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U.S. and India Try to Step Up High-Tech Cooperation in Effort to Overcome Problems

India Report by John E. Carbaugh, Jr.
June 24, 2003

Although high-technology cooperation between the U.S. and India has progressed relatively quietly, this area could prove a critical test of how far the wider bilateral relationship can go.

U.S.-India ties have significantly evolved in the last few years, with Washington no longer seeing New Delhi as a Cold War ally of the Soviet Union and as part of a zero-sum relationship involving Pakistan, but rather as a strategic partner in the 21st Century. These deepening ties, which started in earnest under the Clinton Administration, but have accelerated under the presidency of George W. Bush, have occurred across the board, including in the high-profile defense and security areas.

HIGHER PRIORITY

However, no less important is the field of high-tech cooperation, proponents of better bilateral ties say, with this area being given a higher priority of late.

"Two years ago, American and Indian policymakers did not address together the important issues of cooperative high technology trade, civil space activity, and civilian nuclear power," said outgoing U.S. Ambassador to India Robert Blackwill. "Today, all three of these subjects are under concentrated bilateral discussion, and both governments are determined to make substantial progress."

Indeed, the high-tech issue is even on the mind of President George W. Bush himself. According to India’s Deputy Prime Minister Lal Krishna Advani, Bush told him in a White House meeting earlier this month "that he saw India as one of the leading drivers of the high-technology world who had contributed significantly to the increase in U.S. productivity by providing Indian manpower, know-how and entrepreneurship."

REFLECTION OF WIDER RELATIONSHIP

Although often under the radar screen of publicity, high-tech cooperation is perhaps a microcosm of the overall U.S.-India relationship, with its future direction essential to the success or failure of the two nations forming a deeper alliance. "A vibrant high-technology trade relationship is a key component of the Administration’s overall agenda for fundamentally transforming U.S.-Indian relations," said U.S. Under Secretary of Commerce for Industry and Security Kenneth Juster earlier this month.

Indeed, the high-tech area encompasses a broad set of issues from defense to trade ties, and illustrates both the potential of and problems in the U.S.-India relationship.

Trade relations between the two nations have perhaps been the most disappointing area in the bilateral relationship in the last few years. However, some progress has been made in high-tech trade -- progress that U.S. officials hope could set an example for the broader commercial relationship.

"Because of India’s interest in this area, I hope and believe that we can make real progress in liberalizing the trade and investment environment related to high-tech, and perhaps even use progress in this area to stimulate progress elsewhere," Juster said.

TECHNOLOGY TRANSFER PROBLEMS

U.S. officials also acknowledge that some of their Indian counterparts view progress in high-tech trade -- particularly concerning sensitive dual-use items with potentially both civilian and military uses -- as a litmus test for the depth of the overall relationship.

Technology transfer is a sensitive issue for both sides, with New Delhi viewing it in terms of a measure of Washington’s trust of India. Selig Harrison, director of the Asia program at the Center for International Policy, suggested that the relationship has improved to the point where the U.S. should now relax many of the remaining restrictions in place.

"U.S. curbs on selling industrial high technology have particularly rankled India," said Harrison. "These restrictions, primarily on items that could be used for civilian and military purposes, originated before India became a nuclear power. They should be lifted, because U.S. policy is now based on the implicit strategic premise that Asia is more stable with India having a minimum nuclear deterrent than with China enjoying a nuclear monopoly. The United States should also end its ban on the sale of civilian nuclear technology to India. The fact that China is able to buy such technology has long been an irritant in India-U.S. relations. The United States should treat India as a major power, not only on issues arising from its membership in the nuclear club."

U.S. DEFENDS RESTRICTIONS

However, although the U.S. has lifted many sanctions on India imposed after the 1998 nuclear tests, allowing much high-tech trade, Bush Administration officials are still making it clear that controls on sensitive dual-use items will remain in place, rejecting the argument that easing controls on so-called strategic trade would boost overall high-tech trade.

"I submit that the facts do not support this argument," Juster said. "In analyzing the data, as well as ways to increase high-technology trade between our two countries, it is clear that export controls are not a major factor impeding increased high-technology trade. Dual-use licensing data show that, since the lifting of sanctions by the Bush Administration in September 2001, only a very small percentage of total trade with India is even subject to such controls. U.S. export controls do not meaningfully restrict exports to India of products such as high performance computers, microprocessors, or encryption software, or affect key sectors of high technology such as information technology, life sciences, and nanotechnology."

