct investment, or on national treatment. The FTA reasonably limits professional immigration, and maximally opens government procurement and electronic commerce and data flows, with some security and personal privacy exceptions.

No FTA Because…

The importance of each country to the other ought to have suggested a grand FTA. America is once again India's largest trading partner. Conversely, for goods, India was America's ninth-largest trading partner as of 2019. Bilateral trade in goods and services was $142.6 billion, a record set in 2018. An ambitious FTA would surely lead to more such records. Yet, the Trump Administration was allergic to large bilateral trade imbalances – witness its concerns with NAFTA 1.0 and China – feared broad, deep trade deals would exacerbate them, and thus targeted India's $23.2 billion 2019 surplus in goods trade for reduction through managed trade. Never mind this imbalance was a tiny fraction of that with China.

Indeed, aside from their mutually-attractive bigness, the third big player – China – ought to have been a reason America and India ought to have reached an impressive bilateral FTA. India was concerned about import surges from China. Thus, when India raised Most Favoured Nation applied duties on a wide range of merchandise (electronics, toys, medical devices, walnuts, etc.), via its 2020 Union Budget on Feb. 1, 2020, it insisted the real target was China.

An Indo-American FTA would create trade between the two countries, and divert it from China. Yet, India was unwilling to test its competitiveness on a level playing field with America.

And, the U.S. stereotyped India as a counterweight to Chinese influence in Pakistan and the Belt and Road Initiative.

America and India are yet to see the other as a broad-based ally, akin to America and Japan, or America and Korea. Why? Neither ‘Make America Great Again' nor Hindutva create space for an expanded vision. In the Trump-Modi era, trade decouples and reattaches to nationalism. Thus, Messrs Trump and Modi never thought to apply Smith-Ricardo teachings. They were, declared the President, in the “early stages of discussion for an incredible trade agreement to reduce barriers of investment between the United States and India.” (Emphasis added.) And, he was in “no rush.”

Donald Trump says U.S.-India to sign $3 billion in defense deals. #NamasteTrump

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What A Tapered MTA Would Look Like…

No standard definition of a ‘Managed Trade Agreement' exists. Trade management is a sliding scale away from DFQF treatment upon entry into force for goods, service schedules with zero non-conforming measures, a robust 'positive list' of government ministries open to foreign bidders, and unrestricted cross-border data flows. The greater the slide, the greater the ‘management'. With sufficient deviation from the free trade pole, but before hitting the autarkic pole (no trade), stuff is so regulated that any agreement is better characterised as ‘managed' than 'free'.

If President Trump had been in more of a rush to reduce trade barriers during his 36 hours in India, then he and the PM would have said Namaste! to an MTA that answered “ji haan!” to these questions:

1. Faced with declining domestic demand and stiff Canadian tariff-rate quotas, the U.S. sought access to India's dairy market. However, the 80 million rural households in India's dairy industry are why India is the world's largest milk producer, and why India regulates dairy imports to protect those rural households.

Would the U.S. accept India's offer to grant access, but subject to:

• A 5 percent tariff,
• Quotas, and
• Certification that dairy products are not derived from livestock reared with feed containing blood meal, internal organs, or ruminant tissues?

2. Faced with Chinese counter-retaliation in the U.S.-China Trade War, the U.S. aimed to ship poultry to India. Alas, Indian poultry farmers can't match America's industrial-scale slaughter facilities. Would the U.S. accept India's offer to cut the Indian duty on chicken legs from 100 percent to 25 percent, or would it insist on a reduction to 10 percent? Would the U.S. agree to comparable market access offers by India on turkey meat, as well as fresh produce, such as blueberries and cherries, plus alfalfa hay, dried distillers grains, pecans, pizza cheese, and whey protein?

3. Having denied itself promising markets like Vietnam by withdrawing in January 2017 from TPP, the U.S. wanted to boost motorcycle sales in India. The Harley Davidson-loving President opposed India's 50 percent tariff on large motorcycles. Would the U.S. accept India's offer of a partial reduction in duties on large-engine bikes?

4. Withdrawing from the benefits of the TPP Transparency Chapter Annex on medical devices, the U.S. looked to India. What it found objectionable was India's 2019 decision to cap prices of medical devices like cardiac stents and knee implants. Free market prices ensured inventors could earn a fair return for sunk research and development costs. Might the U.S. appreciate that few Indian patients can afford the prices the U.S. producer-exporters would prefer to charge and accommodate some limits?

5. On services, absent legislative authority from the U.S. Congress, the President couldn't discuss the movement of natural persons. But, he's empowered to speak on cross-border supply. The U.S. looked askance at India's data localisation requirements, which added costs for U.S. financial and health service providers, as they had to set up ‘data fiduciaries' in India to store and process data, and police cross-border data flows. Big Tech knew “India is … the largest open data market in the universe,” i.e., per capita, more data is consumed in India than anywhere else in the world.” Yet, India's Lok Sabha studied a draft Personal Data Protection Bill, 2019 that America's companies opposed: it might impede those flows, and mandate they give user data and reports about breaches to India's Data Protection Authority. The U.S. also disagreed with India's e-commerce restrictions barring platforms like Amazon and Walmart from selling merchandise produced by businesses in which they had a non-de minimis equity interest to avoid vertical integration. Might the two sides examine these topics, the way the U.S. and the EU and Japan were doing?

No MTA Because…

The failure to strike even an MTA was not for lack of market access interest on the American side. Nor should it have been for a desultory effort on the Indian side to leverage its interests. For India, President Trump's June 2019 withdrawal of Generalised System of Preferences, which India enjoyed since the 1970s, was objectionable. So, too, was America's February 2020 rejection of India's self-proclaimed ‘developing' country status for WTO purposes. India seemed not to push these points.

Also objectionable to India were various U.S. sanitary and phytosanitary measures and technical barriers to trade impeding access of Indian farm commodities and manufactured goods. The President's January 2020 decision to extend the Section 232 25 percent tariff on steel and 10 percent on aluminum to derivative products prejudiced India's exports of those derivatives to the U.S. And, India's long-standing gripe about U.S. immigration restrictions (like H-1B visas) remained. Here, too, were unused Indian leverage points.

Slim-Fit Business Contract

The President's remarks in his closing press conference for the visit adduced the end of both free and managed trade, at least for the foreseeable future:

U.S.-India trade deal, if it happens, could happen at the end of year, says President Trump. #TrumpInIndia #TrumpIndiaVisit

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For now, Indo-American trade is contractual. 

The U.S. wants to ship more military goods to India. Will an Indian Cabinet decision to buy 24 multi-role MH-60R Seahawk naval helicopters, worth $2.6 billion, from Lockheed Martin suffice? Yes.

Perhaps might India also buy $1.8 billion worth of air defense radar, missiles, and other arms (including six AH-64E attach Apache helicopters) from U.S. contractors, as well as six nuclear reactors from Westinghouse? Yes again.

America accepted India's offers to buy U.S. ordnance, plus the reactors. The $3 billion price was adequate consideration to support the bargain.

In a shameful irony, India erected a 1,640 long, four-to-six-foot high wall so Trump would not see the Saraniya Vas slum—the residents of which get 90 minutes daily of communal tap water and earn $104.36 monthly as hotel knife sharpeners—along his 22-kilometre motorcade route from Ahmedabad's airport to the new 1,10,000-seat Sardar Patel cricket stadium in Motera. Evidently, scant consideration seemed paid to whether that money could be better spent on poverty alleviation.

Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, or Dentons or any of its clients, and do not constitute legal advice.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its Editorial team.

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