Look at the dollar

Everybody knows that, for all the ideological arguments in favour of free trade, negotiations on trade issues have always been an exercise in quid pro quo exchanges: you give some and you take some.

If it were not so, countries would not wait for trade talks to conclude before opening up their markets - they would do this unilaterally.

So, it is no surprise that Robert Zoellick, the US trade representative, should ask for trade concessions almost in return as it were for keeping the US service market open to Indian BPO companies.

If he went by the precept of free trade, he would have bought the argument put forward by the McKinsey Global Institute and by sundry economists, including many based in the US, that outsourcing low-value jobs from the US to countries like India, where labour is cheaper, is in fact creating a win-win situation for both countries.

But as was predictable because of the state of the American job market, economics has given way to politics on this issue.

Where Mr Zoellick has gone out on a limb, though, is in attempting however tenuous a linkage with trade in agriculture.

This is the one subject on which India is in a relatively strong position on account of its farm subsidies being well below the threshold levels agreed on in the Uruguay Round.

The US has found a convenient escape route here, because it can point to Europe as the bigger culprit and one that refuses to budge from its untenable position.

But the fact is that the US has to do much more than India in order to present a level playing field for agricultural products; after all, US policies on cotton were a major bone of contention at Cancun.

It is of course true that India's tariffs on agricultural items are very high, and little will be lost if they are reduced; it is worth recalling that they were raised to the present levels only after the Uruguay Round agreement, when there was a short-term fear of being swamped by imports of everything from rubber to palm oil.

Indeed, India can and should move faster on tariff reform in general, because it continues to be an outlier on this issue.

And the fact that the country now has both a current account surplus as well as a comfortable reserves position provides the necessary elbow-room for manoeuvre.

Where Mr Zoellick is right, is in underlining the point that India has become a stronger and more important player in world trade, so it should expect to have to give more than it has had to do in the past, when it could argue that it had a serious trade deficit and foreign exchange constraints.

But Mr Zoellick in turn should recognise that no change in Indian tariff policies will take away the reality that the US is living beyond its means and that it has to address its macroeconomic imbalances, if necessary by lowering the value of the dollar still further. If that is done, the US trade balance with India too will automatically improve.