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May 16, 1998


Sanctions will hit US firms harder

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C K Arora in Washington

US sanctions against India for its nuclear tests may have only a limited impact on the latter but a broad and lasting one on the American business interests, says The New York Times, quoting analysts and foreign business executives.

The US is India's largest trading partner and its largest source of direct foreign investment, but the daily says a few countries in Asia can better withstand the sanctions, which are required under US law.

Though India has gradually opened to outside investment in the seven years since it began a broad economic reform, its economy remains cloistered, its ties with foreign banks and companies restricted by decades of near-isolationist industrial policies.

''India knows it needs many things that the outside world has to offer,'' says Mark Riedy, a lawyer for Reid and Preist LLP, whose practice focuses on India. ''But their pride often comes first, if they have to wait 20 or 50 years to get those things, that's what they will do.''

More immediate, perhaps, is the loss to the US businesses, which have only begun to crack the huge Indian market. US industry groups worry that unilateral sanctions will not deny India the goods or capital it needs to develop, but will reduce the American role in providing those things, the daily adds.

''Unless there is a broad initiative among allies, the sanctions will end up hurting US, not India,'' said Jeff Schott, a senior fellow at the Institute of International Economics in Washington.

The 1994 law, the Nuclear Proliferation Prevention Act, under which sanctions are being imposed, applies automatically if a country other than the five declared nuclear powers -- the United States, Britain, France, Russia and China -- test a nuclear device.

The law bars the sale of armaments or military-related industrial goods, ends American aid and loan guarantees and requires that American banks to refrain from lending to government entities.

According to the daily, Washington estimates India could lose $ 20.7 billion in trade, loans and aid under the sanctions, a significant number for a country where total output of goods and services totalled just over $ 350 billion in the 1996 fiscal year.

The figure does not include what India would lose if the United States uses its voting power to oppose World Bank aid and development loans. Washington wields decisive influence at the World Bank, which has nearly $ 15 billion in outstanding credits to India and planned to extend $ 3 billion more this year.

But the sanction figures disguise a modest real impact. The sanctions will not affect the main items of trade between the two countries -- Indian exports of timber and gems, and the US exports of electronics and machinery.

Washington's assessment of the damage to India is based on the assumption that India purchases key American goods with the help of US credits and loan guarantees. Such aid would be easily replaced if India turned elsewhere for purchases, said an Indian diplomat in the United States. He estimated that the actual short-term loss to India would not surpass $ 1 billion.

Unlike its neighbours, India was late to welcome outside investment and trade, and remains relatively self-reliant. Although its population is almost as large as China's, its economy remains more introverted.

Total trade makes up 27 per cent of India's output of goods and services, compared to 40 per cent in China. In 1996, foreign companies invested $ 2.6 billion in India, China received more than $ 40 billion.

In contrast, the sanctions pose immediate worries for American banks, including Citicorp and American Express. Industry officials say the sanctions, if interpreted in their broadest sense, would require American banks to withdraw from India, after years of flighting for footholds there.

Likewise, a ban on loan guarantees by the US Export-Import Bank would make it difficult for India to purchase Boeing aircraft, but would do nothing to prevent India's airlines from buying from Boeing's arch rival, Airbus Industries, a European consortium.

Compounding the problem for Washington, its main allies in Europe have indicated that they will not follow its lead in levying broad sanctions. Though Japan, Canada and several smaller European countries have said they will curtail some forms of aid, Britain, France and Russia appear reticent.

''This is shaping up to be a classic case where sanctions are merely symbolic,'' Schott said.


Defiant India May Ignore Economic Sanctions

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