Modi’s Urgent Agenda For India’s Diplomats In AmericaBloombergQuintOpinion
On March 12, 2021, U.S. President Joseph R. Biden Jr. met virtually with India’s Prime Minister Narendra Modi at the inaugural ‘Quad’ leaders’ summit, along with the Prime Ministers of Japan and Australia. The four leaders announced a collaborative effort to provide one billion Covid-19 vaccine donations to the ASEAN region and beyond. This multilateral initiative came days after ‘On Point’ identified three new areas for America and India to collaborate on a bilateral basis.
To move toward broader, deeper trade ties, the Biden administration and Modi government also need to reconcile the friction that currently impedes progress in bilateral relations. They’re topics on which the Biden Administration already is acting in directions that, if India does not respond constructively, may worsen friction, thereby putting more wear and tear on Indo-American trade relations, which then would demand more upkeep to avoid yet further lost opportunities. That would be most regrettable because, amidst U.S.-China great power competition, India’s interests lie in turning potential dissonance in its trade relations with the U.S. into frictionless consonance.
Digital Services Tax
In the last days of the Trump Raj, the United States Trade Representative issued its investigation results, under Section 301 of the Trade Act of 1974, concerning India’s Digital Services Tax. Guilty as charged, it said.
India’s DST, first implemented in 2016 as a 6% Equalisation Levy on digital advertising sales of companies such as Google, Apple, Facebook, and Amazon (hence the epithet, ‘Google Tax’), was seen as discriminating against American companies. Indeed, of the entities to which the levy applied, 72% were American. The USTR did not impose a remedy – that will be for President Biden’s new U.S. Trade Representative, Katherine Tai. Meanwhile, India broadened the tax base by lowering the threshold to any company earning over Rs 2 crore ($275,000) and raised the levy by 2%.
Fortunately, it won’t need to. On Feb. 26, Treasury Secretary Janet Yellen told G20 Finance Ministers the U.S. was dropping its insistence on a ‘safe harbor’ in any DST agreement. In other words, it won’t be necessary to include a provision that renders compliance with a DST regime voluntary – America will support a binding minimum tax liability. And, America would aim for a deal by mid-July.
Section 301 is the statute the U.S. applies in the trade war with China, and. Biden won office pledging to build America back better. He can’t do that ignoring the interests of America’s flagship e-commerce and I.T. companies, which have helped the U.S. build international competitive advantages in these sectors.
That’s why the USTR announced on March 26 it was preparing Section 301 trade remedies (specifically, tariffs of up to 25%) against 40 categories of Indian-origin merchandise, following its January 2021 finding that India’s DST was inconsistent with international tax principles and burdened U.S. commerce.
It’s also not in India’s interest to scare off, with its levy, small and medium-sized foreign direct investors. India needs FDI to modernize its physical and technological infrastructure. And, America could use India as a reliable partner country in its information and communications technology supply chains. Therein lies the seeds of a tax deal.
India could adjust, or waive, its levy for direct investors — for example, subsidiaries of companies incorporated in India — which function reliably in those chains, and go no further on data localisation and sharing than the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Thankfully, Raisina Hill and India, Inc. have the opportunity to plant these seeds by commenting on the USTR’s proposed action.
Second, to transform H-1Bs into an area of consonance, India should be patient about the pace of change in Washington. The February order did not mention H-1B visas, a temporary status coveted especially by Indian information and communication technology professionals. For its first two months in office, the Biden administration remained officially undecided about whether to lift the ban of its predecessor on issuing new H-1B visas. By April 1, it let the ban lapse.
India can infer from this somewhat dilated process that the Biden Administration did not regard a speedy return to the status quo ante as a high priority. Nor does it see, going forward, an increase in H-1B visas beyond the status quo as an urgent matter.
Securing jobs for U.S. citizens and permanent residents, and providing a path to citizenship for millions of undocumented migrants in the U.S., are more important. With roughly 12 million paperless persons, about 3.5% of America’s population, it’s not reasonable for India to push hard on big increases to H1-Bs. That said, India can work with companies that rely on these visas, and lobby jointly for appropriate adjustments.
In January 2021, the Trump Administration USTR found Vietnam “guilty” of currency manipulation. Again the U.S. used Section 301 to aim what it judged to be an unfair trade practice, though the Trump administration left it to its successor to negotiate a settlement with Vietnam and/or impose a remedy. In December 2020, the U.S. put India back on its Monitoring List of countries engaging in questionable foreign exchange practices. India had been removed from the list of possible currency manipulators a year earlier.
Like any country, for India to be put on the List means it meets two of three criteria established by the 2015 Trade Facilitation and Trade Enforcement Act:
- India has a “significant” bilateral trade surplus with the U.S., specifically, at least $20 billion in a 12-month period.
- India has a “material” global current account surplus of at least 2% of its gross domestic product over a 12-month period; and
- India engages in “persistent,” one-sided intervention in the rupee market, specifically, India’s net purchases of foreign exchange against Rupees total at least 2% of its GDP in at least six months of a 12-month period.
India has two incentives to avoid meeting the third criterion: President Biden must bar Indian companies from government procurement contracts, and the U.S. International Development Finance Corporation cannot finance any of their projects. India has an even stronger incentive to avoid being dubbed a “currency manipulator:” it may face a Section 301 investigation, as Vietnam did.
There’s a third incentive – White House policy: the Biden Administration’s self-declared goal to onshore manufacturing jobs can be realised (arguably) by a weaker U.S. dollar. Already, the Administration is under pressure to weaken the dollar, and Treasury Secretary Janet Yellen says she’ll fight currency manipulation.
But the strongest incentive for India to stand with America against currency manipulation is to avoid an Indo-Pacific, if not global, beggar-thy-neighbor problem.
India could find itself the victim of orchestrated depreciations, for example, with the cross Dong-Rupee rate. Indian producer-exporters would suffer. If forced to fight against the State Bank of Vietnam, or worse yet, the People’s Bank of China, the Reserve Bank of India could expend precious hard currency buying up dong or yuan.
The dramatic tonal change from the erstwhile Trump Raj to the Biden Administration could help usher in a new era of Indo-American trade relations. But, to transform dissonance to consonance, India’s biggest challenge will be to shift its style, too. It will need to overcome the stereotypical reputation among trade aficionados it earned at least as far back as the 1984-1996 Uruguay Round negotiations. It’s the country that obstinately argues every point, insists on arguing each one in international organizations in which it lauds itself as the spokesperson of the developing world, and plays off major powers against each other. The Indo-American trade relationship can be about more than apple tariffs and data storage … if India lets it.
Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, Senior Advisor to Dentons U.S. LLP, and Member of the U.S. Department of State Speaker Program. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, Dentons or any of its clients, or the U.S. government, 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.