Colombia and corruption: the problem of extreme legalism

Once considered independent, the judicial system risks becoming politicised by graft scandals

John Paul Rathbone and Gideon Long in Bogotá



For the past 10 months, Luis Andrade has suffered a baleful daily routine. Every morning, the former McKinsey consultant has breakfast in his Bogotá apartment, works out at the downstairs gym, then goes online, watches movies or scans the news. He has little else to do.

By law, Mr Andrade cannot leave his building overlooking the Colombian capital. His enforced isolation is far from the days when he jetted between clients in New York, São Paulo and Bogotá. It is also an abrupt fall from grace from his recent job.

Until last year, Mr Andrade ran a $20bn portfolio of projects at the National Infrastructure Agency, and was so well regarded that Juan Manuel Santos, the then-president, described him as an “impeccable” public servant. Now the mild-mannered 58-year-old is under house arrest for alleged corruption.

Mr Andrade’s charges stem from the Odebrecht scandal that has rocked Latin America and that the US Department of Justice has called the world’s biggest bribery scheme. The probe into the Brazilian construction firm has felled a Brazilian and a Peruvian president, and led to the conviction of scores of business leaders and government officials across the region.Luis Andrade talks to the British trade minister, Lord Green, in 2013.


Mr Andrade ran a $20bn portfolio of projects at Colombia's National Infrastructure Agency but is now under house arrest © FCO


Popular anger over the scandal has also helped make corruption many voters’ main concern during the marathon of Latin American elections held this year, including in Colombia. Iván Duque, the centre-right president who began his term on August 7, has said he wants Colombia to be “a shining example of law”. There will even be a referendum about corruption this month.

What makes Mr Andrade’s case unusual, though, is that many people regard him as honourable and say he did not accept bribes from Odebrecht. The attorney-general’s office has said there is no evidence of that, a view that gels with testimonies of those who have admitted to paying bribes.

“The Colombian legal system is Kafkaesque,” Mr Andrade told the Financial Times.

Many agree.

“This is an extremely legalistic country,” notes Rodrigo Uprimny, a former Constitutional Court magistrate and member of the International Commission of Jurists. “It’s the most legalistic in Latin America and one of the most legalistic in the world.”

Indeed, such a legalistic culture highlights not only Mr Andrade’s curious situation but also the challenges Mr Duque faces over the next four years, many of which have a legal basis. These range from implementing Colombia’s controversial 2016 peace process with Marxist Farc guerrillas, to Venezuela’s crisis, and the fate of Mr Duque’s political mentor — the polarising figure of Álvaro Uribe, the former president.

A key factor across all these issues is whether Colombia’s legal traditions can help restore confidence in national institutions, or be manipulated by the powerful to save themselves and attack their enemies.

‘A nation of angels’

The notion of Colombia as legalistic may seem counter-intuitive given its reputation for extreme illegality — as dramatised in the Netflix series Narcos. Popular lore even celebrates the rule-bending culture of the vivo, or street sharp. “The vivo lives off the fool, while the fool lives off his work,” runs the refrain. There is also the tragic illegality of a six-decade civil conflict that left a quarter of a million dead.


The Netflix series 'Narcos'


Yet extreme legalism is as strong a Colombian tradition. It dates from the 19th century and Francisco de Paula Santander, a founding national father known as the “man of laws”. Victor Hugo later mocked the country’s 1863 constitution as written for “a nation of angels”. But the lofty quality of Colombian jurisprudence is renowned — as is the bravery of many of its judges who stood up to drug lords such as Pablo Escobar, and who still exercise judicial independence today.

“Most judges take a deep pride in their work, and often risk their lives — which is interesting as they operate in such a violent and corrupt country,” said José Miguel Vivanco, the head of Human Rights Watch and a Chilean lawyer who has worked in Latin America for 30 years. “Colombia probably has the region’s most sophisticated approach to legal principles; it goes far beyond formulistic debate.”

The flipside of that coin, however, is a complex legal system. There are five higher courts: a Constitutional Court; a Supreme Court; a State Council, which adjudicates on public/private disputes; an Electoral Court; and a National Judicial Council to investigate judges.

