India–U.S. Relations: History, Trade, and Security Ties

Introduction: Natural Allies with an Unnatural Distance

With a booming capitalist society, a large population, a strategic location, and an established democracy, India would be a natural ally in a region of the world where the United States has few. However, only within the past five years has a once-chilly relationship between the two nations really begun to thaw. India was a fickle partner during the United States' half-century Cold War with the Soviet Union, as it was courted aggressively by both sides (Gujral, 1997). In fact, despite professing non-alignment with either party, India seemed to favor ties with the Soviet Union (Reassessment of Nehru, 2003).

The United States was frustrated by its inability to win influence in this strategic nation that serves as a gateway to Asia and the Middle East. Even after the Cold War, the U.S. relationship with India remained rocky over issues such as nuclear proliferation, India's conflict with Pakistan, and high trade tariffs. However, a new era seems to be dawning in U.S.–Indian relations. Both sides have begun to look past historically divisive issues and to focus on natural synergies between the nations, particularly in the area of economic cooperation. Despite growing economic ties and increased understanding over India's nuclear status, significant issues still remain in the development of a solid partnership between the two countries.

A History of Wariness

Although there has been some definite turbulence in the twentieth-century relationship between India and the United States, it would be inaccurate to label the relationship as overtly adversarial. It is more appropriate to recognize that many of the frays in the link between the two nations were caused by U.S. frustration in cases where India aggressively asserted its autonomy. As noted above, the United States saw India as a must-have partner in its quest to stop the spread of communism. India had a fledgling democracy, some history of stability enforced by prior British rule, and was an important gateway between Asia and Africa (Gujral, 1997). For the United States, India was a perfect place to contain the spread of communism, while for the Soviets it was a perfect venue from which to launch communism throughout large swaths of the Third World (Hopkirk, 1995). Soviet revolutionary Vladimir Lenin planned to use India for his scheme to "set the East ablaze" (Hopkirk, 1995).

India probably served its national security best when it professed non-alignment with either superpower — a policy that was a brainchild of Indian leader Jawaharlal Nehru (Kapila, 2005). India never formally sided with the Soviet Union, but it did not join the American coalition to oppose it either. Given the "with us or against us" mentality of the Cold War, India's refusal to openly side with the United States meant, from the American perspective, that it was not an ally. The situation was exacerbated by the fact that India traded heavily with the Soviet Union and accepted loans and aid from it (Reassessment of Nehru, 2003). Some scholars have argued that, despite professing non-alignment, India's preference seemed to lean toward the Soviets, who were somewhat successful in casting America in the same light as India's previous colonial masters, Great Britain (Reassessment of Nehru, 2003).

The United States may have struggled to make India a Cold War friend, but it had more success building a relationship with Pakistan, a Muslim nation carved out of India in 1947. Pakistan became an important economic and military partner for the United States — particularly during the Soviet occupation of Afghanistan — and America, in turn, appeared to lend some degree of support to Pakistan's claim over the disputed Kashmir region in northern India (Bloch, 2001). India and Pakistan were bitter enemies whose relationship has only recently begun to heal. India, using the old logic that an enemy's friend is also your enemy, saw America's friendship with Pakistan as a major obstruction to better U.S.–Indian ties.

The end of the Cold War, marked by the 1991 disintegration of the Soviet Union, could have been an opportune moment for the United States and India to bury the hatchet, but tensions escalated again. Trade between the countries was hindered by high tariffs set by the Indian government to dramatically increase the price of foreign goods (Lavin, 2006). Further, India was lax in combating illegal activities such as the widespread cultivation of drugs (particularly opium and heroin), copyright and intellectual property piracy, and money laundering (India, 2006).

Arguably, the greatest tension between the United States and India arose from India's decision to become a nuclear power. India's first test explosion of a nuclear weapon occurred in 1974 and was condemned by the United States and other nations. Not only had India become a nuclear state, but it was not a signatory to the international Non-Proliferation Treaty, meaning it had not consented to numerous safeguards designed to protect nuclear technology from theft or transfer to rogue nations or organizations (Nuclear Weapons, 2002). This was more than the United States was prepared to accept, and it — along with a handful of other nations — imposed economic sanctions on India that lasted from 1998 to 2001, after India detonated a test nuclear weapon (Koppel, 2001). When Indian Prime Minister Manmohan Singh visited the White House in 2005, it was the first time in five years that an Indian head of state had done so (Bowman, 2005).

