Prospects of India-US Bilateral Trade Agreement
(Based on Research (CCS Project) by Mr. Saransh Mody & Mr. Pawan Lahoty)
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. The former US President, Donald Trump, has been very vocal about the US’s increasing trade deficit with India and has criticized India’s unfair trade practices. He has termed India as a ‘Tariff King.’ 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 countries. Although the limited trade deal could not be negotiated, there were signals that a comprehensive Free Trade Agreement (‘FTA’) was not very far away.
Whether negotiated or not, an FTA will have far-reaching consequences on both countries, and it becomes essential to understand if an FTA is a step in the right direction as far as trading relations between the two countries is concerned.
History of India-US Trade Relations
In the post-cold war period, the trade and economic relations between India and the US improved drastically, with both the countries keen on building strong ties through cooperation. The increasing trade relations between the two countries reflect the mutually aligned interests of the two countries.
The bilateral trade (in goods and services) between India and the US witnessed a significant jump from a meager USD 11.2 billion in 1995 to USD 142.6 billion in 2018, recording an impressive 11.7% CAGR over the 23 odd years. Unlike merchandise trade, where trade balance is always in favor of India, trade in services has historically been in the US’s favor. It is only recently that balance is tilting in India’s favor.
India received USD 0.42 billion of FDI investment in the US in 2000. This increased by about five times to reach USD 2.18 billion in 2017. Off late, there has been more excellent traction in US companies wanting to invest in India.
Donald Trump’s Policies
At the 74th session of the United Nations (UN) General Assembly, President Trump put forth his ideas for the US, which were in sharp contrast with past US presidents. Trump’s main policy agenda is — Rebalancing America’s trade relationship and Renegotiating trade agreements that are outdated and imbalanced.
· January 22, 2018: Safeguard tariffs on $8.5 billion imports of solar panels and $1.8 billion imports of washing machines
· March 1, 2018: Import Tariffs on all trading partners of 25 percent on steel and 10 percent on aluminum under national security grounds
Issues of contention between US and India
· The Trump administration’s policies resulted in additional friction to an already complex and long-negotiated India and US bilateral trade agreement. The new US concerns were — Bilateral Trade deficit, Tariffs, and Non-Tariff measures imposed by India and India’s GSP status.
· Although agricultural products do not constitute a significant chunk of US-India trade, resolution over them is long pending. The US claims that India maintains prohibitive tariffs on a broad range of agricultural goods to protect nearly 126 million small farmers. On the flip side, the Indian government fears a loss of control over national food security and disruption of the livelihoods of farmers due to foreign competition.
· US congress started with the ‘Special 301 Report’ to identify intellectual property issues in Trade in 1989, and India has remained on the priority watchlist ever since. US considers India’s progress on IP protection and enforcement as inconsistent and not rewarding for innovators and creators.
· India has restricted FDI in critical sectors such as banking, insurance for ages. While FDI limits have been liberalized for many sectors, issues still remain.
· With the increasing adoption of technology in India, there have been recent disputes between the two countries over data localization, data privacy, and e-commerce.
Talks of a Trade Deal
While the talks of a trade deal between India and the US have been on for quite some time, these talks have been slow to pick up the pace because of the variety, complexity, and sensitivity of the issues involved. The Covid-19 pandemic further stalled the discussions between the two countries.
However, off-late, there has been a conscious effort to finalize some sort of a trade agreement between the two countries to ward off the threat from China, reduce the dependence on China, and move parts of the supply chain outside China.
Potential Provisions of the Limited Trade Deal
In the US, agriculture is heavily controlled by large business companies and is mainly dependent on exports for survival. Despite much lobbying, India has managed to keep its markets sufficiently shut for the US agricultural produce. A US-India FTA could probably be worse for the Indian farmers.
India imposes a 100% tariff on poultry. The import of chicken from the US will not only impact the domestic Indian chicken farms but will also have a cascading impact on the maize and soybean farmers as they are the primary sources of poultry feed.
US has been wary of India’s IPR laws, so India might have to yield to some requests of the US like China as far as IPR protection is concerned. While provisions relating to accelerated granting of patents, an extension of protection for copyrights, etc., may be accepted, India must ensure that its generic pharmaceutical industry heavily reliant on the US markets is not adversely impacted as a result of these terms.
Like China and Japan, India has restricted foreign investment in sectors like banking, insurance, etc. Relaxing foreign ownership conditions might help improve the efficiencies and result in broader adoption of these services in the country.
India’s data localization and data protection policies are not likely to go well with the US, and India may face stiff pushback from the US as far as these two points are concerned.
Conclusion
‘America First’ and ‘Make in India’ are both important to the prospects of the US and India, respectively. The pandemic has delayed the signing of a limited trade deal. Striking a trade deal as soon as possible is only in the best interests of both the nations, given the poor economic performance before the pandemic and, of course, the shrinking economic activity after the pandemic. Whether or not the trade deal with the US goes through, India needs to focus on striking more trade deals with other nations like UK, Russia, EU, etc., to establish a strong foothold in global trade.
Complete report: https://drive.google.com/file/d/1SU7WfCtRO9HbANEc-_73t8EhuQ1Ac99G/view?usp=sharing
Summarized by Mr. Praveen Kumar.
