India’s Atlantic challenge

India’s Atlantic challenge

News:

Trump’s America First policy and the Brexit deal could pose more challenges to economic growth in India

Important Facts:

Why Disadvantage to India

U.S protectionism Factor:

• In the context of protectionism, U.S. President Donald Trump’s ‘America First’ policy could lead to more tariff and subsidy burden.
  • The trade experience of 2018 provides a sense of what could happen in 2019 vis-à-vis India-U.S. trade relations.
  • Last year, Mr. Trump started a trade war by escalating tariffs between U.S. and its three main trade partners – the EU, China and NAFTA.
  • Trump administration is attempting to replace the rules-based trade order with a bilateral trade agreements and sanctions network, a system that has distinct disadvantages for India
  • India was denied an exemption by the U.S. from increased tariffs on steel and aluminum imports, it reciprocated by hiking import duties on 29 American export products, including pulses and iron and steel products.
  • Spiraling trade war with the U.S. could easily spin India out of control and create rifts in other areas such as security and diplomacy.

Brexit Factor

• Due to U.K. Brexit policy India may expect complications regarding trade adjustment, and a U.K.-India Free Trade Agreement (FTA) may be out of the question.
• Positive impacts of Brexit on India
  • Brexit would surely accelerate the Europe’s interest to develop India as a strong trade and strategic partner. Europe needs to counterbalance United States and China geopolitically and would also need to hedge against a slowing China for its economic interests.
  • India is presently the second biggest source of FDI (Foreign Direct Investment) for Great Britain. Indian companies that would set up their factories in the UK could sell their products to the rest of Europe under the European free market system.
  • Britain would not want to lose out on capital coming in from India. Thus, one can expect Britain to try extra hard to woo Indian companies to invest there by providing much bigger incentives in terms of tax breaks, lesser regulation and other financial incentives
  • Presently, British universities are forced to offer subsidized rates for citizens of the UK and EU. With Brexit, however, the universities will no longer be obliged to provide scholarships to EU citizens, which will free up funds for students from other countries including India.
• Negative impacts of Brexit on India
  • First impact would be visible on currency volatility as there will be devaluation of the pound and euro due to Brexit. With the pound expected to fall 20 percent in case of a Brexit, Indian companies with sizeable presence in the UK will have to bear the brunt.
  • Easy selling of goods and businesses form one EU country to the other did open up doors for vendors who established trade between the nations and now with the exit of Britain, there could be rules and customs imposed which will harm trade in more ways we can anticipate
  • UK has always been a gateway for Indian firms to enter into EU. After Brexit, this will cause short-term distress to Indian firms. Global financial market volatility can be readily expected.
  • Many big businesses and international companies are in UK mainly because of its easy connectivity to the open EU market. With that gone, there would be impending threat of these companies withdrawing their business from UK immediately.
  • Brexit can affect India’s flagship IT sector given that the UK accounts for 17% or one-sixth of the sector’s global exports that topped $100 billion. Brexit will increase overhead costs, setting up new headquarters, perhaps in both Europe and Britain.

Way Forward:

• With the U.K., India’s trade in 2019 depends on the twists and turns of Brexit politics, both in London and in Brussels
• For India to secure its trade interests, it needs to renegotiate with both the EU and the U.K. for goods and services
• Also, the discussion on FTA with the EU must be resumed and a similar conversation must be launched with the U.K.
• If these negotiations are managed carefully, Brexit may even emerge as an opportunity for India to recalibrate the legal terms of its trade with the U.K. and the EU, at the multilateral level, and through free trade agreements.
• Brexit is an opportunity for India to reset the legal terms of its trade with the UK and EU, at the multilateral level, and through free trade agreements.