Why Allowing Some US Agriculture Products May Be Not A Bad Idea

The US is currently grappling with the challenge of ‘twin deficits’ — high fiscal and trade deficits. The liberal trade policies pursued by successive US administrations have benefited American consumers but also contributed to trade imbalances. 

Over the years, several countries, including China, Japan, and Vietnam, have benefited from this openness and significantly boosted their exports to the US. At the same time, many of these countries have erected tariff and non-tariff barriers against US goods. 

US President Donald Trump perceives the situation as grossly unjust, uneven and inequitable, and is keen to take steps to bring back some kind of equity, fairness and parity in trading relationships.           
 
In early April, Trump set the cat amongst the pigeons by announcing stiff tariffs on goods imports into the US and retaliatory tariffs on countries that impose tariffs on US goods. He was particularly harsh on China by proposing a whopping 145% tariff. To be sure, China enjoys a $270 billion trade surplus with the US. There are, however, incipient signs that Trump may soften his rigid stand against China.  

Tariffs have created huge uncertainty in the global markets. A looming trade war can potentially hurt global growth, elevate inflation, lead to supply chain disruptions and hurt consumer interests. Shortly after announcing the reciprocal tariffs, Trump suspended them for 90 days and has since extended them till August 1 to facilitate negotiated agreements with trading partners.  

How the countries have responded can be broadly categorised into three general approaches. 

First, direct retaliation, as China has done by imposing tariffs on US-origin goods. China is targeting US-origin agri-commodities, including sorghum, soybean, pork, beef, chicken, wheat, corn, and cotton. 

Second, threaten retaliation like what the European Union has proposed. Third, negotiations to avoid retaliation. Japan and Vietnam are examples of this.

One can add a fourth category – tactical accommodation. India appears to be pursuing this strategy in its own self-interest. 

Indian Approach
India and the US are currently negotiating a Bilateral Trade Agreement. India runs a $45 billion goods trade surplus with the US, which may embolden the US to arm-twist by targeting India’s textiles, seafood and gem and jewellery exports. As these goods are labour-intensive, India can ill-afford US tariffs on these goods, which may result in lower exports and adversely affect jobs and export earnings.

In the bargain, the US will force open India’s agricultural markets. China has tariffs on US exports of commodities like soybean and cotton. As China will import less of US goods, Washington will try to find other markets. India is an easy target. 

The US will push for reduction or elimination of import duties on a range of US commodities like lentils, dry fruits and cotton. In addition, the US will seek to lift non-tariff barriers to allow the import of genetically modified crops like soybean and corn. 

Indian policy of not allowing the import of GM seeds/crops lacks a scientific basis. India has been cultivating GM cotton (Bt Cotton) for over two decades now. Bt Cottonseed contains a bacterium gene that seeks to repel pests like the pink bollworm. There is no evidence of any adverse effect and farmers have happily embraced this technology.  Yet, one finds a lot of misinformation about GM crops floating around in India. Activist voices have often overshadowed scientific consensus, and the government has so far lacked the political will to expand the use of GM crops in agriculture.      
 
While the current Indian policy does not encourage the import of GM crops/seeds, there is a very real possibility that the US will push to open the Indian market. Import of GM soybean on a limited scale should actually benefit India. 

Look at the facts. India imports about 3.5 million tonnes of degummed soybean oil, a semi-finished product, annually, valued at $3.5-$4.0 billion. A part of soybean oil import should be replaced with soybean raw material import. 

The move will deliver multiple benefits – utilisation of the huge idle capacity India carries in the soybean crushing industry, as well as generation of income and employment. Crushing will result in soybean oil and soybean meal. In any case, we need oil for domestic consumption, while soymeal can be used as animal feed for the growing livestock and poultry industry. Any excess meal can be exported. 

For instance, importing 5 million tonnes of soybean will give roughly one million tons of oil and four million tons of meal. Imports should be regulated and monitored. As India itself is a producer of soybean at about 12 million tonnes, a customs duty on imported soybean can be applied so that the landed cost of imported soybean is not less than the minimum support price set for farmers. The exchequer will get revenue.      

By importing 5 million tonnes soybean, India’s soybean oil import will reduce by one million tonnes.   

Indian cotton market fundamentals have tightened last two years. India has turned from being a net exporter to a net importer of cotton. Cotton import attracts a 10% customs duty. The US may force India to import more of US-origin cotton, possibly duty-free.  

For many years, the US has been trying to sell chicken legs to India, but India has resisted as there is a strong and growing domestic poultry sector. But this time, the US may succeed in cracking open the Indian market. Indians need to consume more protein.

Similarly, the US will seek to sell to India animal health products as well as corn and wheat whenever needed. Indian business houses have to brace themselves to face competition from US products.