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What Would a India-US Free Trade Agreement Look Like?
The Wire, January 25, 2018
By Pradeep S Mehta and Bipul
While an FTA is a long shot, the starting steps include both
countries being more flexible on the domestic and international
If India has to realise the imperative of creating new jobs, the
country’s manufacturing base needs to be expanded with a clear trade
strategy in mind. The world economy is on the upswing, offering
better potential for India’s exports. Faced with a World Trade
Organisation (WTO) losing its animal spirits, India needs bilateral
trade deals with countries with big markets such as the US.
Speaking at the Davos summit earlier this week, on the global
response to increasing protectionism, Prime Minister Narendra Modi
inter alia lamented the fact that no bilateral or multilateral trade
negotiations are going on. Agreements on trade help with nil or
lower tariffs and predictability of rules.
Earlier this month US ambassador to India Kenneth Juster made
similar remarks, calling for an eventual free trade agreement
between the world’s two largest democracies
In this respect, let us look at the current status of US-India
trade. From a low base of $20 billion in 2001, trade between India
and the US has registered an impressive growth. It is currently $115
billion. However, the volume is still small, as compared to the
overall trade of these countries. Therefore, one of the stated
objectives of US-India strategic relations is to enhance trade in
goods and services to $500 billion over the next decade or so.
Furthermore, the US wants trade to be more balanced. This means that
the US would like to see a significant reduction in its trade
deficit with India by focusing more on its exports of
high-technology-based products to the country. At present, this
deficit stands at around $30 billion.
However, as against looking at the value of trade in final products,
if we look at it in value-added terms, this deficit is significantly
According to latest data available in the OECD-WTO (Organisation for
Economic Cooperation and Development and World Trade Organisation)
database on ‘Trade in Value-Added’, in 2011, the US witnessed about
a $15 billion trade deficit with India in terms of their total value
of trade. However, this (trade deficit) figure was about $5 billion
when trade is considered in terms of their value addition.
Moreover, while the US is witnessing an increasing trend in its
trade deficit with India as per the total value of its bilateral
trade in value-added terms, since 2003, this deficit is shrinking
over time. On the other side, between 1995 and 2002, US’s trade
deficit with India showed a positive trend in terms of the total
value of its bilateral trade as well as in value-added terms.
Put simply, for goods exported from India to the US there is not
much of value-addition on India’s part as compared to the
value-addition that the US is doing while exporting its goods to
Second, over time there is relatively more value-addition on the
part of US companies in their trade with India as compared to that
by Indian companies.
This is consistent with the fact that US companies are focusing on
upstream as well as downstream parts of global value chains through
innovations, packaging, marketing, etc, while Indian companies are
more in the middle part of global value chains having less
value-added activities, such as assembling.
This is the context in which we need to understand a recently
articulated call for exploring a free trade agreement between India
and the US. After assuming the office of the US ambassador to India,
in his first public address, Ambassador Kenneth Juster expressed his
‘aspiration’ to create a vision for an eventual free trade agreement
between the two largest democracies of the world. “[.] a vision of
where we want to go could help spur the resolution of many of
today’s trade and investment disputes and signal to international
companies that India is fully open for business.”
Juster also said that since the signing of the civil nuclear deal in
2008, this FTA could be another possible signature initiative for
furthering ties with India. While this is understandably a
long-shot, in order to create such a vision, we need to have a clear
roadmap lined up with a number of confidence-building measures. At
least two of these are important in the current context.
Domestic regulatory environment
In today’s world of value-added trade, tariffs are no longer a
significant determinant. In the US, tariffs on most goods are
already low and there is not much necessity for further lowering
such a barrier. But, in India, while tariffs are still relatively
high, these are coming down as a result of unilateral liberalisation
The domestic regulatory environment – standards, intellectual
property, public procurement policies – play an important role in
determining international trade. This is more so because there is
more growth and potential in trade in services as compared to goods,
which is determined by the quality and predictability of regulatory
regimes. Even goods are now getting more and more embedded into
need for improvement in the predictability of domestic regulatory
environment in the US. For example, the issue of temporary entry of
Indian information technology professionals working for Indian as
well as American companies. Similarly, and more importantly, India
needs to improve the quality as well as predictability of its
Many US companies are reluctant to do trade with India because they
are unsure about the application of standards and treatment of
intellectual property rights in the Indian market. Also, there is a
sub-optimal risk management system in Indian ports, adding to time
and cost of “trading across borders”.