Furthermore, as of this year, Colombia has yet another court system, the Special Jurisdiction for Peace tribunals, or JEP. It will rule on war crimes from the civil conflict, and has been hailed by some as a model for peace processes elsewhere. “Colombia is a paradise for lawyers,” says Fernando Carrillo, the state ombudsman. Adding further complexity to the system are tutelas — legal complaints launched by individuals if they believe constitutional rights are infringed.

Néstor Osuna, professor of constitutional law at Bogotá’s Externado University, says a staggering 7m tutelas have been lodged since the 1991 constitution launched the system. One recent tutela judged that the 1m Venezuelan refugees in Colombia can have access to the national health system.

“Often [all] these courts end up working at cross-purposes,” said Ramiro Bejarano, a leading civil and commercial lawyer. “On the one hand, that creates a system of checks and balances as the courts balance each other out. The problem, though, is that the system has become corrupt, often because the judges are appointed via a political process.”


Carmenza Gomez Romero, a member of the 'Mothers of Soacha' campaign group, speaking after a JPE hearing into extra-judicial killings by the army © Reuters


This politicisation of Colombia’s legal system is essentially why Mr Andrade believes he is under arrest.

In 2011, he gave up his McKinsey job to work in Colombia’s public sector with a specific task: cleaning up the National Concessions Institute (Inco), a notoriously mismanaged institution. Cost overruns on Inco projects were often huge, with the extra cash allegedly shared between corrupt beneficiaries. Such illicit payments are colloquially known as “marmalade”, and are often spread around to fund political campaigns.

Rather than reform Inco, Mr Andrade created the National Infrastructure Agency. Roads and bridges were built as investment flowed in. In 2014, P3 Bulletin, a specialist journal, voted ANI the best public-private partnership agency in the Americas. Under Mr Andrade, it awarded more than 30 contracts without any legal complaint.

However, the ANI also had some infrastructure contracts with Odebrecht left over from Inco. When the Odebrecht scandal erupted in 2016, Mr Andrade was dragged in.


Colombia corruption chart


As elsewhere in Latin America, the scandal had a political dimension. It emerged that Odebrecht provided funding towards not only the 2014 presidential re-election campaign of Mr Santos but also his rival, Óscar Iván Zuluaga. Further complicating matters is an apparent conflict of interest that reaches to the heights of Colombian politics and finance.

The investigation is led by the office of the attorney-general. He is Néstor Humberto Martínez, a former legal adviser to Luis Carlos Sarmiento, Colombia’s richest man. Mr Sarmiento, who has an estimated $11bn fortune, is the founder and chairman of financial conglomerate Grupo Aval, which controls a subsidiary, Corficolombiana, an Odebrecht minority partner.

Grupo Aval says it is a “victim” of Odebrecht’s fraud and strongly denies any involvement in corruption. Mr Martinez denies any conflict of interest, saying he has withdrawn from the case due to his past links with Aval and has handed it to another prosecutor.

Caught in the crosshairs, meanwhile, is Mr Andrade who faces charges of “undue interest in the awarding of a contract” — a nebulous term which essentially means he was influenced by others who took bribes.Mr Andrade believes instead that he is being “punished for getting in the way of the interests of the most corrupt company in Latin American history [Odebrecht]” as well as “the corrupt political establishment”.

Colombia corruption chart


Last week the attorney-general’s office levied fresh charges against Mr Andrade, including destruction of evidence. Mr Andrade, who has called for an independent investigation, could be sentenced to 30 years.

For its part, Odebrecht says it has spent 18 months seeking to agree a reparations settlement, as it has done elsewhere in Latin America. But Colombia “seems to be the one country where we have struggled to reach such an agreement”.

It is not just big business and civil servants that have become entangled in such legal and political controversies but also senior judges and even former president Uribe. Their tangle of interests goes to the dark centre of Colombia’s civil conflict, and traumas that the country seeks to heal.

Last year, the country’s anti-corruption chief, Luis Gustavo Moreno, was arrested for corruption after the US Drug Enforcement Agency taped him accepting a bribe in Miami.

