What Would a India-US Free Trade Agreement Look Like?

The Wire, January 25, 2018

By Pradeep S Mehta and Bipul Chatterjee

While an FTA is a long shot, the starting steps include both countries being more flexible on the domestic and international front.

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 low.

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 India.

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 efforts.

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 services.

There is 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 regulatory regimes.

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 trading system.

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 agreements.

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.

This article can also be viewed at: