Trade Pattern Between

India and US

INTRODUCTION
International trade is exchange of capital, goods, and services across
international borders or territories.[1]. In most countries, it represents a significant
share of gross domestic product (GDP). While international trade has been present
throughout much of history (see Silk Road, Amber Road), it’s economic, social,
and political importance has been on the rise in recent centuries.
Industrialization, advanced transportation, globalization, multinational
corporations, and outsourcing are all having a major impact on the international
trade system. Increasing international trade is crucial to the continuance of
globalization. Without international trade, nations would be limited to the goods
and services produced within their own borders.

International trade is in principle not different from domestic trade as the

motivation and the behavior of parties involved in a trade do not change
fundamentally regardless of whether trade is across a border or not. The main
difference is that international trade is typically more costly than domestic trade.
The reason is that a border typically imposes additional costs such as tariffs, time
costs due to border delays and costs associated with country differences such as
language, the legal system or culture.

Another difference between domestic and international trade is that factors of

production such as capital and labour are typically more mobile within a country
than across countries. Thus international trade is mostly restricted to trade in goods
and services, and only to a lesser extent to trade in capital, labor or other factors of
production. Then trade in goods and services can serve as a substitute for trade in
factors of production. Instead of importing a factor of production, a country can
import goods that make intensive use of the factor of production and are thus
embodying the respective factor. An example is the import of labor-intensive
goods by the United States from China. Instead of importing Chinese labor the
United States is importing goods from China that were produced with Chinese
labor.

International trade is also a branch of economics, which, together with

international finance, forms the larger branch of international economics.

International trade uses a variety of currencies, the most important of which are
held as foreign reserves by governments and central banks. Here the percentage of
global cummulative reserves held for each currency between 1995 and 2005 are
shown: the US dollar is the most sought-after currency, with the Euro in strong
demand as well.
Top trading nations

Rank Country Exports + Imports Date of

information
-  European Union (Extra-EU27) $3,197,000,000,000 2009 [26]
1  United States $2,439,700,000,000 2009 est.
2  People's Republic of China $2,208,000,000,000 2009 est.
3  Germany $2,052,000,000,000 2009 est.
4  Japan $1,006,900,000,000 2009 est.
5  France $989,000,000,000 2009 est.
6  United Kingdom $824,900,000,000 2009 est.
7  Netherlands $756,500,000,000 2009 est.
8  Italy $727,700,000,000 2009 est.
-  Hong Kong $672,600,000,000 2009 est.
9  South Korea $668,500,000,000 2009 est.
10  Belgium $611,100,000,000 2009 est.
11  Canada $603,700,000,000 2009 est.
12  Spain $508,900,000,000 2009 est.
13  Russia $492,400,000,000 2009 est.
14  Mexico $458,200,000,000 2009 est.
15  Singapore $454,800,000,000 2009 est.
16  India $387,300,000,000 2009 est.
17  Taiwan $371,400,000,000 2009 est.
18  Switzerland $367,300,000,000 2009 est.
19  Australia $322,400,000,000 2009 est.
20  United Arab Emirates $315,000,000,000 2009 est.

Regulation of international trade

Traditionally trade was regulated through bilateral treaties between two nations.
For centuries under the belief in mercantilism most nations had high tariffs and
many restrictions on international trade. In the 19th century, especially in the
United Kingdom, a belief in free trade became paramount.[citation needed] This belief
became the dominant thinking among western nations since then. In the years since
the Second World War, controversial multilateral treaties like the General
Agreement on Tariffs and Trade (GATT) and World Trade Organization have
attempted to promote free trade while creating a globally regulated trade structure.
These trade agreements have often resulted in discontent and protest with claims of
unfair trade that is not beneficial to developing countries.
Free trade is usually most strongly supported by the most economically powerful
nations, though they often engage in selective protectionism for those industries
which are strategically important such as the protective tariffs applied to
agriculture by the United States and Europe. The Netherlands and the United
Kingdom were both strong advocates of free trade when they were economically
dominant, today the United States, the United Kingdom, Australia and Japan are its
greatest proponents. However, many other countries (such as India, China and
Russia) are increasingly becoming advocates of free trade as they become more
economically powerful themselves. As tariff levels fall there is also an increasing
willingness to negotiate non tariff measures, including foreign direct investment,
procurement and trade facilitation. The latter looks at the transaction cost
associated with meeting trade and customs procedures.

