Will the ‘Fruit and Nut Tax’ Adversely Impact Indo-U.S. Relations?

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India’s retaliatory tariff on 28 U.S. goods, including some finished metal products, has been dubbed the “fruit and nut tax” in trade circles. The facetious label, though, does not take away from the seriousness of the developing situation.

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In India and the U.S., exporters, importers, trade and industry are apprehensive about the turn this fresh step by India will take in the coming days, especially in light of the current U.S.-China trade war.

Will the move by India escalate into a similarly full-blown trade war? Or will it be used as a bargaining chip by the Indian side during the visit by U.S. Secretary of State Mike Pompeo to India later this month?

Last weekend, the Hindu Business Line reported the Indian government slapped tariffs on 28 U.S. products, including: almonds, apples, chemicals, flat-rolled stainless steel products, other alloy steel, tube, pipe fittings, screws bolts and rivets.

India’s Ministry of Finance said the decision was in the “public interest.”

Technically, it comes in retaliation to America’s imposition of a 25% tariff on steel and a 10% import duty on aluminum products in March 2018. That it took a year or so for India to go ahead with this counter was that despite announcing the counter-tariffs on June 21, 2018, the country had decided to go slow on implementing them for various reasons, one of them being general elections held earlier this year.

So why now?

The answer to that lies in U.S. President Donald Trump’s removing India from the list of nations with preferential trade treatment, just one day after a new government was sworn in in India.

Questions are already been asked in India – will the country lose more than it will benefit because of this new move?

The U.S. is India’s largest trade partner, and India sells much more to the U.S. than it buys. Last year, India imported U.S. goods worth U.S. $33 billion and exported goods worth $54 billion. Last year, trade equivalent to $54 billion was conducted between the two nations. The equation is slightly in favor of India only in the IT sector because of the outsourcing of services to Infosys and other firms.

All of this means the U.S., if chooses to do so, could hit back at India with fresh tariffs, which in turn would escalate the trade battle and, in turn, deliver a body blow to India’s already-suffering economy.

An editorial in Indian newspaper The Hindu said the Indian government has sent “a strong message that Indian is not going to be compelled to negotiate under duress.”

“To be sure, India has much at stake in ensuring that economic ties with its largest trading partner do not end up foundering on the rocky shoals of the current U.S. administration’s approach to trade and tariffs, one that China has referred to as ‘naked economic terrorism,” the editorial continues.

“The counter-tariffs have now lent the Indian side a bargaining chip that the US Secretary of State, Mike Pompeo, will have to grapple with during his visit later this month.”

To be fair, unlike countries like Canada and Mexico, India had extended the deadline for imposition of these duties eight times in the hope that some solution would emerge during a negotiation between the two nations. Earlier, India dragged the U.S. to the World Trade Organization’s dispute settlement mechanism over the imposition of import duties on steel and aluminum. India exports steel and aluminum products worth about USD $1.5 billion to the U.S. annually.

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All attention is focused on Pompeo’s India visit, even as backchannel dialogue continues in the hopes of reaching a solution in the interest of both nations.

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