US now India’s Largest Trade Partner FY 21 - 22

Keep reading about know more about how the trade synergies match between two prolific economies and the way IPEF dovetails into this framework.

In an interesting development for India, the United States of America (USA) has surpassed China as its largest trading partner for the year 2021 – 22, with two-way bilateral trade valued at $119.42 billion.

Bilateral trade between the US and India amounted to $80.51 billion in 2020 – 21, about $40 billion lower. Impressively, India enjoys a decent trade surplus of $32.8 billion with the US.

Though pushed to the second place by the US, bilateral trade between China and India is not far behind at $115.42 billion in the year under review, a gap of mere $4 billion when juxtaposed with the world’s largest economy. In 2020 – 21, Sino - Indian trade amounted to $86.4 billion.

Unlike with the US, India suffers a massive trade deficit of $72.91 billion with China, which rose from $44 billion witnessed in 2020 – 21. India’s Ministry of Commerce and Industry shared these statistics recently.

However, we must be cognizant of the fact that both 2020 – 21 and 2021 – 22 were pandemic-plagued years wherein all trade was haywire at a the global level.

China topped trade with India for over six years

Despite the drop, it must be noted that China topped bilateral trade with India for almost half a dozen years, stretching from 2013 – 14 to 2017 - 18 and again in 2020 – 21.

Prior to China, it was the United Arab Emirates (UAE), that hosted a large Indian diaspora. The UAE continues to be a major source of remittances for South Asia’s largest economy.

Indo-Pacific Economic Framework for Prosperity (IPEF)

On May 23rd, 2022, only a few days before the US topped bilateral trade with India, President Joseph Biden launched the IPEF in Japan, collaborating with a dozen countries, including India to strengthen America’s ties with the critical region of the Indo-Pacific.

With this initiative, the US aims to define the next decades of technological innovation and the global economy as well, including creating a stronger, fairer, resilient economy for families, workers, and businesses in the US and the Indo-Pacific.

India, a key member of the IPEF, will be joined by the US, Australia, Brunei, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. IPEF members account for 40 per cent of the world’s GDP.  

Through IPEF, the US, an Indo-Pacific economic power, will propel US economic leadership in the region to bolster American workers and businesses and the people of the Indo-Pacific region.

One of the major objectives through this economic grouping for the US is to tackle inflation, lower costs and power supply chains to be more resilient in the long term, considering the supply chain chaos suffered by numerous industries following China’s zero-Covid strategy, world’s leading supplier.

As factories in Shanghai and several other crucial Chinese cities shut down, owing to stringent zero-Covid rules, several industries across the world choked while the havoc wreaked by the disruption of chip supplies to the global automobile industry is a known pain point, including in India.

IPEF aims to protect the US industries from costly disruptions which will eventually aggravate to sting customers with pricier products.

US invested nearly $1 trillion in the Indo-Pacific

Foreign Direct Investment (FDI) from the US into the Indo-Pacific region nearly amounted to $1 trillion in 2020, doubling in the past decade. The US is a leading exporter of services to this region while trade with it also sustains three million jobs in the US, including the reciprocal attraction of up to $900 billion FDI.

As per White House’s analysis, Indo-Pacific, a region which houses 60 per cent of the world’s population is forecast to fuel global growth for the next three decades.

Along with its IPEF partners, the US wants to innovate, especially in the disciplines of clean energy, digital and technology sectors in the coming decades, even as all of them strive to fortify their economies to counter threats such as corruption, fragile supply chains and tax havens.

According to the US, the earlier models of economic engagement or trade pacts failed to properly face these headwinds, resulting in vulnerabilities to businesses and workers.

The IPEF framework will hinge on the four key pillars of ‘Connected Economy’, ‘Resilient Economy’, ‘Clean Economy’ and ‘Fair Economy’.

As part of ‘Resilient Economy’, the US will seek first-of-their-kind supply chain commitments which can better anticipate and arrest disruptions in supply chains, including setting up early warning systems, mapping critical mineral supply chains and coordinating diversification efforts among others.

Likewise, under ‘Connected Economy’ pillar, the US will pursue high standard rules in digital economy, seize opportunities and address concerns in the digital economy

Under the clean economy pillar, the US will seek first-of-their-kind commitments on infrastructure, decarbonization and energy. High ambition targets to address the climate crisis, including in the fields of renewable energy, energy efficiency standards, carbon removal and methods to counter methane emissions.

India – US trade to rise

Amid deepening ties between India and the US at various levels and fields, it is expected that bilateral trade between the two countries will rise. A few days ago, Indian Prime Minister Narendra Modi personally travelled to Japan to ink the Indo-Pacific Economic Framework for Prosperity (IPEF) pact in the presence of US President Joseph Biden.