Both countries should, therefore, work together to improve their
domestic regulatory environment in specific areas to boost the
confidence of their companies to trade with each other. Other than
enhancing the volume of bilateral trade, this will also help
bilateral investment flows. As rightly pointed out by ambassador
Juster, investment follows trade, not the other way.
For instance, both the countries can explore the possibility of
joint intellectual property held by Indian and American companies.
This is an innovative means to allay fears about the violation of
intellectual property rights while trading with a foreign country.
As part of a periodic review of their comprehensive economic
partnership agreement, India and South Korea are exploring this
option, which can be extended to other major trading and strategic
partners, such as the US. Bothe the countries should compare
specific regulations adopted in their free trade agreements and see
how the gaps can be bridged through outcome-oriented initiatives.
Similarly, the Indian customs and the US customs can jointly work to
improve the risk management system in Indian ports. This will help
both Indian and American companies to make better use of Indian
ports for their supply-chain management. Such joint initiatives can
also be extended to other areas, such as drug inspection, conformity
assessment of sanitary and phyto-sanitary measures and technical
barriers to trade.
Partnership at the multilateral level
At the 11th ministerial conference of the WTO, held in Buenos Aires,
Argentina, in December 2017, the US trade representative, Robert
Lighthizer, called for institutional reforms in the multilateral
trade body, particularly in its dispute settlement system. Despite
the impasse in the negotiating function of the WTO, such reforms are
needed for greater predictability in trade.
Also, it is important to understand that 21st century trade issues,
such as electronic commerce, including cross-cutting issues like
global value chains, services embedded in manufacturing, cannot be
dealt with a system developed mainly for addressing 20th century
trade challenges, which were mainly about reduction in tariffs.
India is also keen to see reforms at the WTO, albeit for different
reasons. Therefore, there is scope for India and the US to work
together to propose institutional reforms. This is despite the fact
that both the countries are at loggerheads at the WTO with disputes
on subjects like solar panels and poultry meat. However, this has
not deterred them from taking joint initiatives for the improvement
of the functioning of the WTO. In fact, that would build mutual
confidence in setting up a roadmap for a bilateral FTA, which can
then be used as a building block for taking forward the multilateral
Thus, there could joint proposals for improving the WTO’s dispute
settlement system so as to prevent other members to adopt
competitor-specific trade measures and use the existing system of
dispute settlement to gain market access. Also, there could be
reforms to enhance the role of the WTO’s councils and committees to
negotiate specific issues without waiting to resolve all issues, as
was originally envisaged in the built-in agenda of the Uruguay Round
India and the US working together for institutional reforms of the
multilateral trading system will not only strengthen this body but
will also act as a significant confidence-building measure for
enhancing bilateral ties. As articulated by ambassador Juster “… the
true value of our partnership is that it can better enable each of
us to positively influence global affairs …”
Therefore, we need to understand the underlying thoughts in Juster’s
address, which resonates perfectly with the overall thinking of
modern-day economic diplomacy. First, economic diplomacy starts with
trade and ends with trade and investment. And second, making trade
possible and making trade happen are two different things.
Through grounded research, extensive stakeholder consultations in
both countries, including taking into account strategic, security
and political aspects of our bilateral ties and those in the
Indo-Pacific region, we need to take specific confidence-building
measures to create a vision for this free trade agreement.
Pradeep S. Mehta and Bipul Chatterjee are secretary general and
executive director respectively of CUTS International, a global
think-and-action-tank on economic policy issues.
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