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India-US Trade Issues: Free Trade Agreement

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  • 04 Sep 2021
  • 7 min read

Why in News

Recently, the new (Joe Biden) US administration has indicated that it is no longer interested in securing a bilateral Free Trade Agreement (FTA) with India. The US is India’s largest trading partner, and one with whom it has a significant trade surplus.

  • This calling off of the US-India mini-trade deal provides an opportunity for India to holistically review its stance on global trade.

Key Points

  • Free Trade Agreement (FTA):
    • About:
      • It is a pact between two or more nations to reduce barriers to imports and exports among them. Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
      • The concept of free trade is the opposite of trade protectionism or economic isolationism.
    • India and FTAs:
      • After India opted out of the Regional Comprehensive Economic Partnership (RCEP) in November 2019, the 15-member FTA grouping that includes Japan, China and Australia, FTAs went into cold storage for India.
      • But in May 2021 came the announcement that India-EU talks, which had stalled in 2013, would be resumed. This was followed by the news that FTAs with other countries like the UAE, Australia and Britain, too, are in various stages of discussion.
  • About US-India Mini-Trade Deal:
    • India’s Demands:
      • Resumption of export benefits to certain domestic products under the Generalised System of Preferences (GSP).
      • Greater market access for its products from sectors like agriculture, automobile, auto components and engineering.
    • US’ Demands:
      • Greater market access for its farm and manufacturing products, dairy items and medical devices.
      • The office of the US Trade Representative (USTR) has underlined India’s measures to restrict companies from sending personal data of its citizens outside the country as a “key” barrier to digital trade.
      • USTR report also highlights that India's move to impose data equalisation levy on foreign e-commerce firms discriminates against American companies.
      • The US has also raised concerns over the high trade deficit with India.
  • Other Major India-US Trade Issues:
    • Tariffs: India has been referred to by the US as “tariff king” that imposes “tremendously high” import duties.
      • In June 2019, the Trump administration decided to terminate India’s benefits under the GSP scheme.
      • Removal from the GSP list amidst rising trade tensions prompted India to finally impose retaliatory tariffs on several American imports. This made the US approach the WTO (World Trade Organisation) against India.
    • Intellectual Property (IP): The two sides differ on how to balance IP protection to incentivize innovation and support other policy goals, such as access to medicines.
      • India remains on the “Special 301” Priority Watch List for 2021, based on such concerns as its treatment of patents, infringement rates, and protection of trade secrets.
    • Services: India also continues to seek a “totalization agreement” to coordinate social security protection for workers who split their careers between the two countries.
  • Issues in India’s Foreign Trade Policy:
    • Poor Manufacturing Sector: In the recent period, manufacturing holds a share of 14% in India’s GDP.
      • For advanced and developed nations like Germany, the US, South Korea and Japan, the comparable figures are 19%, 11%, 25% and 21%, respectively.
      • For emerging and developing countries like China, Turkey, Indonesia, Russia, Brazil, the corresponding figures are 27%, 19%, 20%, 13%, 9%, respectively, and for low income countries the share is 8%.
    • Unfavorable FTA’s: In the past decade, India signed FTAs with the Association of Southeast Asian Nations (ASEAN), the Republic of Korea, Japan, and Malaysia.
      • However, it is largely believed that India’s trade partners have gained more from these agreements than India.
    • Protectionism: The Atmanirbhar Bharat campaign has exacerbated the view that India is increasingly becoming a protectionist closed market economy.

Way Forward

  • Switching to Multilateralism: Given that India is not party to any mega-trade deals, this would be an important part of a positive trade policy agenda.
    • Having walked out of RCEP, India needs to demonstrate to its potential FTA partners, including the EU and the UK, that it is a viable alternative to China in a post-Covid world.
  • Economic Reforms: India’s trade policy framework must be supported by economic reforms that result in an open, competitive, and technologically innovative Indian economy.
  • Improving Manufacturing: The share of manufacturing in theGDP needs to rise through efficient implementation of schemes such as the Make in India initiative.
  • Need For Innovation: If innovation needs to be promoted, perhaps India should have unveiled an innovation incentivization policy, as intellectual property rights are the flip side of the innovation coin.

Source: TH

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