Transfin.

India-US Trade War: The Trump Administration Wants India to Import More Harley-Davidson Bikes

US President Donald Trump recently wrapped up his first state visit to India. Attending a mega rally in Ahmedabad's Motera Stadium, touring the Taj Mahal and holding talks in New Delhi, Trump declared that relations between India and the US had reached historic strength: "It has never been as good as it is right now."

 

The reality, though, is more complex. India-US relations have come a long way from Cold War-era distrust. A mixture of geopolitical considerations, mutual benefits and democratic convergence have enabled the two countries to become better friends in recent years.

 

But beneath the surface, tensions remain. Especially when it comes to trade.

 

Can parity in bilateral trade between an economic superpower and a developing nation be achieved in terms of trade balance? An economic superpower like USA is not a low-cost manufacturer of bread and butter items required by a developing nation like India. The Trump administration is not comfortable with its trading partner nations running large trade surpluses with USA. In simplistic terms, if a country exports 'x' amount of goods to US, Trump administration expects such country to also import 'x' amount of goods from USA.

 

This is how the India US trade war of the Trump era emerged. And the best symbol of these trade battles is the unlikely Harley-Davidson bike.

 

The Trade Relationship Between India and the US

 

In 2018, India exported about $54bn worth of goods to USA comprising medicines, chemicals, hosiery and linens, leather goods, diamonds, metals and minerals, animal products, vegetables, plastics and rubbers, food products like shrimp, and engineering goods like bearings, gears etc. In return, India imported $34bn worth of goods from USA comprising machinery, gold, diamonds, chemicals, mineral products such as coal, briquettes, petroleum coke, agriculture products such as almonds, walnuts, cashews, apples, wheat and peas, instruments, paper products, civilian aircraft and parts, oil and gas and other items like Harley-Davidson bikes.

 

India also exported $30bn worth of services to USA and imported $25bn worth of services from USA in 2018. Thus India had a trade surplus of about $20bn in goods and $5bn in services with USA in 2018. Previously, bilateral trade deficits were not a major concern for USA. Under the America First policy of the Trump administration, bilateral trade deficits have come under closer scrutiny. In 2017, President Trump issued an executive order requiring a study of the United States’ most significant trade deficits with other nations. In 2019, India was the eleventh largest trade-surplus nation with USA running a trade surplus of about $23bn. China tops the list with a trade surplus of about $323bn with USA.

 

Indian negotiators have proposed to reduce India's trade surplus by increasing purchases of US products like liquefied natural gas, oil and aircraft. But US negotiators expect India to increase its imports in some other items. Unlike China, USA is not a low-cost global factory. India imports most of its necessary requirements such as electronic gadgets, smartphones, machines, engines, pumps, organic chemicals, fertilizers, iron and steel, plastic goods etc. from the low-cost producer China. India ran a trade deficit of $57bn with China in 2018.

 

In March 2018, the Trump administration unilaterally imposed a 25% tariff on steel imports and 10% tariff on aluminium imports, invoking national security concerns, under Section 232 of the Trade Expansion Act of 1962. This has adversely affected steel and aluminium producers outside USA, including India. President Trump had also signed an executive order in November 2018 that ended duty-free status and special benefits for 50 items. India’s retaliatory tariffs imposed in 2019 are limited in scope, which included US farm products like almonds, walnuts, cashews, apples, wheat and peas. This has become another contentious issue between the two nations. India is the largest importer of California almonds for about $600m in 2018, according to the California Almond Board. The USA Dry Pea & Lentil Council described pulses exports as “devastated” by trade wars since 2017.

 

Long Shots and Missed Opportunities

 

A trade deal between India and the US is still a distant dream. Negotiators have been at the table for months now, hammering out the details, but unable to reach a middle ground. A breakthrough was rumoured numerous times, notably when Prime Minister Narendra Modi visited Houston for the "Howdy Modi" event and during Trump's recent visit. Far from it, Trump has said the deal between the US and "tariff king" India could take months longer and be signed only after the US Presidential election in November this year.

 

The tit-for-tat trade tensions are unfortunate, especially as they come at a precarious time for the global economy, which faces further doldrums as the coronavirus outbreak spreads across the world.  The tensions are unfortunate not only because it hurts relations between the world's two largest democracies but also because the Indo-US relationship could act as a bulwark against a rising China. The US-China trade war has also seen American firms scrambling to diversify their manufacturing bases and India with its cheap labour and potential could be an attractive alternative. India, meanwhile, has chosen to stay away from regional multilateral ventures like the Belt and Road Initiative and the Regional Comprehensive Economic Partnership (RCEP). It needs a successful trade treaty to help boost its ailing economy.

 

A trade deal would have been a win-win for both nations.

 

The Harley-Davidson Angle

 

Harley-Davidson motorcycles have become a sensitive issue in the trade negotiations. The tariffs on the more expensive and larger variety of Harley-Davidson motorcycles fell to 50% (from earlier 75%) after Donald Trump discussed the issue with Narendra Modi in 2018, but Trump had said that 50% is “still too high and unacceptable.” To make the bikes more affordable, Harley-Davidson has also built an assembly plant in India for the less expensive models, where imported parts from USA are assembled. Import of parts are subject to much lower duties and thus Harley- Davidson saves in tariffs for such less expensive models assembled in India. A completely-knocked down (CKD) unit attracts only 15% duty. 

 

Harley-Davidson bike prices in India start at ?5.33L ($7,356) for Harley Davidson Street 750, which is the cheapest model. The most expensive Harley Davidson bike CVO Limited is priced at ?50.53L ($69,745). Harley-Davidson motorcycles, even the less expensive models, are beyond the affordability of most Indian households. Harley’s India sales dropped from 4,708 units in FY2015-16 to 2,676 units in FY2018-19. It is a misconception that further reduction in tariffs can boost Harley’s India sales.

 

The bike that has indulged Americans for more than a century has been a sticking point between India and the US for a decade. In fact, Trump has made the motorcycle a symbol of the India US trade war as well against several countries. Even a zero-duty regime will not boost Harley's business in India, but this won't deter Trump harping on about it. The bike's iconic status makes it an excellent means to drive home Trump's message to voters in the US since it has a strong recall. After all, his trade-war rhetoric won't have the same connect with the American masses if he were talking about aluminium instead of Harley.

FIN.

Funny how a bike can be a symbol of a brutal trade war, right? In this mad world, it's very difficult to connect the dots...unless you're a Quiz Wiz! How well do you know the top news of the last week? Have a go at Quiz Knock, our Weekly Quiz, and connect the dots!