India must do a better job of countering false beliefs about its trading system that proliferate amongst the global elite.

 

The global trade system is enduring an unusual amount of strain as a result of the gradual erosion of the multilateral trading regime. The withdrawal (or threatened withdrawal) of the US from a variety of multilateral agreements, in conjunction with the ambitions of China in the Indo-Pacific, have become a political, economic and security concern for a variety of key regional stakeholders. In this context, India has a unique and indispensable role to play in promoting free trade and enhancing security throughout Asia and beyond.

Given that America’s relationship with much of Asia will remain in a state of flux as the Donald Trump administration continues to find its footing, India has an opportunity to have a greater impact on the future direction of its unique relationship with America, as well as to further strengthen its trading position vis-à-vis the rest of Asia. One important way of protecting against further erosion is for India and the US to continue to strengthen their growing bilateral economic relationship. The cumulative value of their bilateral trade increased from US$37 billion in 2005 to US$115 billion in 2017, commensurate with the growth in overall political, economic, and security ties between the two countries.

That said, some serious constraints could stand in the way of India’s future growth. The state of India’s infrastructure is a principal reason why the broader economic partnership has not grown even stronger than it has. For example, China, Japan, South Korea, and other Asian economies have more advanced infrastructure and manufacturing capabilities, significantly enhanced trade relations with the US, and are even more globally interconnected, despite having had developmental histories that are closer to India’s than to the developed West.

India has the ability to make up for lost time by forcefully addressing the infrastructure issue and putting its relationship with the US into hyperdrive. The country’s infrastructure deficits have cost it between 4% and 5% of GDP, severely dampening its ability to improve its economic competitiveness. Broad regulatory issues stemming from weakly enforced laws, deeply rooted systemic corruption, and a mentality among Indian bureaucrats that is incompatible with the pursuit of free trade also greatly contribute to the constraints standing in the way of India’s future growth—all in their own ways being remnants of the “socialist raj”. These deficits span the sectors most critical to enhanced trade connectivity, such as power, information technology and transportation. Only when India has shaken off this atavistic mentality can its enormous trade potential be actualised.

Another reason why India’s potential has not been realised is the degree to which its approach to intellectual property is perceived as being out of step. While India has enshrined a National Intellectual Property Rights Policy, it has yet to be comprehensively implemented and has left India open to the same sort of trade-related criticism frequently levelled against China. Copyright infringement is rampant in India at all levels due to the weakness of enforcement mechanisms and grotesque levels of corruption throughout its bureaucracy.

India must also do a better job of countering false beliefs about its trading system that proliferate amongst the global elite. Contrary to popular belief, India is not a high tariff country. Its average tariff in the last three years ranged between 1.7% and 2.3%, similar to the average tariff rates for relatively open economies. Such misconceptions can significantly impact other countries’ desire to trade with New Delhi, which may not consider commencing or growing a trade relationship as a result of such misinformation.

While India and the US have much in common—such as democratic political frameworks, pluralist open societies, constitutional legislatures, and widespread use of English—there are also several scenarios that could hinder deeper future cooperation. The potential for conflict between Prime Minister Narendra Modi’s “Make in India” push versus President Donald Trump’s “Make America Great Again” platform is a primary area of concern. In addition, issues pertaining to constrictions levied against H-1B visa holders, greater regulation of high technology transfer, and outsourcing are creating friction that is hampering the relationship.

Yet, it is too early to conclude that the potential for conflict between these two agendas is linear. The continued prosperity of the American economy is dependent upon unhindered access to the international supply chain, while the manufacturing jobs that PM Modi seeks to grow largely exist in supply chain sectors that diverge from those that are of concern to President Trump. As a result, greater American investment in Indian manufacturing could create a framework for additional streamlining of trade restrictions in order to attract greater foreign direct investment into India.

The bilateral trade relationship has serious geo-strategic implications for the international order, particularly given India’s critical role as a stalwart against Chinese political, economic and military ambitions. Greater engagement between the two nations in trade is also consistent with the US goal of supporting India’s emergence as a global power, while serving as counterweight against China in the Indo-Pacific.

Closer trade ties are also consistent with an even friendlier defence relationship—an extension of facilitating a more open economic partnership between the two nations. A more seamless exchange of sophisticated defence technology within the context of more open trade regulations would also contribute to a security framework that supports the rules-based international order, which has contributed to so much prosperity and stability around the world.

India cannot afford to allow the gradual disintegration of the global trading regime to hinder its own pursuit of a broader free trade framework, nor its ability to maintain a strong relationship with the US, both of which are critical to its own future prosperity and security. It will be incumbent upon India to ensure that the progress it has made in both areas stays on the right track, while doubling down on its core values as a responsible and engaged major power in the region, and the world.

Daniel Wagner is CEO of Country Risk Solutions and co-author of Global Risk Agility. Aditya Ramachandran is a Research Associate at the Hybrid Reality institute.

 

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