Date : 03/08/2023

Relevance – GS Paper 2 – International Relations

Keywords – FTA, U.S.-Mexico-Canada Agreement (USMCA), TPF, Trade Potential

Context :

Prime Minister Narendra Modi's historic State visit to Washington on June 22, 2023, marked a turning point in the U.S.-India relations. With the Biden administration demonstrating a keen interest in cultivating India as a long-term partner, the visit underscored the strategic significance of their partnership, particularly in the context of the United States' competition with China. Although progress has been made in various realms, the economic and trade relationship between the two nations still has untapped potential.

The Growing U.S.-India Trade Partnership:

During the fiscal year 2023, the United States solidified its position as India's most prominent trading partner, with bilateral trade soaring to an impressive $128.55 billion. Notably, India experienced a commendable 2.81% growth in exports to the U.S., while imports from the United States saw a remarkable surge of approximately 16% during the same period. The major export items that India dispatched to the U.S. encompassed a diverse range of goods, such as petroleum, polished diamonds, pharmaceutical products, jewelry, and frozen shrimp. Conversely, pivotal imports from the United States comprised essential commodities, including petroleum, rough diamonds, liquefied natural gas, and gold. This significant expansion in trade relations highlights the strengthening economic ties between the two nations and signifies the potential for further collaborations in the future.

Realizing the Trade Potential:

Despite the considerable expansion in trade, the economic relationship between the United States and India is not fully realizing its potential. To maximize the benefits of this crucial strategic partnership, trade must be accorded a more central and pivotal role. India has exhibited a proactive approach by engaging in negotiations for fresh trade relationships with significant global partners and is presently reevaluating its longstanding stances. In recent times, the Indian government has successfully finalized free trade agreements with both the United Arab Emirates and Australia, while simultaneous negotiations with the European Union, the United Kingdom, and Canada remain underway. This proactive approach highlights India's dedication to fostering robust trade ties and exploring new avenues for economic cooperation on the international stage.

The U.S. Trade Approach:

The Biden administration has undergone a transformation in its stance on free trade agreements (FTAs), shifting its focus towards resilient supply chains, reshoring, and promoting labor rights and climate-friendly production. While this shift has garnered support from some quarters, there are critics who argue that it fails to fully recognize the advantages that FTAs can bring in effectively addressing these objectives. As an illustration, the U.S.-Mexico-Canada Agreement (USMCA) serves as a comprehensive trade deal that modernized trade relations among the three North American nations. It enabled increased market access, reduced trade barriers, and established robust labor and environmental standards.

The Need for Balancing Trade Objectives:

Achieving a harmonious trade policy is paramount for the U.S. administration, requiring a balanced approach that acknowledges the strategic importance of the relationship with India without neglecting the trade aspect. It is crucial for both nations to seek common ground, navigating the realms of resilient supply chains, labor rights, and climate-friendly production while also capitalizing on the potential benefits that a free trade agreement (FTA) can offer. The U.S.-Mexico-Canada Agreement (USMCA) stands as a compelling example, illustrating how trade deals can effectively address multiple objectives while promoting economic growth.

Strengthening Trade Ties:

The State visit produced favorable results, leading to the resolution of six disputes at the World Trade Organization. Leveraging these achievements, trade negotiators from both nations should receive a more ambitious mandate from their leaders. India's positive strides in negotiating FTAs with other trade partners are promising, and although these agreements may not align entirely with the U.S. gold standard, the disparities are diminishing. India's gradual willingness to open its agricultural sector presents an opportunity for deeper engagement and further collaboration.

Leveraging FTA Negotiations:

Commencing FTA negotiations holds the potential to foster broader agreements on agriculture and facilitate increased trade in goods, services, and investments between the U.S. and India. Drawing inspiration from the successes of the USMCA, such agreements can unlock fresh opportunities and bolster economic ties. India's gradual market opening, coupled with concessions, offers the prospect of substantial gains, particularly in the agriculture sector. A compelling illustration of this is Australia's Economic Cooperation and Trade Agreement with India, where both nations achieved significant benefits in each other's markets, showcasing the potential of successful FTA negotiations.

Looking Beyond Transactional Concessions:

Indeed, the bilateral Trade Policy Forum (TPF) has already played a role in securing transactional concessions between the U.S. and India in certain sectors. Nevertheless, a comprehensive Free Trade Agreement (FTA) holds the potential to establish a more stable and predictable environment for businesses and investors from both nations. By lowering tariffs, simplifying regulations, and strengthening the protection of intellectual property rights, an FTA would foster increased bilateral trade and investment, unlocking new avenues of economic cooperation and growth.

Navigating Challenges:

As both countries aim for a more ambitious trade agenda, it is vital to acknowledge and tackle the challenges and concerns that may arise. For India, one of the critical considerations is addressing the trade deficit with the U.S. To achieve this, India can focus on diversifying its export portfolio, fostering innovation, and adding value to its products. These measures can potentially lead to an increase in India's exports and contribute to a more balanced and mutually beneficial trade relationship between the two nations.

Conclusion:

The historic State visit of Prime Minister Narendra Modi to Washington reaffirmed the growing strategic partnership between the U.S. and India. To fully realize the potential of this alliance, trade must be elevated to a central role. Both countries have shown a willingness to negotiate and adapt their trade policies, making it an opportune moment for FTA negotiations. By aiming higher and bolstering the mandate from both administrations, the target of $500-$600 billion in bilateral trade by 2030 can be easily attained. The USMCA provides valuable insights into how a comprehensive trade agreement can benefit both parties while addressing multiple objectives. As the U.S. and India navigate the challenges ahead, a robust trade relationship will undoubtedly propel their partnership into the 21st century.

Source – The Hindu