Is It Finally Time for a U.S.-India Free Trade Agreement?

February 26, 2018

President Donald Trump says he is a free and fair trader and wants to negotiate new bilateral trade deals with nations around the globe. India and the United States have had little but good things to say about each other as “natural partners” for decades now. The United States is counting on its fellow mega-democracy to help address international strategic issues ranging from the fight against terrorism to the rise of China as a hegemon in Asia.

But strategic and economic relationships are joined at the hip, and the truth is that the U.S.-India trade relationship has not kept pace with the strategic relationship. The United States and India need to step up our game when it comes to economic engagement. Our new U.S. ambassador to India, Ken Juster, recognized this in his maiden policy speech when he said, “… a strategic view of our economic relationship could eventually lead to a roadmap for a U.S.-India Free Trade Agreement.”

The case for greater trade between the two largest democracies in the world is strong. The U.S. economy is the second-largest in the world on a purchasing power basis while India ranks third. The U.S.-India economic relationship has grown rapidly since India in large measure abandoned its “license raj” socialist system.

Yet measured by what the relationship could be, and what it could mean for prosperity to the average man and woman in both the United States and India, the trade side of the U.S.-India partnership is vastly underperforming. Two-way trade in goods and services is about $115 billion. This sounds good but pales in comparison with two-way trade between the United States and China, which at about $650 billion is almost six times as large.

World Bank and Peterson Institute studies have predicted significant gains for both the United States and India if a free trade agreement were concluded.

So why not seal a free trade agreement with India?

A basic problem is that, while both sides talk about “free and fair trade,” their actions do not always reflect this sentiment. Prime Minister Narendra Modi is promoting “Make in India” in part by providing protection while Trump pushes “America First” in trade as in everything else.

Trump has already imposed “safeguard” tariffs on solar panels and washing machines and is threatening action on steel. India is the world’s third-largest steel producer and already has a case pending against the United States on carbon steel restrictions. Trump couldn’t resist a dig at Modi when they met in June about India’s trade surplus with the United States.

For his part, Modi recently spoke against protectionism at Davos. But, as CSIS’s Rick Rossow has pointed out, Modi followed Davos up with a budget that raised tariffs on many significant items. This from a nation that is already considered to have tariffs many times higher than the United States.

These discontinuities just begin the list of trade disagreements between these two great democracies with supposedly market-driven economies. In many instances, it is a case of “the pot calling the kettle black.” Both sides are willing to resort to protectionism when they think it suits their domestic political agendas.

A case in point is the dueling World Trade Organization (WTO) actions on solar energy. The United States sued India at the WTO over local content rules that are plainly not allowed under WTO rules. India lost but vowed to appeal. India lost again. Now instead of adjusting its rules, India has retaliated by suing the United States over requirements in some states of local content in renewable energy projects. India may very well win this suit, but where does that leave us?

The most serious disagreement concerns agriculture. About two-thirds of Indian votes come from farmers. Thus, it is natural for Indian politicians to seek to protect the economic interests of farmers, rich or poor. In the recent budget, Modi’s government is increasing subsidies far beyond levels agreed through the WTO. Conversely, U.S. agricultural interests are legendary for their outsized influence on the nation’s economic and trade policies.

The list of disagreements goes on and on to include textiles, nonimmigrant visas, pharmaceuticals, and motor vehicles. At last count, India was the primary plaintiff in 10 WTO cases against the United States, and the United States was suing India in an additional 8. And neither U.S. nor Indian administrations seem to believe that the WTO is serving the interests of its peoples.

The only way that these myriad trade conflicts can be solved and freer economic engagement again become the engine that pushes the relationship forward is to have a trade negotiation that is broad enough to encompass the fundamentals of economic engagement between India and the United States. The resulting understanding can be called a “free trade agreement,” a “trade and investment framework,” a “trade promotion agreement,” or one of the other euphemisms used to describe a freer movement of goods and services between the United States and India. The important point is not what it is called, but what it does.

Perhaps Trump is right. Perhaps the way to go at this point is a bilateral approach that can flesh out the alternatives and provide broad enough scope for the trade-offs that will be necessary. The reality is that the U.S.-India economic engagement is underperforming in spite of the progress that has been made over the past 30 years. The best way to approach these seemingly intractable issues may well be to consider on a bilateral basis specific broad-based projects where benefits to the average citizen can be shown on both sides. Then steps can be agreed to lessen the trade impediments to the realization of these projects.

At least such an approach can move forward an economic relationship that is progressing in spite of trade discontinuities. The reality is that, long term, no number of military training exercises or exchanges of security personnel or sharing of intelligence is going to provide the close strategic partnership that both sides envisage without a stronger economic relationship.

For too long the level of our ambitions for the U.S.-India economic relationship have not matched the soaring rhetoric of our strategic pronouncements. The way forward is to begin now on serious negotiations for a U.S.-India free trade agreement.

(This essay originally appeared in the February 24 issue of the Diplomat. It is reprinted here with permission.)

Raymond E. Vickery Jr. is a senior associate of the Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).