Juster also pointed out that U.S. high-tech trade with China -- with which the U.S. has stricter export controls than India -- has progressed in recent years despite such restrictions.

"My point that U.S. export controls are not inhibiting high-technology growth in India is further supported by examining the U.S.-China trade and high-technology relationship," he noted. "The United States maintains a more restrictive dual-use export control policy toward China than it does India. Nonetheless, U.S.-China trade -- including trade in high-technology -- has thrived. U.S. exports to China in 2002 were over five times greater than U.S. exports to India, and China was the fourth largest trading partner of the United States. Clearly, the more restrictive export controls on China have not impeded or prevented the emergence of a vibrant U.S.-China high-technology relationship."

INDIAN TRADE BARRIERS

Instead of just focusing on liberalizing dual-use U.S. export restrictions, U.S. officials contend that high-tech trade would benefit much more by dealing with barriers in India that impede commerce across the board, such as high tariffs, lack of adequate infrastructure, lack of enforcement of intellectual property rights protections, absence of transparent government procurement processes, complex customs policies and procedures, and excessive taxes.

"In order to truly transform U.S.-Indian high-technology trade, our bilateral efforts must focus on all of the issues affecting such trade," Juster said. "If our actions are limited only to dual-use export controls, we will make an important political statement, but we will not achieve full progress in the overall trade relationship."

MEETING NEXT MONTH

The two nations will examine barriers to technology trade at the first full meeting of the U.S.-India High-Technology Cooperation Group in Washington next month, which was established to facilitate and promote high-tech trade, and to enhance the more problematic dual-use strategic commerce.

The agenda includes Indian tariffs on information technology products, customs procedures that the U.S. says inhibit high-technology trade, e-commerce promotion, and improved data protection.

In addition to the High-Technology Cooperation Group, a meeting is planned between private sector representatives from the U.S. and India to examine high-tech commerce.

Indeed, some observers stress that while government-government high-tech dealings are important, especially to deal with sensitive licensing issues and defense trade, the private sector will ultimately be the driving force in this sector. Linkages between the public sector entities of the two nations may enhance the potential private sector networking initiatives, according to a report from the East-West Center in Hawaii. However, the report stressed that "while building of public institutions and policies relating to trade, technology and investment remain important for Indo-U.S. technology co-operation, a shift in policy focus to ‘market induced’ inter-firm alliances may be desirable."

Next month’s private sector meeting will examine the current climate affecting capital investment and financing in both countries -- with a particular focus on the areas of information technology, life sciences, nanotechnology, and defense technology.

DEFENSE TECHNOLOGY TRADE

The latter area has proven to be a particular irritant to India which has complained that the U.S. remains skittish over selling its more advanced weapons. "The necessity of the U.S. adopting a more liberal, less restrictive technology transfer regimen toward India -- and for the United States not to impede the transfer to India of critical military equipment and militarily-relevant technologies from third parties, Israel for example -- emerged from the interviews with Indians in virtually every context," said a Pentagon report that was based on interviews with U.S. and Indian officials.

India is upset that it is still denied some high-technology and dual-use products, despite the lifting of most of the nuclear sanctions. "America’s reluctance to engage in focused technology transfer is a deal killer in the effort to construct an enduring strategic relationship," according to an Indian official interviewed in the Pentagon report.

A senior Indian policymaker added: "If the United States is willing to share dual-use technologies, then it suggests that the United States regards India as a partner that shares strategic concerns and burdens. If the United States denies access to dual-use technology, then it gives the impression that India is not accepted or trusted."

However, some U.S. officials are suspicious that India’s sole interest in the security relationship with the U.S. is to gain access to American technology.

PROGRESS SEEN

Nevertheless, observers point to a sign of a possible breakthrough in differences over this issue. The Bush Administration recently gave the go-ahead for Israel to sell India Phalcon Airborne Warning and Control Systems aircraft, an advanced technology the U.S. stopped Israel from selling last year because of rising tension between India and Pakistan.

This shift could also mean that India will soon get the go-ahead to buy the Arrow-2 anti-missile system from Israel, which was jointly developed by Israel and the U.S.