In a plea bargain, Mr Moreno said several Supreme Court judges had accepted payment from politicians in exchange for favourable verdicts during investigations into their alleged ties to paramilitary death squads.

The scandal, which became known as the “Cartel of the Robes”, a reference to judges’ flowing gowns, shocked the country. “There was full, eventual disclosure”, and nothing was swept under the carpet “as might happen in Mexico or Central America”, Mr Vivanco notes. Still, the scandal sapped Colombian confidence in their institutions.

According to a Gallup poll, only 11 per cent now have a positive view of their judicial system compared with 50 per cent a decade ago. Moreover, that faith will be tested as the JEP tribunals hear inevitably controversial war cases, and Mr Uribe himself comes under the legal spotlight.

A divisive but popular politician, Mr Uribe heads the largest rightwing party, which provides Mr Duque with crucial Congressional support. He also has a long history of brushes with the law. Over the past decade, he has been dogged by claims of links to death squads and that he has bribed witnesses.

Mr Uribe vehemently denies the accusations, which supporters say are politically motivated, and he has never been charged. But in July, the Supreme Court placed him under formal investigation for bribery and perverting the course of justice.


Colombia's former president Álvaro Uribe, centre, was last month placed under formal investigation for bribery and perverting the course of justice © AFP


The case puts Mr Duque in a tricky position. Does he stand by his political patron and defend him from the accusations, which Mr Uribe denies, or does he distance himself and let justice run its course? For many, the outcome will be the biggest test yet of the judiciary’s independence.

“The Supreme Court may well be incapable of standing up to a government backed by Uribe,” said Mr Bejarano, reflecting a widespread sense that, even in this highly legalistic country, power and money often trump justice.

If Mr Bejarano is right, it would be of a piece with Mr Andrade’s situation, where a thorny case involving powerful men has apparently been kicked into the long grass. More importantly, it will mark whether Colombia can move on from war and prove that it really is a “country where the law shines bright”.


A model peace process?

Somehow, the mundanity of the setting only emphasised its importance.

Last week, in a makeshift courtroom on the 12th floor of a nondescript Bogotá office building, retired army colonel Gabriel de Jesús Rincón begged for forgiveness.

“I ask for pardon from every one of the victims . . . of this awful internal conflict that has caused so many Colombians so much pain,” he told the court and the mothers of five peasant farmers assassinated in 2008 by the army unit that Mr Rincón once commanded.

Mr Rincón’s case, and that of 13 other soldiers, is one of the first of tens of thousands that will be heard over the next decade under Colombia’s transitional justice scheme, or JEP.

The scheme, which is central to the country’s 2016 peace process with Marxist Farc guerrillas, will probably form a constant and controversial backdrop to Iván Duque’s administration.

That is because under the JEP, anyone who pleads guilty and confesses fully receives only light sentences. That is a red flag for many of Mr Duque’s conservative supporters in Congress, who claim the JEP will let former leftist guerrillas off the hook for human rights atrocities.

However the JEP scheme also holds for members of the military or civil society that may have been involved in rights abuses. Mr Duque was elected on a platform that promised, in part, to change or “perfect” the peace process.

The JEP tribunals are unusual as they go beyond punishment to include reparations and victims’ rights. Although hailed by some jurists as a model for peace processes elsewhere, they are also something of a test of international criminal law.

Unlike South Africa’s transition from apartheid, Colombia’s peace process is the first transitional justice scheme undertaken by a signatory to the Rome statute — the 1998 treaty that created the International Criminal Court and forbids impunity for war crimes.


Sentiment Speaks: Why Would You Even Think About Buying Gold?

by: Avi Gilburt

 
- Gold is a relic of the past.

- Bullish sentiment is at multi-year lows.

- I am expecting a major bottoming in the coming weeks.

- This idea was discussed in more depth with members of my private investing community, The Market Pinball Wizard
 
    
Gold is a relic of the past. There is no interest from the millennials for gold. The cryptocurrencies are taking demand away from gold. Central banks have been selling gold over the last few years. Interest rates do not support a rally in gold. Gold funds have been closing of late, which evidences the lack of demand for gold.
 