Traditionally agricultural interests are usually in favour of free trade while

manufacturing sectors often support protectionism.[citation needed]This has changed
somewhat in recent years, however. In fact, agricultural lobbies, particularly in the
United States, Europe and Japan, are chiefly responsible for particular rules in the
major international trade treaties which allow for more protectionist measures in
agriculture than for most other goods and services.

During recessions there is often strong domestic pressure to increase tariffs to

protect domestic industries. This occurred around the world during the Great
Depression. Many economists have attempted to portray tariffs as the underlining
reason behind the collapse in world trade that many believe seriously deepened the
depression.

The regulation of international trade is done through the World Trade Organization
at the global level, and through several other regional arrangements such as
MERCOSUR in South America, the North American Free Trade Agreement
(NAFTA) between the United States, Canada and Mexico, and the European Union
between 27 independent states. The 2005 Buenos Aires talks on the planned
establishment of the Free Trade Area of the Americas (FTAA) failed largely
because of opposition from the populations of Latin American nations. Similar
agreements such as the Multilateral Agreement on Investment (MAI) have also
failed in recent years.

Risk in international trade

Companies doing business across international borders face many of the same risks
as would normally be evident in strictly domestic transactions. For example,
  Buyer insolvency (purchaser cannot pay);
 Non-acceptance (buyer rejects goods as different from the agreed upon
specifications);
 Credit risk (allowing the buyer to take possession of goods prior to
payment);
 Regulatory risk (e.g., a change in rules that prevents the transaction);
 Intervention (governmental action to prevent a transaction being completed);
 Political risk (change in leadership interfering with transactions or prices);
and
 War and other uncontrollable events.

In addition, international trade also faces the risk of unfavorable exchange rate
movements (and, the potential benefit of favorable movements)

India-U.S. Economic and Trade Relations

After decades of strained political relations, the U.S. and Indian governments
are currently pursuing a “strategic partnership” based on numerous overlapping
interests, shared values, and improved economic and trade relations. India is in the
midst of a rapid economic expansion, and many U.S. companies view India as a
lucrative market and a candidate for foreign investment. For its part, the current
Indian government sees itself continuing the economic reforms started in 1991,
aimed at transforming a quasi-socialist economy into a more open, market-oriented
economy. However, the U.S. government is concerned that India’s economic
reforms are progressing too slowly and unevenly.

Economic and trade relations between the United States and India have
experienced a number of ups and downs since India’s independence in 1947.
During
much of the 1950s and early 1960s, the United States was a leading trading partner
for India, providing the nation with about a third of its imports. However, those
economic ties quickly subsided when India fostered closer ties with the Soviet
Union
following the Indo-Pakistani War of 1965. For the next 40 years, political and
economic relations between India and the United States were rather cool.
Since 2004, Washington and New Delhi have been pursuing a “strategic
partnership” based on numerous shared values and improved economic and trade
relations.1 India is in the midst of a rapid economic expansion, and many U.S.
companies view India as a lucrative market and a candidate for foreign investment.
For its part, the current Indian government sees itself continuing the economic
reforms started in 1991, aimed at transforming a quasi-socialist economy into a
more
open, market-oriented economy. However, the U.S. government is concerned that
India’s economic reforms are progressing too slowly and unevenly.

Politically and economically, India and the United States (US) play a significant
role in the global arena. The US is India's largest export destination and also one of
the leading foreign investors in India. Further, according to a
PricewaterhouseCoopers study released in 2008, the Indian economy is estimated
to grow to 90 per cent of the US economy by 2050.

In November 2009, as part of the India-US Green partnership, the US agreed to

help India set up the National Environment Protection Authority (NEPA). The
move is part of efforts to strengthen cooperation and partnership between the two
countries on environment and climate-related issues.

Moreover, US fund houses are showing great confidence in the Indian economy. In
August 2009, they launched five more India-specific exchange-traded funds
(ETFs) to tap India's growth potential.

On other fronts too, India and the US continue to enter into agreements. In July
2009, they concluded three agreements including the creation of a science and
technology endowment fund and a technical safeguard agreement for the launch of
civilian satellites incorporating US components.
On Prime Minister Dr Manmohan Singh's US visit in November 2009, the Obama-
Singh 21st Century Knowledge Initiative was set up to strengthen linkages
between American and Indian universities.

