Indo-US FTA: A strategic opportunity amid global trade challenges

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 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, exports of Indian goods in 2023 were $432 billion, with a nominal growth rate of 3.2 per cent over the last decade (a nominal doubling every 22 years). For comparison, Vietnam, with a population that’s 7 per cent of India’s, was at $354 billion in 2023, with a decadal nominal growth rate of 10.4 per cent (a nominal doubling every seven years). 

At the recent Emerging Markets Conference (https://bit.ly/EMC-12-2024), Daniel Rothschild offered an important idea. He said that conditions were good for a strong Indo-US free-trade agreement (FTA). He argued that an Indo-United States FTA would be supported within the United States (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 the knowledge that goes all the way back to David 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 an FTA 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. On 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 Donald Trump and some of his cabinet picks. There is genuine competence in his economics team. It is not all hostility to globalisation, and they will bring genuine state capability to FTA negotiations. There is more to the US federal government than Mr Trump and his inner circle.

  What are the contours of such an FTA?

  1. Both sides have tariffs that can be meaningfully reduced. The American side has concerns about rules of origin, about India being a rerouting station for trade diversion, eg 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 restrictions, to ensure that their high technology does not reach buyers in Russia or China through India. 

3. Growth in services export is the 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 foreign direct investment (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 interests of efficiency of public spending on both sides. 

7. A variety of procedural frictions need to be improved upon, such as Customs procedures, the US Food and Drug Administration 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 information technology (IT) and services, which require an open international regime around IT hardware, software, and data flows. Interference in digital free trade, eg 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 be a disruptor. 

Strategic autonomy is easy, and foreign policy is hard. It requires homework in understanding the Indian economy deeply so as to map out India’s interests and envision the range of possibilities in negotiations. 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 that delivered disappointing outcomes through myriad restrictions shaped by special interest groups. Many an FTA in name leaves the Indian state in place, actively hindering cross-border activities. The devil will lie in the detail, in the ability of both sides to build negotiating teams that achieve more than propaganda. 

The writer is a researcher at XKDR Forum