We have heard so many reasons as to why no one should buy gold. In fact, the people you speak with about gold either view it with disgust (those who own it) or complete indifference (those who do not).
 
But, let me ask you a question: Is the best time to buy an asset when everyone loves it or hates it?
 
The bullish sentiment in the gold market is the lowest we have seen in years if not rivaling the same levels as the lows we have seen over decades. And, as Baron Rothschild was quoted as saying: "Buy when there is blood in the street... even if it is yours."
 
When GLD broke down below $117.40, I warned that this could cause blood to flow in the streets, as it opened the door to drop as deep as the $105 region. While I am unsure whether we will see levels that deep on this last pullback before the bull market resumes, I can tell you that I do not think we will spend much time down there should we see those levels. Rather, if we see the $105 region, it will likely be in an overreaction spike down which will likely provide us with one of those V bottoms.
 
But, do take note that the overnight futures pricing has already struck the top to our bottoming target for the GLD.
 
While I don't always publicly provide the charts that I show to the members of my Market Pinball Wizard service, I think it would be helpful for you to see a visual of what I am seeing, and why I think we have a tremendous buying opportunity being presented to us.
 
 
As long as we remain below the $116 region and do not see an impulsive structure breaking out through that resistance, I am looking for a lower low to complete the larger degree wave II pullback.
 
Moreover, as I have noted, that low can even be as deep as the $105 region, wherein we have an a=c target for this larger degree 2nd wave we have been mired within for the last 2 years. Yet, should we be able to see a strong break out in the coming weeks through the $116.50 level, then it opens the door to gold having bottomed. But, unfortunately, there are still a number of miners that will likely take a bit longer until they complete their pullback.
 
The fact that the market has dropped as deeply as it has can either be a point of frustration for you or a huge opportunity. Much depends on how you control your emotions and view the market. In fact, if you review the common sentiments I listed at the start of the article, that is what you want to be reading to suggest gold is striking a long-term low. So, I would strongly suggest you view this larger degree pullback as an opportunity to purchase assets in this complex at prices you may not again see in your lifetime.


The Zero-Sum Economy

Adair Turner



LONDON – Across the global economy, the potential for automation seems huge. Adidas’ “Speedfactory” in Bavaria will employ 160 workers to produce 500,000 pairs of shoes each year, a productivity rate over five times higher than in typical factories today. The British Retail Consortium estimates that retail jobs could fall from three million to 2.1 million within ten years, with only a small fraction replaced by new jobs in online retailing. Many financial-services companies see the potential to cut information-processing jobs to a small fraction of current levels.

And yet, despite all this, measured productivity growth across the developed economies has slowed. One possible explanation, recently considered by Andrew Haldane, chief economist of the Bank of England, is that while some companies rapidly grasp the new opportunities, others do so only slowly, producing a wide productivity dispersion even within the same sector. But dispersion alone cannot explain slowing productivity growth: that would require an increase in the degree of dispersion.

However, to focus on how technology is applied to existing jobs may be to look in the wrong place, for the clue to the productivity paradox may instead be found in the activities to which displaced workers move. David Graeber of the London School of Economics argues that as much as 30% of all work is performed in “bullshit jobs,” which are unnecessary to produce truly valuable goods and services but arise from competition for income and status.

Graeber usefully views the world from the perspective of an anthropologist, not an economist. But the phrase “bullshit jobs” and his focus on demotivated workers doing pointless work may divert attention from the essential development: individual workers may regard as stimulating and valuable many jobs which cannot in aggregate contribute to total welfare.

Suppose, for example, that you cared passionately about the objectives of a particular charity, had a flair for fundraising, and successfully increased that charity’s share of available donations. You would probably feel both motivated and good, even if all you had done was divert money from another charity about which another equally motivated fundraiser was equally passionate.

The crucial economic question, therefore, is not whether individual jobs are “bullshit,” but whether they increasingly perform a zero-sum distributive function, whereby the dedication of ever more skill, effort, and technology cannot increase human welfare, given the skill, effort, and technology applied on the other side of the competitive game.