Assistant Secretary of Defense for International Security Affairs Peter Rodman acknowledged recently that high-tech defense trade was a "difficult" area in relations, but that progress has been made of late.

"I am convinced that as our strategic relationship develops and deepens and as our two countries increasingly find that our policies and our strategic goals are parallel or converging, the inevitable result is a more durable connection and more consistent links in the defense and other fields," Rodman said. "As our relationship continues to expand, it is inevitable that the quantity and quality of defense trade will follow. It remains our intention to share high technology with our allies and friends, including India.

"From the Defense Department’s perspective, technology is instrumental to the effectiveness of our armed forces," Rodman added. "When the United States shares military or dual-use technologies, even with our closest allies, we attach conditions. We need the ability to protect specified items and services. We expect our friends to protect militarily valuable technologies through a robust export control system, with its own strong legal, regulatory and enforcement infrastructure. This is why dialogue on export controls has become a prominent fixture of our bilateral relationship. It is clear that in the past year, we are moving together in the right direction. The United States has an interest in looking positively on a much wider range of activities with India, including defense trade and technology cooperation. We have a number of good reasons to do so, including improving interoperability between U.S. and Indian armed force and enhancing India’s ability to defend itself."

FRUSTRATIONS REMAIN

Overall, there is "immense potential" for trade in the high-technology sector between the U.S. and India, in areas ranging from information technology to telecommunications and bio-technology to trade in nuclear technology for civilian use, according to Juster.

However, Juster acknowledged that progress has been less than what it could be in trade as a whole, including the high-tech area. "Given the level of cooperation between the U.S. and India in other areas, one would logically expect the trade and economic relationship to be equally robust. While the recent trends are positive, the trade relationship should be better than it is."

Some India frustration was also perhaps evident when Prime Minister Atal Behari Vajpayee recently proposed a high-tech alliance, not with the U.S., but with China. The Indian leader suggested that India and China could combine their complementary strengths in information technology instead of competing, including setting up a bilateral institutional mechanism to compete jointly for international software contracts. He pointed out that Indian software could be embedded into Chinese hardware to produce an unbeatable combination worldwide.

However, despite some frustration over U.S.-India high-tech trade and cooperation, U.S. officials are vowing to focus harder on the issue. "More and more attention within the U.S. Government is being directed to finding ways to strengthen and invigorate our economic relationship with India," Juster said. "Part of this is due to our own commercial interests. Many U.S. companies -- especially IT and software companies of all sizes -- have established a presence in India to take advantage of the extremely talented workforce there."

OUTSOURCING FRICTION

However, this talented workforce is the cause of some new friction between the U.S. and India. Opposition is growing in the U.S. to the outsourcing of IT services and service centers to India, which is projected to be a $20 billion business in the next five years, mostly from the U.S.

A number of state governments are pushing legislation to ban outsourcing, arguing that it takes away local U.S. jobs.

"Neither the people in India who have the jobs, nor the people who are unemployed here in the U.S., are giving anything back in the way of taxes or buying and consuming U.S. goods and services, which is what stimulates our economy," said New Jersey state Sen. Shirley Turner, who is pushing a bill banning the state from outsourcing services. "By outsourcing these jobs to other countries we’re helping the poor remain poor in this country. We have a $5 billion deficit in New Jersey and outsourcing these jobs to foreign countries only adds to the burden that the state must pick up when our citizens need [welfare] services. When people lose their jobs, and their unemployment benefits run out, the state must step in and take up the burden to provide the services. That’s not cost savings and it really just snowballs when jobs are taken offshore."

Although the Bush Administration has made it clear that it opposes such legislation, Blackwill said recently that the issue cannot be ignored. He suggested that it should be included when addressing broader bilateral trade issues, including barriers in India.

Although there is no need to set off alarm bells, the outsourcing issue nevertheless requires the attention of the Indian Government, Blackwill said. "The issue is one job loss and that’s always very sensitive," he said. "If the constituency of a politician is suffering, what do you do about it?"

Blackwill suggested that India move to open up its market further to help quell U.S. resentment at American jobs going to India. "India has to pay attention to the issue of job losses and the best way to do that is to import more American goods and services because that leads to job creation. Then we can say, well, some jobs are being lost because of outsourcing, but look at the jobs being created by Indian imports."