What Would a India-US Free Trade Agreement Look Like?
The Wire, January 25, 2018

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.

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