Numerous jobs fall into that category: cyber criminals and the cyber experts employed by companies to repel their attacks; lawyers (both personal and corporate); much of financial trading and asset management; tax accountants and revenue officials; advertising and marketing to build brand X at the expense of brand Y; rival policy campaigners and think tanks; even teachers seeking to ensure that their students achieve the higher relative grades that underpin future success.

Measuring what share of all economic activity is zero sum is inherently difficult. Many jobs involve both truly creative and merely distributive activities. And zero-sum activities can be found in all sectors; manufacturing companies can employ tax accountants to minimize liabilities and top executives who focus on financial engineering.

But available figures suggest that zero-sum activities have grown significantly. As Gary Hamel and Michele Zanini point out in a recent Harvard Business Review article, some 17.6% of all US jobs, receiving 30% of all compensation, are in “management and administrative” functions likely to involve significant zero-sum activity. Meanwhile employment in financial and “business services” firms has grown from 15% to 18% of all US jobs in the last 20 years, and from 20% to 24% of measured output.

Hamel and Zanini argue that if we could only strip out unnecessary management jobs, productivity could soar. But the growth of zero-sum activities may be more inherent than they believe. As technological progress makes us ever richer in terms of many basic goods and services – whether cars or household appliances, restaurant meals or mobile phone calls – it may be inevitable that more human activity is devoted to zero-sum competition for available income and assets.

As our ability to produce higher-quality goods with fewer people increases, value may come to lie more and more in subjective brands, and rational firms will devote resources to activities like market analysis, financial engineering, and tax planning. Eventually, almost all human work might be devoted to zero-sum activities.

Whether or not robots will ever achieve human-level intelligence, it is illuminating to consider what an economy would look like if we could automate almost all the work required to produce the goods and services human welfare requires. There are two possibilities: one is a dramatic increase in leisure; the other is that ever more work would be devoted to zero-sum competition. Given what we know about human nature, the second development seems likely to play a significant role.

As I argued in a recent lecture, such an economy would probably be a very unequal one, with a small number of IT experts, fashion designers, brand creators, lawyers, and financial traders earning enormous incomes. Paradoxically, the most physical thing of all – locationally desirable land – would dominate asset values, and rules on inheritance would be a key determinant of relative wealth.

In John Maynard Keynes’s words, we would have solved “the economic problem” of how to produce as many goods and services as we want , but would face the more difficult and essentially political questions of how to achieve meaning in a world where work is no longer needed, and how to govern fairly the inherent human tendency toward status competition. Seeking to resolve these challenges through accelerated technological development and faster productivity growth would be like pursuing a mirage.


Adair Turner, a former chairman of the United Kingdom's Financial Services Authority and former member of the UK's Financial Policy Committee, is Chairman of the Institute for New Economic Thinking. His latest book is Between Debt and the Devil.


Turkey in the Long Run

The crisis is part of a systemic problem that rapidly emerging powers frequently encounter.

By George Friedman


Too easily we lose sight of historical context, and when it comes to nations, context is a matter of decades or centuries, not hours or weeks. Those trying to understand Turkey’s financial crisis are checking the price of the lira each morning. Others are following the predictable script of financial crises by assigning the roles of victims and villains. In reality, the causes of Turkey’s crisis are complicated, and many have nothing to do with economics. Trouble has been percolating beneath the surface for years and has created the need for a major recalibration of all political and social systems. That is what is happening in Turkey right now: a recalibration. Financial crises, especially in emerging powers, are common. They destabilize and weaken, but as with the U.S. in 1929, they seldom destroy. Turkey is no different.
 
