News in Charts: Driving increased India-US trade flows

US President, Donald Trump, was in India this week, on an official state visit. India’s Prime Minister, Narendra Modi, laid out the red carpet, with over 100,000 attending the Motera cricket stadium to hear Mr Trump speak. Both countries have a unique claim as beacons of democracy: the US is said to be the world’s oldest, and India the world’s largest. Meanwhile, the US appears to have entered an era of strategic rivalry with China, driven partly by different political models. As a result, access to each other’s market has become more limited, and may stay that way for some time. Gross Sino-US trade flows have already dropped from an annual record of $660 billion in 2018, to $559 billion in 2019. As a large emerging economy, and having a more similar political model, India is on the list of potential beneficiaries from trade diversion. However, there has been little sign of that so far. Over the past two years, when Sino-US trade flows fell by $101 billion, gross India-US trade flows increased by just $4 billion, from $88 billion to $92 billion.

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India has a reputation for being protectionist when it comes to trade, and there is some basis for that view. The weighted average tariff rate applied on India’s imports is 5.8%, which is higher than its equivalent in China (3.8%) or the world average (2.6%). However, it is substantially lower than was the case in 1999 (28.5%), indicating less protectionism than before. Moreover, tariffs are just part of the story. India ranks a little better than China when it comes to non-tariff barriers, such as product regulations or import quotas. Albeit both are well below US levels, something that the current US administration is trying to change. And while, no trade deal was announced on this visit. The two leaders did at least agree to unwind some of the tariffs that have been put in place recently, as well as begin formal negotiations over a more comprehensive agreement that would include both tariffs and non-tariff barriers.

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Looking further ahead, even if Sino-US trade tensions remain elevated and the US and India reach a comprehensive trade agreement, it is hard to imagine India catching up with China’s total trade flows rapidly. There are many things that help to drive trade between countries: contiguous borders, trade agreements, even sharing a common language. Among the two most important are: distance and GDP. There is nothing India can do about its distance from the US (a little further than China’s if you measure the distance between each country’s largest city). There are steps that it can take to increase its economic weight. Annual India GDP totals $3 trillion. India GDP is around one-fifth of China’s. That figure has declined for most of the past few decades as growth in China outpaced that in India. There has been a modest upwards drift since 2015 with only a gentle increase expected over the next few years. Part of the reason for China’s historic fast pace of economic growth was increased trade with the world. Indeed, across countries, openness to trade flows is associated with gains in productivity and therefore output. With that in mind, future US-India trade flows may depend on more than the mooted trade agreement between those countries. To the extent that India’s trade deals with other countries boost its trade with them and then its GDP, they will help to determine US-India trade flows too. It might also be worth extending an invitation to a senior EU delegation.

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