The Boeing Deal and the Future of U.S.-India Defense Trade

Amy Hariani
On June 6, 2011, the Government of India announced its purchase of ten C-17 Globemaster III airlifters from Boeing for $4.1 billion. Some hail this announcement as a pivotal turning point in the U.S.-India defense trade relationship, while others say that it is simply one more step in the right direction for increasing defense trade ties between the two nations. Like those in the latter group, Timothy J. Roemer, U.S. Ambassador to India, said, “[f]or India, the [Boeing] sale adds strategic and humanitarian muscle to its defense needs” and that the sale will sustain 23,000 jobs in America. Ambassador Roemer also indicated that the Boeing contract would strengthen political and economic ties between the United States and India and lead to enhanced cooperation on security issues.

Nothing is more telling of a deep and solid partnership than the sharing of defense technology and sale in defense goods. But the strategic and economic alliance that the United States has enjoyed with India is a relatively new relationship and it will surely continue to experience setbacks as the relationship matures. As the friendship between the United States and India matures, and the U.S.-India defense trade grows, it is important to understand the objectives of both countries and how each ally might fulfill the other’s expectations for defense security and cooperation.

THE TURNING POINTS IN THE U.S.-INDIA DEFENSE TRADE RELATIONSHIP

In order to understand the current relationship between the United States and India, it is critical to examine the historical relationship between the two countries. During the Cold War, India aligned itself with Russia and the United States aligned itself with Pakistan. In 1991 these alliances began to shift with the easing of India’s foreign investment restrictions and the end of the Cold War. Throughout the 1990s, India experienced impressive economic growth as New Delhi continued to loosen restrictions on foreign trade and investment. Many credited Finance Minister Manmohan Singh for India’s dramatic growth during this time. As a result of his financial reforms, Mr. Singh became popular with the Indian electorate and was elected Prime Minister in 2004 as a member of the popular Congress Party.

In the early 2000s, Prime Minister Singh and President George W. Bush were quick to form a friendship, especially as President Bush was looking for allies in the region to assist with the U.S. War On Terror and to counter the ever-impending economic threat of China. U.S.-India relations continued to grow and, by July 2005, Prime Minister Singh and President Bush concluded a global partnership and framework agreement to share U.S. nuclear technology. The U.S.-India Civil Nuclear Cooperation Agreement, or the 123 Agreement as the agreement is sometimes called, was seen as a watershed agreement and a turning point for U.S.-India defense trade. After completing the 123 Agreement, the United States and India continued to deepen their friendship and reliance on each other. India wanted access to nuclear technology, and the U.S. wanted to sell it to India. Although India promoted the 123 Agreement as a means of meeting the country’s substantial energy needs, India was simultaneously complaining to the United States that it also was concerned about its security, particularly with respect to nearby neighbors China and Pakistan.

President Barack Obama continued to deepen the U.S.- India defense trade relationship by visiting India in the first half of his current term. During his November 2010 visit, the U.S. President announced his plans to boost trade with India. In so doing, President Obama said he would make “‘fundamental reforms’ to the export controls that guide trade between the two countries….[including] removing several Indian space and defense companies from the entities list, which identifies firms that manufacture products with dual civilian and military purposes and makes it more difficult for them to trade with the United States.” President Obama’s announcement thus concluded another turning point in the U.S.-India defense trade relationship.

To facilitate increased defense trade with India, the U.S. Department of Commerce announced in January 2011 that it was easing export controls on U.S. goods to India by issuing a regulatory Final Rule. The stated objectives of the Final Rule were to realign U.S. export policy toward India to reflect the strategic partnership between the two countries and to expand U.S.-India cooperation in civil space, defense, and other high-technology sectors. Among the changes made in the Final Rule were to remove nine Indian space and defense organizations from the Department of Commerce’s Entity List (a list of foreign end users involved in proliferation activities). Coincident with the issuance of the Final Rule, Commerce Under Secretary Eric L. Hirschhorn stated that the United States would support India’s full membership in the four multilateral export control regimes: the Wassenaar Arrangement, the Nuclear Suppliers Group, the Australia Group, and the Missile Technology Control Regime. By February, 2011 it appeared that there were few obstacles that could stop the growth of the U.S.-India defense trade.