Other key outcomes as a result of the visit include partnership for global peace and
security and cooperation in energy security, food security and climate change.

India and the US signed the India-US Trade Policy Forum Framework for
Cooperation on Trade and Investment in March 2010, which seeks to facilitate
trade and investment flows between the two countries. An initiative "Integrating
US and Indian small businesses into the global supply chain", which aims to
expand trade and job-creating opportunities for US and Indian small and medium-
sized companies, was also announced.

Trade
According to the Ministry of Commerce, bilateral trade between India and US
amounted to US$ 39.71 billion in 2008-09.

Imports from US form 6.11 per cent of India's total imports. India imports
fertilisers, nuclear reactors, gems and jewellery, aircraft, electrical machinery and
equipment from the US. Indian imports from the US dropped by 11.89 per cent to
US$ 18.56 billion in 2008-09 as against US$ 21.02 billion in 2007-08.

Exports to the US form 11.41 per cent of India's total exports. India mostly exports
gems and jewellery, articles of iron or steel, electrical machinery and equipment,
apparel and clothing accessories to the US.

During 2008-09, merchandise exports from India to the US went up by 2.02 per
cent to reach US$ 21.14 billion against US$ 20.73 billion in 2007-08.

Between April and September 2009-10, India has exported goods worth US$ 8.94
billion to the US, while it has imported goods worth US$ 7.43 billion during the
same period.

According to a study released by the Confederation of Indian Industry (CII) in

November 2009 titled 'India and the United States: Trade and Investment Analysis'
the Indo-US services trade is likely to grow to US$ 150 billion by 2015.

US Investments in India
India's rapidly expanding economy along with a booming consumer market and
easy availability of skilled personnel has been instrumental in attracting several
American companies to invest in India. The US is the third largest contributor of
foreign direct investment (FDI) in India. The overall FDI flow into India from the
US during April 2000-February 2010, according to the Department of Industrial
Policy and Promotion was US$ 8.21 billion. During 2008-09, FDI inflow from the
US was US$ 1.80 billion. FDI inflow between April to February 2009-10 was US$
1.88 billion.

After companies like Microsoft, Intel, IBM, Dell, Citigroup, J P Morgan and
Morgan Stanley, many other US companies are also planning to enter the Indian
market with big investments.

 In May 2010, US-based Abbott Laboratories bought Piramal Healthcare's

formulation business for US$ 3.63 billion.
 USA's biggest independent tower firm American Tower Corp (ATC) in
February 2010, agreed to acquire 4,450 towers of Essar Telecom
Infrastructure (ETIPL). The purchase estimates an enterprise value of US$
431.4 million for ETIPL.
 BorgWarner Inc, a US based auto component and systems manufacturing
company with presence in 18 countries, has established its Indian
manufacturing facility at Sipcot Industrial Park at Sriperambadur near
Chennai. Set up on a 6.3 acre campus at a cost of US$ 6.6 million, the plant
will have an annual capacity of 300,000 assemblies.
 US-based Hospira has bought Orchid Chemicals & Pharmaceuticals'
injectables business for around US$ 400 million

Indian Investments in the US

India has emerged as the second fastest growing investor in the United States after
the UAE between 2004 and 2008, according to Under Secretary of State for
Economic, Energy and Agricultural Affairs Robert D Hormats. Between 2004 and
2008, India accounted for 64 per cent of the foreign direct investment in the US.

According to data released by the US Treasury Department, India's holdings

amounted to US$ 29.6 billion in December 2009. The holdings were higher than in
the corresponding period of the previous year by US$ 400 million.
Besides the Reserve Bank of India (RBI), institutions that invest in US Treasuries
include the General Insurance Corporation of India, foreign branches/subsidiaries
of domestic banks and domestic mutual funds that are permitted to invest in
foreign securities.

Some recent investments include:

 In April 2010, information technology company Rolta acquired US-based IT
consulting firm OneGIS for an undisclosed amount.
 Inox Group's venture, Inox India, has acquired US-based Cryogenic Vessel
Alternatives (CVA), the world's largest cryogenic transportation equipment
maker.

Road Ahead
There are several areas where there is abundant scope to further improve economic
cooperation between India and the US. Opportunities for progress exists especially
in areas like communication infrastructure, IT, telecom, IT-enabled services, data
centres, software development, and other knowledge industries such as
pharmaceuticals and biotechnology.