Historical Context
The Ottoman Empire had been a great empire, spreading its power deep into Europe, the Mediterranean, the Middle East and North Africa. It was majority Muslim and was governed by Muslims, but it was prepared to ally with Christian states and to trade with anyone. It had integrated Islam with a sophisticated foreign and economic policy. The collapse of the Ottomans after World War I left Turkey diminished in size, power and wealth. The Islamic rulers were discredited, and Turkey was recast by Mustafa Kemal Ataturk as a European, secular power. A former army officer, Ataturk tasked the military with defending his idea for the new Turkish state.
Turkey refrained from participating in World War II, but in the aftermath, in response to Soviet attempts to destabilize it, Turkey became a key part of the U.S.-led anti-Soviet coalition. Membership in this alliance was necessary and reinforced the self-image of Turkey as Western and secular. Any Turkish government that strayed too far from Ataturk’s vision triggered a military intervention. Turkey was never quite stable, but its place in the world was fixed.
Turkey was suddenly torn from its moorings in 1991-92 by three events. First, the collapse of the Soviet Union took away the anchor of its national strategy. Second, the signing of the Maastricht treaty and the long-term refusal of Europe to allow Turkey into the European Union, in spite of Turkey’s desire to join it, created a gulf between Turkey and Europe. Finally, Operation Desert Storm, along with other events, ignited Islamic self-awareness and destabilized the Turkish model, in which a secular, Europeanist elite oversaw a passive Muslim populace.
Turkey became increasingly hostile toward Europe, and vice versa. The surface issue was membership in the EU, but the Turks were doing well outside the bloc – perhaps better than they would have done in it. The deeper issue was Europe’s mistrust of Turkey’s Islamization and of Turks in Europe, as well as fears about immigration and terrorism. Turkey saw Europe, and especially Germany, as trying to undermine it.
The Turks also became suspicious of American intentions, unwilling to play the role of very junior partner to the United States. In particular, they refused to participate in the 2003 invasion of Iraq, fearing that it would destabilize the region, which it did. Other Turkish relationships, such as the one with Israel, atrophied or ruptured.
And as Islamic ideology grew stronger among the Turkish people, the regime needed to integrate it. Along came the Justice and Development Party, or AKP, in 2001. By the 2002 elections, the AKP was the largest party in Turkey’s parliament. In some ways the AKP was less radical than it appeared; though the secularists were uneasy, the regime was not suddenly overthrown. But in harnessing the Islamic sentiment that was sweeping the Muslim world, it moved Turkey away from what it had been since World War I.
 
Booms and Busts
And the AKP was remarkably successful in other ways. It oversaw an impressive period of economic growth. With the exception of 2009, after the global financial crisis, Turkey maintained an annual growth rate between 5 and 10 percent. Its growth was one of the elements that turned it from a marginal power into a significant regional power. It gave it a seat at the table with the U.S. and Russia when it came to the region’s affairs. Foreign lenders and investors poured into Turkey to take advantage of the boom that would never end. 
 
Everything was going well on the surface, but beneath the surface, it was approaching unsustainability. First, an extended boom like what Turkey experienced, without major recessions beyond 2008, allows inefficiencies to build up. Recessions are necessary correctives for rapidly growing economies, and the constant flow of foreign money into Turkey hid the underlying problems.
Second, the question of secularism and religion was not settled. The army, or at least part of it, continued to see itself – as the constitution called for – as the guarantor of secularism. As the government apparently became increasingly Islamist, powerful elements within the military saw it as their duty to halt this movement in a way that had become normal since World War I: by intruding into the political process.
Third, there were strategic issues facing Turkey in Syria, Iraq and the Black Sea, not to mention the Kurdish issue in Turkey itself. Turkey knew what it no longer was, but it was not sure what it had become. It didn’t have clear strategies in any of these places and found major powers intruding near its borders. Turkey’s behavior was tactical, and the absence of a strategy made it unpredictable to other nations, which strained relationships.
The crisis broke in 2016 when the Turkish military tried to overthrow the AKP and replace it with a military government. The failed coup prompted the government to both eliminate any future threat from the military and intimidate potential enemies. It saw this as a necessity to protect the democratically elected government and as an opportunity to impose its will on society as a whole.
The coup and the extended state of emergency changed the perception of Turkey among foreign investors and lenders. Although economic growth continued, Turkey’s stability came into question. Where the government hoped the vigorous pacification program would increase confidence in Turkey, it had the opposite effect. The government cracked down hard and long. The length of the crackdown magnified the threat to the government and the government’s threat to stability.
The influx of foreign money slowed, and the underlying weaknesses of the economy began to show themselves. The government needed high growth to maintain stability. As confidence declined, it attempted more and more desperate measures to contain the problems, increasing unease among outsiders about the economy’s stability.
What has happened is that in the political, strategic and economic spheres, the solution that Turkey found a decade after the 1991-92 breakpoint reached its limits. The current crisis is part of a systemic problem. The United States, having grown dramatically from the Civil War until the 1920s, underwent a massive financial crisis that aligned with a restructuring of the federal government and World War II. There were those who doubted that it could recover, but the U.S., of course, weathered these crises.
I have argued that Turkey is emerging as a great regional power. This crisis does not diminish my confidence – such crises are common, even necessary, among emerging powers because they clear away failing parts. And it is essential not to spend time imagining that political leaders and their idiosyncrasies determine the long-term direction of nations. Over the long term, geopolitical realities, like economic realities, are not subject to the whims of anyone. Turkey, like other countries, cannot be understood by looking at one person or a few people. And Turkey remains, by geography and history, the key power in the region.