Without question, U.S.–India relations in the twentieth century were marked by mistrust and conflict. These two nations, whose friendship would seem inevitable, often had difficulty finding common ground. In the past five years, leaders have been able to work past many of these issues and, at the very least, establish a vibrant economic relationship and a mutual understanding regarding India's military security. However, if the relationship between these two nations is to continue to blossom, there are still economic and security issues that will need to be resolved.

Economic Cooperation Between the United States and India

In terms of international business, India is arguably one of the most attractive partners in the world today. With over a billion people, it has a sizable consumer base. Further, as a remnant of British colonialism, many educated Indians speak English, which serves as the common language of business despite Hindi being the national language (India, 2006). This makes India a potential source of abundant, inexpensive labor without the language barriers that other nations present for American businesses.

Business between the United States and India was hindered somewhat by the lingering effects of trade sanctions. During the late 1990s, talks began in the Clinton administration about ending sanctions against India and fully opening the country to American business, and the feat was finally accomplished by President George W. Bush in 2001 (Koppel, 2001). In explaining the economic justification for waiving the sanctions, Bush said: "Trade with India is going to be an important part of our growth in the future. India has got a fantastic ability to grow, because her greatest export is intelligence and brain power" (President Meets, 2001). While many American companies had already begun outsourcing specific types of work to India — such as call center staffing, IT support, and software design — before the sanctions were fully lifted, the pace accelerated sharply once they were waived.

India has become known as the "King of Outsourcing," and the Indian economy has been growing at a rate of 7% to 8% a year, largely fueled by service sector growth (Bokhari, 2004; India, 2006). Its inexpensive, educated, and abundant labor force — India produces 2.5 million English-speaking college graduates a year — has been a major cost saver for American companies. Approximately 50% of Fortune 500 companies are currently outsourcing information technology services to India (Fortune 500, 2005; Bhatnagar, 2005).

The influx of American jobs into India has created a booming middle class with more purchasing power than ever before. In 1985, less than 10% of the Indian population was considered middle class; by the turn of the century that figure had more than doubled, and more than half of India's population is expected to reach middle-class status between 2020 and 2040 (Das, 2001). That would represent more than half a billion potential consumers of American products and services. In 2006, the United States sent a historic delegation of hundreds of business leaders to India to investigate outsourcing opportunities and ways to sell products to India's growing middle class (Lavin, 2006).

But the difficulty American companies face in reaching India's middle class presents one of the major areas of friction in U.S.–Indian relations. The United States government has called India's economy "one of the most closed in the world" (India, 2004). India has established double-digit tariffs on a variety of import products, with some tariffs exceeding 30% and tariffs even on medical products — making them cost-prohibitive to some of the poor (Medical Device, 2000). High tariffs have contributed to a U.S. trade imbalance with India exceeding $8 billion (India, 2004).

There have been numerous diplomatic and business lobbying efforts over the past several years to further open India's markets to American goods, and to a certain degree those efforts have achieved success. India has reduced tariffs on a number of product categories and cut its basic ceiling tariff rate from 25% to 20% (India, 2004). However, there were notable exceptions to that reduction, and India's average weighted tariff actually increased to 28% in 2004 compared to 21% in 2001 (2006 Index, 2006). In short, tariffs remain high in key product categories.

The good news is that India has been receptive to discussions on lowering tariffs, but it remains a protectionist economy that is not completely open for business. The government even controls pricing in certain sectors — such as energy and pharmaceuticals — and attempts to regulate pricing in others (India, 2004). India's trade practices remain a sticky issue in U.S.–Indian relations and have closed off the Indian market to some American companies. Although dialogue is ongoing, this is an issue that will need to be addressed.

Conclusion

India and the United States are still in the early stages of what will hopefully be a strong and prosperous friendship. These two nations share a democratic tradition and are strategically important to each other. However, decades of mistrust and friction have left lingering issues that will need to eventually be resolved if relations are to fully flourish. On the economic side, India has developed protectionist trade practices that have caused a significant trade imbalance in India's favor. American companies have imported thousands of jobs to India, but the nation's tariffs keep it closed to many American companies that would like to sell to India's considerable consumer base. As long as India imposes punitively high tariffs on American and other foreign products, there will always be a degree of economic friction between the two nations.

The major security issue between the United States and India will continue to be India's relationship with Pakistan, which has become a critical U.S. ally in the war on terror. The United States has become a military and economic partner to both nations, and if tensions flare again over Kashmir, a neutral U.S. policy might not be acceptable to either side.

Clearly, remaining issues must be resolved to broaden U.S.–Indian ties, but they are not necessarily worse than the issues the United States faces with a great number of other nations. Important progress has been made by both nations in the past ten years, and both sides seem interested in continuing the forward momentum.

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