India’s accession to IPEF assumes significance in the light of the South Asian giant shunning the Regional Comprehensive Economic Partnership (RCEP) less than two years ago, whose centerpiece was China along with the participation of several other countries from the Association of Southeast Asian Nations (ASEAN) and Oceania.

Trade pundits believe that India can make up with IPEF what it reportedly lost out by isolating from RCEP, such as slashing or eliminating tariffs on a plethora of goods and services as well as establishing the rules of investment, competition and safeguarding intellectual property.

As one of the founding members of the US-led IPEF, India now gets another opportunity to establish its own pivot in the Pacific as the new pact is simply bigger than a regular trade deal and also extends to anti-corruption and taxation.

Incidentally, all the new members of the IPEF, other than the US and India, are members of the RCEP. Notably, China, which is the largest trade partner of several ASEAN members, is not a member of the IPEF grouping.

According to India’s External Affairs Minister S. Jaishankar, IPEF syncs with India’s ambition of forging closer relations with Southeast Asia by constructing infrastructure through Bangladesh and Myanmar.

Besides ushering in some standardization across sectors, Rajan Katoch, a former bureaucrat noted that IPEF can also power India to procure some supply lines to be located in the country.

IPEF dovetails with India’s trade ambitions

At a time when India aspires to emerge as a $5 trillion-strong economy, IPEF membership bodes well and dovetails with this target. India’s IT-BPM industry, startups, e – commerce sector, Saas and deep tech solutions, digital engineering and connected solutions, IoT and inroads in Artificial Intelligence (AI) and Machine Learning (ML) align with the IPEF’s Connected Economy pillar.

According to the National Association of Software and Services Companies (NASSCOM), multiple US-headquartered MNCs entered India to set up their Global Capability Centers (GCCs), especially in top tech cities such as Hyderabad and Bengaluru. Tech powerhouses such as Google, Facebook, Apple, Microsoft, Amazon and others have set up their largest offices outside the US in India.

Key focus areas of new GCCs encompass blockchain, natural language processing, ML, cybersecurity and conversational AI while GCCs also emerged from the Banking, Financial Services and Insurance (BFSI) and Automotive sectors.

Pegged at a market size of $40 billion, GCCs, which are into innovation, clocked a growth rate of 11.7 per cent between fiscals 2015 and 2020.

Meanwhile, the Indian IT industry has already crossed the $200 billion revenue mark in February 2022 to reach $227 billion while the growth target has been set at $350 billion revenue by FY26.

Similarly, India’s clean and renewable energy targets match with the IPEF’s Clean Economy pillar. The South Asian giant’s National Renewable Energy Laboratory (NREL) has teamed up with the US Agency for International Aid (USAID) to bolster deployment of advanced energy systems in developing countries.

This partnership entails renewable energy integration, grid modernization, distributed energy resources and storage, efficiency, power sector resilience, including data and analytical tools required for supporting successful energy transitions.

Some fruits of this collaboration include developing a comprehensive training programme to enable Colombia’s energy sector workforce to integrate rising volumes of variable renewable energy, leading advanced energy partnership for Asia, offering technical assistance to the Government of Bangladesh to propel renewable energy and deploying mini-grids for sustainable economic growth in Haiti among others.

Besides this collaboration, India itself had a target of installing 175 GW of renewable capacity by 2022, comprising 100 GW of solar power and 60 GW of wind power. Likewise, India, in association with France conceived the International Solar Alliance (ISA) as a collaborative platform to promote increased deployment of solar energy technologies.  

In addition to the matching of synergies in futuristic technologies between the two countries, both are prolific trade partners with India being the 12th largest goods export market for the US in 2019, pre-pandemic times, according to the Office of the United States Trade Representative (USTR).

Major American exports to India include mineral fuels, precious metals, stones and diamonds, aircraft, machinery, organic chemicals, tree nuts, cotton, fresh fruit, dairy products and pulses.

Under the services sector, major exports to India in 2019 were intellectual property, comprising computer software, audio and visual related products, travel and transport sectors.

Likewise, India was America’s 10th largest supplier of goods imports in 2019. Top Indian exports to the US were precious metals, stones and diamonds, pharmaceuticals, machinery, mineral fuels, organic chemicals, spices, rice, essential oils, processed fruit and vegetables and other vegetable oils.

Leading Indian services exports to the US include telecommunications, computer and information services, research and development and travel sectors. The US and India are poised to scale greater heights in trade in the near future.