Prospects of India-US bilateral trade agreement

Abstract

The United States (‘US’) and India are important strategic partners for advancing common interests regionally and globally. For the US, its bilateral trade in goods and services with India is only about 3% of its overall world trade. However, the trading relationship is much more nuanced for India. In 2018, the US was India’s second-largest goods export market (16% share) after the European Union (‘EU,’ 17.8%), and third-largest goods import supplier (6.3%) after China (14.6%) and the EU (10.2%). India had a trade surplus of approximately USD 31 billion with the US in 2018. The current US President, Donald Trump, has been very vocal off-late about the US’ increasing trade deficit with India and has criticized India’s unfair trade practices. He has termed India as a ‘Tariff King.’ He has been very critical of India’s protectionist policies that make import of defense equipment, medical devices, agricultural and dairy products from the US prohibitively expensive. He has accused India of enjoying the benefits of a developing country in the US, without allowing the US access to the Indian markets. India, on the other hand, has maintained its stance that its tariff policy is in line with the World Trade Organisation (WTO) standards, and the tariff rates are high in an attempt to protect the domestic industries from the onslaught of the foreign players. What followed was a series of retaliatory tariff hikes. With effect from June 2019, the US denied India the privileges available under the Generalized System of Preferences (‘GSP’) under which Indian exports were granted duty-free access in the US markets. The removal of GSP is estimated to have costed India dearly since GSP allowed USD 6.3 billion worth of goods to enter the US duty-free. In July 2019, the US also dragged India to the WTO by filing a complaint against India’s move to increase customs duties following the GSP withdrawal, alleging the decision to be inconsistent with the global trade norms. Indian Prime Minister Narendra Modi’s visit to the US in September 2019 was critical in the sense that there were expectations of a limited trade deal being negotiated between both the countries. Although the limited trade deal couldn’t be negotiated, there were signals that a comprehensive Free Trade Agreement (‘FTA’) was not very far away. Entering into an FTA that would reduce tariffs on the imports from the US and restore benefits under the GSP to India would work out well for both the countries. Further, given the US-China trade war and India’s backing out of the Regional Comprehensive Economic Partnership (‘RCEP’), it is only mutually beneficial for India and the US to enter into a bilateral FTA. An FTA would be the potential middle ground between ‘America First’ and ‘Make in India.’ An FTA could help Trump register a policy victory in an election year. It could also help Modi, who is struggling to shore up an economy that is set to grow at its weakest pace in more than a decade. An FTA, whether negotiated or not, will have far-reaching consequences on both the countries, and it becomes important to understand if an FTA is a step in the right direction as far as trading relations between the two countries is concerned.