Trade and Security: The Two Sides of US-Indian Relations

New Delhi is a valuable partner to Washington on one but not the other.

By Allison Fedirka


The U.S. and India will have no shortage of topics to discuss during the first joint meeting of their foreign and defense ministers scheduled for Sept. 6 in New Delhi. Over the past year, the two countries have disagreed on several issues related to security and trade. India plays a key role in the United States’ current strategy for the Indo-Pacific region, but some of Washington’s recent moves, including pulling back from its global commitments, placing sanctions on Russia and Iran, and levying new tariffs on a host of goods, are incompatible with India’s interests. The U.S. doesn’t want to risk alienating India, so it will try to find accommodations for New Delhi on security matters. But on trade, the two countries are more likely to be at odds. The U.S. has so much leverage over India that it doesn’t really need to compromiso.
 
Security Cooperation
For the U.S., India’s strategic value in the Indo-Pacific stems from its proximity to China and its potential to take over some of the United States’ security responsibilities as it tries to decrease its commitments abroad. Washington has identified China as one of the biggest threats to the U.S. But it wants to be more selective with its global engagements and avoid being drawn into conflicts and disputes that can be dealt with regionally. Washington’s strategy for managing China has long been to control sea lanes around China’s littoral waters that are critical to Chinese trade and, by doing so, contain Chinese expansion. Given its position, India could help the U.S. apply this strategy on land and by sea. India and China have had an antagonistic relationship in the past, so containing Beijing is a goal of New Delhi as well.

While India stands to benefit from cooperating with the U.S., it also wants to chart its own course. India has a history of pragmatism in its foreign relations and therefore has avoided committing itself too deeply to any security alliances. During the Cold War, for example, India was one of the original members of the Non-Aligned Movement, a group of countries that refused to side with either the U.S. or the Soviet Union. Since then, it has similarly avoided getting too close to the U.S., either cooperating with Washington or keeping it distance as the situation warranted.

The recently re-established “Quad” alliance is one example. Along with Australia, Japan and the United States, India joined the Quad to try to contain Chinese assertiveness in the Indo-Pacific. But it has also tried to limit its capabilities. In May, India’s highest military commander, Adm. Sunil Lanba, said the Quad didn’t need a military dimension because its focus was on maritime security and because India was the only member that shared a land border with China. India also declined to participate in an infrastructure initiative in Southeast Asia launched by Australia, the U.S. and Japan to counter China’s One Belt, One Road initiative. New Delhi has instead focused on improving bilateral ties with Southeast Asian countries. It held its first joint naval exercises with Vietnam in May. Two months later, it agreed with Indonesia to develop the Sabang port in Aceh province and to conduct naval exercises in the Java Sea. New Delhi has also enhanced naval defense cooperation with Thailand and Singapore. And while the focus has been primarily on naval capabilities, India has also started to conduct land defense exercises, most notably with Thailand and Japan.