According to a CII report titled 'India-US Economic Relations: The Next Decade'
released in June 2009, bilateral trade between India and the US could increase
eight fold to US$ 320 billion in 2018 from US$ 42 billion in 2007-08.

Exchange rate used:

1 USD = 45.51 INR (as on March 2010)
1 USD = 46.88 INR (as on May 2010)

U.S., India Trade Relationship Gets Some Much

Needed Attention
Perhaps unbeknownst even to the most avid follower of U.S.-India relations, the
seventh annual U.S.-India High Technology Cooperation Group (HTCG) meetings
will be held in Washington this Monday and Tuesday.

There is much to celebrate. U.S.-India trade has nearly tripled from $13.5 billion in
2001 to $37.6 billion in 2009. Last year, high-tech products accounted for more
than 13 percent of total bilateral trade and nearly 25 percent of all U.S. exports to
India.
Despite these successes, complacency has plagued recent HTCG discussions. Vital
but thorny issues have been routinely glossed over and tough discussions
conveniently postponed. In reality, the U.S.-India trade relationship requires more
attention, from both sides.

The current trend must change: the United States and India must take a roll-up-
your-sleeves approach to address barriers to bilateral high-tech trade.

Conceived in 2002 out of President George W. Bush and Prime Minister Atal
Bihari Vajpayee’s vision for closer U.S.-India cooperation, the HTCG was
instituted to enhance bilateral high-tech trade and to promote confidence building
in the trade of sensitive goods and technologies. Co-chaired by the U.S.
Department of Commerce’s undersecretary for the Bureau of Industry and Security
(BIS) and the Indian Ministry of External Affairs’ foreign secretary and in
partnership with the U.S.-India Business Council, the Federation of Indian
Chambers of Commerce and Industry, and Confederation of Indian Industry, the
HTCG is a two-day conference in which U.S. and Indian industry representatives
meet to discuss impediments to bilateral trade and provide recommendations to
their governments, which then subsequently take up these recommendations and
other bilateral issues. Over the years, the HTCG has included discussions on
defense and strategic trade, biotechnology and life sciences, nanotechnology, and
information technology. This year, there will be talks on these areas as well as civil
aviation and industry meetings on civil nuclear issues.

As this is the first HTCG of the Obama administration and Prime Minister
Manmohan Singh’s re-elected government, the conference presents a prime
opportunity to discuss long-standing issues important to the U.S.-India
relationship, specifically export controls, defense trade, and civil nuclear
cooperation.

U.S. Export Control Policy: There have been repeated calls for the United States
to relax export controls toward India to take into account the transformed bilateral
relationship. In brief, the United States maintains some unilateral controls on
exports to India based on a number of reasons, including historic nonproliferation
concerns. In addition, some Indian entities are on the “Entity List,” which invokes
special licensing requirements for entities whose activities have been deemed to
increase the risk of diversion to weapons of mass destruction programs and to pose
other threats to U.S. foreign policy interests. To put export controls into context, in
1999, 24 percent of total U.S. exports to India required a “dual-use” license from
BIS, today that number is less than 0.2 percent. While this number appears small, it
is impossible to quantify trade that is precluded due to misperceptions over the
reach of U.S. export controls.

Reportedly, the White House has already tabled a proposal to revise U.S. export
control policy toward India. BIS Assistant Secretary Kevin Wolf is slated to speak
at the HTCG and may shed more light on what has been proposed. The Obama
administration should be commended for taking up this unfinished business of the
Bush administration: U.S. export control policy should take into account India’s
status as a strategic ally. However, U.S. proposals should be matched with
reciprocal commitments. India should shed its reluctance to join the multilateral
export control regimes, provide substantiation for why its listed entities should be
removed from the Entity List, and be more aware of U.S. political sensitivities with
respect to certain U.S. licensing requirements. The HTCG should provide a forum
for meaningful discussions on these issues and both sides should be prepared to
make concrete commitments to move the process forward.

Defense Trade: Since the completion of the 2005 U.S.-India defense framework,
military-to-military contacts and joint exercises have been on the rise along with
defense trade. India is expected to expand its military and homeland security
capabilities, spending at least $30 billion in acquisitions over the next five years,
rising to more than $100 billion in the next ten years. U.S. defense companies are
well-placed to supply this demand. India recently purchased six Lockheed Martin
C-130J Super Hercules Airlifters and the Department of Defense recently notified
Congress of a potential upcoming sale of 145 M777 light-weight Howitzers. U.S.
companies are also among the finalists for the Indian government’s purchase of a
fleet of Multi-Role Combat Aircrafts.

