India, the world’s largest milk-producing nation, has traditionally restricted dairy imports to protect the livelihoods of 80 million rural households involved in the industry.

But Prime Minister Narendra Modi is trying to pull all the stops for the U.S. president’s Feb. 24-25 visit, aimed at rebuilding bonds between the world’s largest democracies. In 2019, Trump suspended India’s special trade designation that dated back to the 1970s, after Modi put price caps on medical devices, such as cardiac stents and knee implants, and introduced new data localization requirements and e-commerce restrictions.

Trump’s trip to India has raised hopes that he would restore some of the country’s U.S. trade preferences, in exchange for tariff reductions and other concessions.

The United States is India’s second-largest trade partner after China, and bilateral goods and services trade climbed to a record $142.6 billion in 2018 (all figures US$). The United States had a $23.2 billion goods trade deficit in 2019 with India, its ninth-largest trading partner in goods.

India has offered to allow imports of U.S. chicken legs, turkey and produce such as blueberries and cherries, Indian government sources said, and has offered to cut tariffs on chicken legs from 100 per cent to 25 per cent. U.S. negotiators want that tariff cut to 10 per cent.

The Modi government is also offering to allow some access to India’s dairy market, but with a five per cent tariff and quotas, the sources said. But dairy imports would need a certificate they are not derived from animals that have consumed feeds that include internal organs, blood meal or tissues of ruminants.

New Delhi has also offered to lower its 50 per cent tariffs on very large motorcycles made by Harley-Davidson, a tax that was a particular irritant for Trump, who has labeled India the “tariff king.” The change would be largely symbolic because few such motorcycles are sold in India.

Trump will be feted in Modi’s home state of Gujarat, then hold talks in New Delhi and attend a reception that the hosts have promised will be bigger than the one organized for former president Barack Obama in 2015.

Enough for Lighthizer?

But it is far from clear whether India’s offers will be enough to satisfy U.S. Trade Representative Robert Lighthizer, who cancelled plans for a trip to India this week. Instead, he has held telephone talks with Indian Commerce Minister Piyush Goyal.

The U.S. dairy industry remained skeptical on Thursday that a viable deal is at hand.

“We’re always looking for market access, but in terms of India, as of today I’m not aware of any real progress going on,” said Michael Dykes, president of the International Dairy Foods Association and a member of USTR’s agricultural trade policy advisory committee.

Dykes said the U.S. dairy industry was looking for access in viable commercial quantities.

A USTR spokesman and India’s trade ministry did not respond to requests for comment.

Privacy law complications

An Indian parliament panel is reviewing a draft data privacy law that imposes stringent controls over cross-border data flows and gives the government powers to seek user data from companies.

It is not clear whether it will be passed, or in what form, but the possibilities have unnerved U.S. companies and could raise compliance requirements for Google, Amazon and Facebook.

The draft law is not part of the trade discussions, Indian officials say, because the issue is too difficult to resolve at the same time.

“The privacy and localization piece will be raised independently and in concert with the trade discussions,” said a Washington-based source with knowledge of the U.S. administration’s thinking.

Trump on Tuesday was non-committal about sealing a trade deal before his visit. “If we can make the right deal, we’ll do it,” he told reporters.

Two U.S. sources said progress had been made on proposed alterations to the medical device price caps. India’s new import tariffs on medical devices, walnuts, toys, electronics and other products on Feb. 1 surprised U.S. negotiators, however.

The new tariffs were aimed at China, which also makes medical devices, according to an Indian government source. “We have to protect our market and our companies,” the source said.

— Reporting for Reuters by Sanjeev Miglani, Neha Dasgupta and Aditya Kalra in New Delhi and David Lawder in Washington; additional reporting by Rupam Nair in Mumbai.

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Monday’s move comes as trade tensions between the United States and India mount. The U.S. is trying to rework pacts with a number of other countries as well, including China. Trump has said weak deals have cost millions of U.S. jobs and has vowed to cut U.S. trade deficits.

India played down the impact, saying it was keeping retaliatory tariffs out of its talks with the U.S., but the opposition could seize on the issue to embarrass Prime Minister Narendra Modi ahead of general elections this year.

Trump has repeatedly called out India for its high tariffs, and U.S. trade officials said scrapping the concessions would take at least 60 days after notifications to Congress and the Indian government.

“I am taking this step because, after intensive engagement between the United States and the government of India, I have determined that India has not assured the United States that it will provide equitable and reasonable access to the markets of India,” Trump told congressional leaders in a letter.

India is the world’s largest beneficiary of the Generalized System of Preferences (GSP), which dates from the 1970s, and ending its participation would be the strongest punitive action the United States has taken against the country since Trump took office.

Reuters last month reported the planned U.S. action, which comes as the United States and China appear close to a deal to roll back U.S. tariffs on at least $200 billion worth of Chinese goods (all figures US$).

“Discussions are on with the United States, and given cordial and strong ties, (we are) keeping retaliatory tariffs out of it,” Commerce Secretary Anup Wadhawan said in New Delhi.

The preferential treatment brought India an annual “actual benefit” of just $190 million, he told reporters.

Of the 3,700 products covered, India used the concession for just 1,784, Wadhawan added.

“The benefit to industry is low, U.S. tariffs are already low,” said another government official, who spoke on condition of anonymity. “GSP is more symbolic of the strategic relationship, not in value terms.”

Still, some expect the move to ratchet up pressure on India to address U.S. concerns.

“The Indian government hasn’t engaged enough to address market access issues,” said Chuck Grassley, a Republican from Iowa and chairman of the Senate finance committee. “For the sake of the many Americans and Indians who relied on GSP benefits, I hope that India will work to quickly address these legitimate concerns.”

Political price

Despite its limited impact, the GSP removal could hurt Modi’s Hindu nationalist ruling party ahead of the election, expected in the next couple of months.

“It can become a political issue in an election year,” said the official who declined to be named.

Modi’s own relationship with Trump has been limited, with their meetings less frequent than those of Chinese President Xi Jinping with Trump, for example.

Trade ties with the United States suffered after India adopted new rules on e-commerce curbing how internet retail majors Amazon.com and Walmart-backed Flipkart do business.

That followed a drive by New Delhi to force global card payments companies such as Mastercard and Visa to move their data to India and higher tariffs on electronic products and smartphones.

In 2017, the U.S. protested against India’s decision to cap prices of medical devices.

Last week, India delayed until April 1 higher tariffs on some U.S. imports announced in response to a U.S. refusal to exempt it from new steel and aluminum tariffs.

“Despite intensive engagement, India has failed to take the necessary steps to meet the GSP criterion,” USTR said. The agency estimates the United States ran a goods and services trade deficit of $27.3 billion with India in 2017.

India’s top GSP exports to the United States in 2017 included motor vehicle parts, ferro alloys, precious metal jewellery, building stone, insulated cables and wires, said business grouping the Confederation of Indian Industry.

“Some industries which are highly export-oriented to the American markets would be impacted, like pharma or textiles,” said Siddharth Sedani, equity advisory head at brokerage Anand Rathi.

India’s falling trade deficit with the United States is estimated to have narrowed by more than $4 billion in 2018, the trade ministry said, adding it would fall further on growing demand for energy and civilian aircraft.

— Reporting for Reuters by Eric Beech and Neha Dasgupta; additional reporting by Manoj Kumar, Krishna N. Das and Aditya Kalra in New Delhi and Chris Prentice in New York; writing by Sanjeev Miglani.

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