 
One issue that could cause friction in U.S.-India relations is U.S. sanctions on Iran and Russia. The sanctions on Iran set to be reimposed in November target the country’s energy exports, and the U.S. could penalize countries that import them. India is one such country, dependent as it is on energy imports. Some 80 percent of India’s oil supply comes from imports. In July, Iran surpassed Saudi Arabia to become India’s second-largest supplier, accounting for about 18 percent of India’s oil imports. Cutting off Iranian oil supplies overnight would severely disrupt India’s economy. New Delhi and Washington have already discussed how they can work around the sanctions. Options include waivers and gradually reducing India’s need for Iranian energy. No deal has been reached yet, but the U.S. plans to send 319,000 barrels of oil per day to India in August, more than double the 119,000 bpd it sent in July. This won’t replace all of India’s energy imports from Iran – which totaled 768,000 bpd in July – but it will surely help.


U.S. sanctions could complicate India’s plans to modernize its military, too, because India’s defense industry depends so heavily on supplies from Moscow. Between 2013 and 2017, India was the world’s leading importer of major arms, and Russia supplied nearly two-thirds of those arms, according to the Stockholm International Peace Research Institute. The U.S. has increased its arms sales to India over the past five years, but it’s still a distant second to Russia, in part because it doesn’t export many of the things India needs. India’s military modernization and defense industry plans prioritize joint development and technology transfer, and the U.S. wants to maintain its technological edge. Russia and India have plans to jointly develop and build various naval vessels, including submarines, as well as supersonic cruise missiles, among other high-end systems. India also agreed to purchase the S-400 air defense system, though this deal would violate a U.S. law that calls for sanctions on any country that buys this kind of equipment from Russia.

Here the U.S. has been somewhat more flexible. Washington is considering granting India a waiver so that it will be exempt from the sanctions imposed on Russia. And far from distancing itself from India because of its defense ties with Moscow, Washington has actually intensified security cooperation with New Delhi. India was recently granted Strategic Trade Authorization-1 status, which allows it to procure high-tech weapons systems from the U.S. and gives it the same access to high-tech products as NATO allies – despite the fact that it had only three of four export control regimes typically required for status holders. The U.S. and India are also expected to sign the Communications Compatibility and Security Agreement soon, after more than 15 years of negotiations. This agreement would open the door for defense equipment the U.S. sells to India to include highly secure, U.S. encrypted communication equipment.
 
Disagreements on Trade
On the trade front, the hurdles for the U.S. and India may prove harder to avoid. Many of the industries and products targeted by the U.S. trade war are key parts of the Indian economy. India was one of the countries affected by the U.S. tariffs on steel and aluminum products. Depending on the findings of the U.S. Trade Representative’s investigation into the automotive industry, Washington could impose 25 percent tariffs on automobiles too. This would in no uncertain terms hurt India, where the auto sector accounts for 7 percent of India’s GDP and employs 32 million people. India has a booming pharmaceutical industry, which could also be the subject of a future USTR investigation as the U.S. tries to protect its intellectual property rights. In fact, India has been put on the Priority Watch List for failing to sufficiently protect intellectual property, according to the U.S. There’s also the issue of H1B visas. The U.S. wants to more tightly control these visas – which would affect hundreds of thousands of Indians who have either received or applied for an H1B.

The problem for India is that it’s in a much weaker bargaining position on trade. The U.S. market matters far more to India’s economy than vice versa. Last year, only 2.1 percent of imports to the U.S. came from India, and only 1.7 percent of U.S. exports were destined for India, according to Trade Map. The U.S., on the other hand, was India’s top import supplier, accounting for 15.6 percent of imported goods, and its second-largest export destination at 5.4 percent. India threatened to retaliate against U.S. tariffs, with duties on $241 million worth of U.S. exports to India – a negligible amount for an economy as large as the United States’. India has shown an interest in reforming its intellectual property practices but meeting U.S. standards could take several years.

The U.S. has little incentive to make exceptions for India on trade. Where their interests align, as they frequently do on security, both countries have been willing to cooperate and work toward shared goals. But when it comes to trade, both know that Washington is willing to go it alone.