Geithner’s Veiled Threat to Swap India for China

http://www.reuters.com/article/idUSTRE6350Z720100406

Here’s a new trade strategy twist.  As reported in the above-linked Reuters article, Treasury Secretary Tim Geithner proposes that India and the U.S. work together to rebalance global growth.  The implication is clear:  the U.S. is threatening to steer imports away from China and toward India.  While this might be an effective strategy for applying leverage to get our way with China, we’d simply be trading a terrible trade deficit with China for an even worse one with India. 

U.S. trade with the two nations is an interesting contrast.  While imports from China have exploded in the past decade, trade with India has remained stuck in low gear – a tiny fraction of our trade with China.  That’s a bit surprising when you consider that India is a long-time ally of the U.S., was once ruled by Great Britain, and has just as large a population (known to corporations as consumers), making it an even more hospitable environment for American businesses than China.

The biggest reason that trade with India has floundered is that it was never a communist super-power and a threat to the U.S. like China.  With the death of Mao and the ensuing acceptance of capitalism by the new generation of Chinese leaders, the U.S. and other western nations fell all over themselves in a bid to use trade to defuse tensions and make China a responsible member of the global community.  India (like most other undeveloped nations) was left holding the bag.  So rapid and thorough was the shift of manufacturing jobs to China that there is little left carrying “made in the U.S.A.” labels whose manufacturing can be outsourced to India. 

It is interesting that Geithner seems to believe that a bigger trade relationship between the U.S. and India could blossom in a balanced way that trade with China could not.  With a population density 2-1/2 times that of China, India is even less capable of absorbing imports from the U.S. than China (because overcrowding has even more seriously eroded their potential domestic per capita consumption), while their even worse excess labor capacity makes them that much more of a threat to American manufacturing.  Only tariffs or import quotas imposed on India would have any hope of assuring balanced trade with the U.S.  Would India be willing to subject themselves to such restrictions while China is not?  Why?  And would the U.S. even be smart enough to insist on them?  We haven’t demonstrated such trade policy savvy for the last six decades.  Why should we believe we’d start now? 

It’s an interesting trade policy twist, but one that seems to be more of a transparent ploy to make China squirm a little (something we’d all love to see) than a serious change in trade policy.  Time will tell, but I wouldn’ t take it very seriously.