Envisioning an India-US free trade agreement

Business Standard, 23 December 2024

How will the Trump presidency rock the global economy? Many kinds of turbulence will arise in international trade. India will face some unintended consequences of actions that are initiated by the major powers.

India is a small player in global merchandise trade and does not have the leverage to materially shape the global story. As an example, the Indian goods exports of 2023 were $432 billion, with a nominal growth rate of 3.2% over the last decade (a nominal doubling every 22 years). For a comparison, Vietnam -- with a population that's 7% of India -- was at $354 billion in 2023, with a decadal nominal growth rate of 10.4% (a nominal doubling every 7 years).

Is an India-US FTA feasible in US political economy?

At the recent Emerging Markets Conference 2024, Daniel Rothschild offered an important idea. He said that conditions are good for a strong Indo-US free trade agreement ("FTA"). He argued that a potential Indo-US FTA would be supported within the US by three important groups:

  1. The people in the US who are imbued with free trade as a philosophy are concerned about the growing impediments to global trade. An Indo-US FTA would be supported by them as a way to keep gains from trade alive, drawing on knowledge that goes all the way back to Ricardo, that unilateral liberalisation of trade by each country is good for their self-interest. Particularly if America is going to restrict trade with other countries, the highway with India becomes more valuable.
  2. Big business interests in the US stand to get hurt by protectionist moves in the US and counter-moves by other countries. For them, keeping one channel open for increasing the size of overseas activity, in the form of a free trade agreement with India, would be welcomed.
  3. The third group in the US that would welcome an Indo-US FTA are the people who are focused on the problem of China. While Indian democracy is highly flawed, it remains a fact that the Indian state has greater constitutional foundations as compared with China. In the Freedom House measure, India is classified as "Partly free", with a score of 66/100. China stands at "Not free" with a score of 9/100. In the eyes of American China-hawks, principles and realpolitik favour a greater alignment with India.

With these three important groups that would support an Indo-US FTA, it becomes a realistic pathway that merits exploration. We should not be deterred by our disrespect for Mr. Trump and some of his cabinet picks. There is genuine competence in his economics team, it is not all hostility to globalisation, they will bring genuine state capability to an FTA negotiation. There is more to the United States federal government than Mr. Trump and his inner circle.

Elements for such an FTA

How should we think about the contours of such an FTA?

  1. Both sides have tariffs and other barriers that can be meaningfully reduced. The American side has concerns about rules of origin, about India being a re-routing station for trade diversion, e.g. for Chinese solar panels that reach the US while bypassing US restrictions upon Chinese exports into the US.
  2. The American side will have concerns about the implementation of US export controls [EiE Ep64], to ensure that their high technology does not reach buyers in Russia or China through India.
  3. Services export growth is key to India's future. Both sides have an interest in removing barriers to cross-border services activity. At present, American firms in finance are largely not active in India, particularly after the reduction of activity in India by major firms such as Citibank and Goldman Sachs. American law firms have yet to step into India.
  4. Cross border investment is hindered by Indian capital controls and tax policy, and by difficulties of taxation in the US. There is much to do for both sides to make FDI and portfolio investment work better. The investment relationship is not as one-sided as we may think. There is now a considerable footprint of Indian outward portfolio and FDI assets in the US. The Indian state has an interest in creating frictionless conditions for Indian persons to do FDI and portfolio investment in the US.
  5. Problems of visas will be on the table. It is difficult for US citizens to travel to India or work in India.
  6. Both sides can make much progress with government procurement, removing rules that restrict government purchases to locals. This is in the interest of efficiency of public spending on both sides.
  7. A variety of procedural frictions need to be improved, such as customs procedures, the US FDA operating in India, the operations of US export controls, etc.
  8. There are concerns in the US about restrictions on the activities of foreign philanthropies and non-profits in India.
  9. Finally there are the problems of technology policy. Both sides have an interest in full free trade in the information economy. India's most important export is IT and services, which requires an open international regime around IT hardware, software and data flows. Interference in digital free trade, e.g. rules for data localisation, hinder these possibilities. It is in India's interests to fit into the global IT order and prosper from it -- as was done in the first 30 years of the IT revolution -- rather than playing the role of a disruptor.

Negotiations require state capability

Strategic autonomy is easy, foreign policy is hard. It requires homework, in understanding the Indian economy deeply so as to map out India's interests, and envisioning the range of possibilities in negotiation. Absent such homework, we are down to grandstanding and the requests of special interest groups.

The Indian government has signed many FTAs or Comprehensive Economic Cooperation Agreements ("CECAs") that delivered disappointing outcomes, through myriad restrictions shaped by special interest groups, that gave us a situation more like traditional Indian autarky and less like free trade. Many an FTA in name leaves the Indian state in place, actively hindering cross-border activities. The devil will lie in the details, in the ability of both sides to build negotiating teams that achieve more than propaganda and a photo op.

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