On April 28, 2011, however, the relationship that was otherwise humming along was provided a jolt when the Government of India decided to rule out both of the U.S. companies (Boeing and Lockheed Martin) competing for an $11 billion fighter-jet supply contract for the Indian Air Force (IAF Contract). The exclusion of the U.S. companies from the $11 billion deal – and subsequent awarding of the IAF contract to an EU-based defense supplier – was widely viewed as a setback for the Obama Administration and the ability for India to create a truly meaningful defense relationship with the United States. Ambassador Roemer went so far as to announce that he would resign his post the day after the United States lost its bids to the IAF Contract. While Ambassador Roemer stated that he was leaving India for personal reasons, many in the defense community linked the two events as more than a coincidence. Whatever disappointment existed at the time of the IAF Contract announcement, however, quickly disappeared. In fact, shortly after the IAF Contract announcement, Boeing admitted that it still believed that India presented enormous market opportunities.

Boeing was right, because on June 6, 2011 the U.S. defense trading relationship with India regained its footing when the Government of India awarded Boeing the C-17 Globemaster III contract. Many hailed the contract as evidence that the United States and India were on the path to long-term trade in defense goods. Ron Somers, president of the U.S.-India Business Council (USIBC), stated that the contract was a “testament to India’s appreciation of U.S. technology and confidence in the U.S. as a long-term defence sales partner. This largest-ever Indian purchase of U.S. defence technology, we hope, will be just the beginning of much more to come.” According to news reports, “[o]nce these planes are delivered, India will possess the largest fleet of Globemaster III after the United States.” Ambassador Roemer stated that the deal would “further strengthen the strategic ties between the U.S. and Indian armed forces, leading to enhanced cooperation for a safer and more secure region and world.”

FOR GEOPOLTICAL AND FINANCIAL REASONS, TRADE IN DEFENSE GOODS IS IMPORTANT TO INDIA AND THE UNITED STATES

While commercial trade between the United States and India has progressively improved since the opening of India’s economy in 1991, trade in defense goods signals a new turning point in the U.S.-India partnership. The Boeing C-17 aircraft deal represented the first U.S. military aircraft purchase in India’s history. Although India would like access to enhanced military technology, the United States must remember that India cautions itself against aligning too closely with any single country. In addition, India is currently negotiating a free trade agreement with the European Union and announced on May 12, 2011 that it was entering into Free Trade Agreement negotiations with Australia. Although Free Trade Agreements with the EU and Australia would likely require several years to conclude, these negotiations should signal to the United States that deepening U.S.-India ties run parallel to India’s efforts to develop defense cooperation and trading partnerships with other allies around the world. Therefore, the United States must remember that while India may want defense technology, it does not necessarily need it from the United States.

India must also recognize that the United States demands certain expectations from its relationship with India. The United States is relying heavily on India to fulfill President Obama’s National Export Initiative to double U.S. global exports within five years. Consequently, India should recognize that the United States is relying on India’s promise to boost U.S. exports by purchasing defense and nuclear items from the United States. India should understand that if it fails to perform on its promises, the United States may instead look to other developing nations to promote U.S. exports. India’s delay in living-up to its promises is now evident by India’s nuclear liability law, which has effectively stalled the sale of civilian nuclear technology to India and rendered the 123 Agreement meaningless at the moment. India should seek to understand the U.S. motivations in partnering with India and be honest about its ability to fulfill the American expectations of that partnership.

THE U.S.-INDIA DEFENSE TRADE RELATIONSHIP WILL CONTINUE FOR MANY YEARS TO COME

The trading relationship between the United States and India will continue to grow and prosper as the countries further develop their relationship. But India will not rely on the United States alone to support it defense needs. India will use a multi-ally approach to build its defense arsenal by relying on the United States, the European Union, and other trading partners. As long as the United States understands that India is not going to align itself only to the United States and that India will continue to look out for what is best for India, the trading relationship in defense goods between the two countries will grow and prosper, albeit with setbacks along the way, for years to come.

Amy Stanley Hariani is an associate in the international trade group at King & Spalding LLP, with a particular focus on trade issues with India. She advises in import and export compliance, trade remedies, market access issues, and cases before the World Trade Organization. She can be reached at ahariani@kslaw.com or amyjstanley@gmail.com.

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