While defense procurement continues to be an important element of the U.S.-India

strategic relationship, there are issues which are hindering more robust trade. First,
the Indian government has not yet signed the Communications Interoperability
and  Security Memorandum of Agreement (CISMOA), the Logistics Support
Agreement (LSA), and the Basic Exchange and Cooperation Agreement for
Geospatial Cooperation (AGC), which are crucial to providing mutual logistical
support and enabling the exchange of sensitive communications and equipment.
Prime Minister Singh faces domestic opposition to these agreements over
sovereignty concerns. The United States has historically been dogmatic about such
agreements, but they are required under U.S. law in order to sell top-flight U.S.
military equipment abroad and enhance cooperation between military forces. The
United States and India should conclude these agreements to pave the way for
enhanced technology and information sharing, and closer cooperation on
counterterrorism and regional and global security efforts.

Second, the Indian government maintains a restrictive “offset” policy which

requires that foreign firms selling defense products to India must re-invest up to 30
percent of their investment in India. The purpose of offsets is to enhance
indigenous military production capabilities. However, because of historic state
involvement in Indian defense production, the nascent private Indian defense
production base is not yet equipped to support this magnitude of investment. The
Indian government should consider adopting international best practices for offsets
by rethinking the scope of where offsets may be reinvested, making the policy
more practical for all parties.

Civil Nuclear Cooperation: The landmark U.S.-India Civil Nuclear Agreement—

the crown jewel of the U.S.-India strategic partnership—was signed in October
2008, but remains unimplemented due to a number of unresolved bilateral issues.
French and Russian nuclear companies have been the beneficiaries of this delay, at
the expense of U.S. companies, and have progressively secured a larger market
share in India. These outstanding issues must be addressed without delay so that
the U.S. efforts in forging the Civil Nuclear Agreement actually yield benefits for
U.S. industry. There will be industry meetings on civil nuclear cooperation during
the HTCG, but no government meetings. Consequently, the governments should
refer the industry recommendations to the appropriate forum for immediate action.

First, the U.S. Department of Energy (DOE) is required to authorize U.S.

companies to participate in most aspects of civil nuclear activities abroad through
the Part 810 process. Applications to provide nuclear products and technologies to
India have been submitted to DOE, but the Indian government has balked at
providing the required nonproliferation assurances, claiming that these were
already provided under the Civil Nuclear Agreement. These Part 810 assurances
are required under U.S. law and were known to the Indian government in advance.
India should look to provide these Part 810 assurances as soon as possible.

Second, a U.S.-India agreement on reprocessing spent nuclear fuel is also pending

and needs to be completed in short order. Negotiations began in July 2009 and a
number of deadlines have passed. Moreover, the Indian Department of Atomic
Energy has apparently taken the position that the reprocessing agreement is a
prerequisite to doing business with any U.S. nuclear company. This policy includes
U.S. nuclear fuel suppliers, who do not require Part 810 assurances to operate in
India. The Indian government has instead concluded nuclear fuel supply
agreements with France, Russia, Canada, Kazakhstan, and others, supplanting most
potential business opportunities for U.S. companies.

Third, India is neither party to any international convention on nuclear liability nor
has any domestic laws which limit nuclear damage liability for suppliers of nuclear
materials—a requirement for the participation of U.S. companies in the Indian civil
nuclear market not just of U.S. suppliers, but all private-sector companies,
including Indian companies. There is currently nuclear liability legislation pending
in the Indian parliament, but it is facing stiff political opposition. In addition, India
has yet to join the Convention on Supplementary Compensation for Nuclear
Damage, which will provide added liability protections. French and Russian
companies have not required the Indian government to take action on nuclear
liability, likely because of their respective home government support. The cost of
this time delay has again been borne by U.S. suppliers and must be addressed.

The issues discussed above have persisted for years and are impeding significant
opportunities for the expansion of U.S.-India high-tech trade. The HTCG can
provide a re-energized forum in which these and other bilateral irritants can be
taken up and resolved. The U.S.-India strategic partnership as a whole will be the
beneficiary.