While the government formulates its policy priorities for NDA-II, grappling with the challenges confronting India-US trade ties is likely to be high on the agenda. How this thorny issue is addressed by the government could have far reaching implications for India’s economic growth.
India’s list of grievances against the US include problems encountered by its exporters of IT services, tariffs imposed by the US on exports of steel and aluminium products and the threat of the US to remove India from the list of developing countries enjoying preferential access to its markets.
US complaints include perceived barriers erected by India to its exports, India’s recent measures related to e-commerce and its perennial criticism of India’s intellectual property laws. At the WTO, the two countries have divergent positions on many issues, including the crisis at the dispute resolution mechanism and WTO reform.
In order to iron out the trade friction between the two countries, some strategic experts and foreign policy analysts have suggested that India should work towards a comprehensive bilateral trade deal with the US.
No doubt it should be a high political priority for India to have an enduring and mutually beneficial trade link with the US. However, any move by India for a comprehensive trade deal with the US should come only after a detailed examination of the fundamental reasons bedevilling trade relations between the two countries.
Despite the gradually deepening links between India and the US on geo-political issues, why have the two countries failed to forge deeper trade ties? Even a superficial analysis of the interests of the two countries would make it obvious that the path to strengthened trade relations is fraught with hurdles, many of which are insurmountable.
How does the US wish-list stack up against India's interests and concerns? At least six grounds of concern arise from an India-US trade deal.
First, as the average tariffs in the US is 3.4 per cent, India’s exports are unlikely get any significant boost, even if the US were to reduce its existing tariffs to zero. Second, India would be conceding considerable market access to the US by reducing/eliminating its tariffs from the existing average level of 13.8 per cent. As India is not price competitive in a large number of products, the country may find it extremely difficult to face import competition under a zero-duty regime. This would pose severe risk to the manufacturing sector and could frustrate the Make in India flagship initiative of NDA-1.
Farmers at risk
Third, on the agriculture front, India’s farmers will be continuously exposed to the risk of being knocked out of the market by cheap and subsidised imports from the US. Tariff as a policy instrument would not be available to the government to regulate such imports. The consequences of such a situation can be extremely alarming. In particular, the horticulture sector, dairy sector and wheat would come under extremely intense pressure from US imports. Prospects of doubling farm income is likely to get dented by a comprehensive trade deal with the US.
Fourth, on the IPR front, India will get confronted by US to agree to its onerous demands, particularly for extending the monopoly protection enjoyed by the US pharmaceutical companies in India. This would require India to make crucial changes to its domestic laws and regulations, which would eventually destroy the generic pharmaceutical industry in the country. This would result in sharp increase in prices of medicines, thereby compromising the health of the sick and the needy in India.
Fifth, the India-US trade deal would significantly erode the policy space currently available to the government to nurture the fledgling domestic digital economy in India. We are already witnessing a strong backlash unleashed by the US-based digital giants against some of the recent actions of the government, including data localisation for credit cards and the press note seeking to contain the unfair practices indulged in by retail platforms.
The trade deal will certainly be used by the US-based digital giants to ensure that their interests in India are strongly protected. This will compromise the digital future of our country.
Would the trade deal help India secure greater market access for its exports of services to the US? If the past FTAs of the US are an indicator, the US is extremely unlikely to agree to India’s demands for more access for its professionals under Mode 4 of Services.
Further, given the strong emotions unleashed in the US against immigration, the US is not likely to show any flexibility to India in allowing seamless movement of professional. On the other hand, India would be required to grant considerable access to US firms in many sectors, including for financial services.
The proponents of the India-US trade deal are also optimistic on two issues, both of which need careful scrutiny.
Tech bogey
First, some experts have claimed that the trade deal will enhance India’s access to high technology. This is not only incorrect, but also goes against the grain of the consistent stand of the US at various inter-governmental forums that technology transfer is governed by patents; and that it cannot direct its firms to share high technology. In short, the trade deal will certainly not have provisions that would facilitate technology transfer.
Another aspiration being articulated by some supporters of the trade deal is that it will enhance US investments in India. However, the link between bilateral investment protection treaty (BIT) and investment inflows is extremely weak.
On the contrary, based on a rigorous empirical exercise, UNCTAD’s Trade and Development Report (2014) has concluded that “BITs appear to have no effect on bilateral North-South FDI flows”. It is, thus, unlikely that the India-US trade deal will result in enhanced investment inflows from the US into India.
In conclusion, the stark reality is that a bilateral trade deal with the US would be extremely skewed and loaded against India's economic interests. The injurious consequences for India would far outweigh the export gains of a few billion dollars.
The proponents of the trade deal need to examine the nuts and bolts of a potential treaty and objectively assess its economic impact on the country. India must not fall into the dangerous trap of initiating negotiation for a comprehensive trade deal with the US.
Instead, the two countries must continue to talk and address individual irritants in trade ties. The time for a comprehensive India-US bilateral trade deal has not yet come.
The writer is Head of Centre for WTO Studies, Indian Institute of Foreign Trade. Views expressed are personal