Trade and geopolitics

The India imperative in US global trade policy

Anushka Shah

Published 29 October 2024

Over the last two US administrations, China has consistently provided the foil against which Washington has reset its trade policies. The vital role that India can play in US national security and Asia engagement strategy is mentioned considerably less. There is no better moment than a change of leadership at the White House, whether Democratic or Republican, to chart a new course in US-India geoeconomic strategy.

In a few days, a US presidential election will take place that will have enormous impact worldwide and on US domestic policies. And while trade has not dominated the airwaves in the last stretches of both the Republican and Democratic campaigns, the next administration will almost certainly play a critical role in reshaping international trade for years to come.

Over the last two administrations, China has consistently provided the foil against which the United States has reset its trade policies. India is mentioned considerably less. In fact, the US-India trade relationship languishes even as the broader bilateral strategic partnership responds to tectonic shifts in global geopolitical dynamics. The same forces make this partnership compelling as a basis for a reinvention of US trade policy on India.

The United States and India have struggled to raise the ambition of their trade relationship, despite important progress in bilateral trade during the last two administrations. Yes, annual bilateral trade in goods and services is roughly US$200 billion a year, and is likely to increase as US companies invest more in India, supply chains accelerate in migrating from China, and Indian middle-class consumption grows. But the US-India trade agenda lacks meaningful commitment on both sides to take bilateral trade to the next level even as the two governments engage more frequently, identify new areas of cooperation, and establish new institutional arrangements. In fact, while each identifies China as a central concern in their respective international trade policies and has imposed new tariffs and other trade restrictions to curb trade with China, their trade flows with China experience only occasional speed bumps, and certainly not decisive changes in direction.

With a new US administration, whether headed by Vice President Kamala Harris or former President Donald Trump, it is critical that there is greater emphasis on US-India bilateral trade and support from the very top to use all tools to advance this relationship.

Encouraging signals on growing US-India trade ties

The US-India trade relationship has been a challenging one for decades. In the World Trade Organization (WTO), where the two countries’ trade missions regularly engage on a multilateral basis, US and Indian interests generally have clashed and the relationship is much more one of tension and conflict than active diplomacy and compromise. The bilateral trade relationship outside the WTO in Geneva has been more positive in tenor but accomplished not much more.

However, times and dynamics have changed, and there is a new context for committing to higher ambition in the trade relationship and negotiating and concluding concrete trade agreements with India, even on an incremental basis.

First, the strategic relationship continued to flourish during the Trump and Biden administrations through various groupings, including the Quadrilateral Security Dialogue and the US-India 2+2 Dialogue.

In contrast, government-to-government engagement on bilateral trade has lagged despite Trump-era efforts to conclude a wide-ranging deal related to India’s tariff benefits under the Generalized System of Preferences (GSP) program, created by Congress in 1974 to spur US ties with developing economies, and resolution of seven WTO disputes and agreement to some tariff cuts in the Biden administration.

Developments related to the pandemic and strategic competition with China sharpened US supply chain needs and the importance of better integrating US and Indian supply and demand in critical sectors. The two countries saw and pursued mutual gains in supply chain collaboration. However, this has yet to translate into real, game-changing action.

Private-sector support for higher ambitions on bilateral trade has steadily increased, particularly as the Indian economy continues to grow at impressive rates, on track to become the third-largest global economy in a few years (fourth if you count the European Union) and more firms recognize that India is too big to ignore.

Persistent trade restrictions on both sides, such as tariffs and non-tariff measures, remain sticking points and will likely continue to be so, absent stronger efforts to pursue preferential trade opportunities more aggressively.

However, as global trade relations have fractured with the decline of the multilateral trading system and the bubbling up of strategic and autarkic instincts that now wield more influence in determining national policies worldwide, US-India trade relations have remained stuck. India has shown remarkable capacity to strike up new geostrategic and trade alignments, including with other developed economies from Europe to Australia as well as US rivals such as Russia. The United States seems not to see trade agreements with India as a key component of its national security. This atrophy benefits neither country.

There is no better moment than a change of leadership at the White House, whether Democratic or Republican, to chart a new course.

A menu of options

A more ambitious approach, leading to meaningful, enforceable trade agreements, can be incremental, comprehensive, or, most likely, something in between. An initial effort to generate incremental results could make sense and could focus on cross-sectoral issues that are already on the agenda for the India-US Trade Policy Forum, a platform created in 2005 and held sporadically since, such as implementation of the WTO Trade Facilitation Agreement (TFA) and related upgrades, good regulatory practices focused on transparency, predictability, and accountability in developing central government regulations and aligning regulatory approaches in key sectors, and transparency in government procurement practices, particularly in areas in which governments are significant actors in the market. From there, or in parallel with these efforts, the two sides could convene negotiations on specific sectors that are critical in promoting supply chain resilience.

Critical minerals are an obvious area, building on recent collaboration under the Biden and Modi administrations and potentially tied to preferential treatment for India on batteries and other components for electronic vehicles under the Inflation Reduction Act (IRA). Peter Harrell, a former Biden official, has laid out compelling arguments for future sectoral trade agreements.

However, there could be factors at play that favor pursuing a higher-ambition agreement right from the start of a new administration, including reciprocal market access negotiations. First, an incremental approach is easier said than done if there aren’t compelling trade-offs on the table that might come from a broader set of negotiable terms. Second, India’s trade negotiation agenda with other trading partners, including the European Union, the United Kingdom, Australia, and the European Free Trade Area (EFTA) countries – Iceland, Liechtenstein, Norway, and Switzerland – seems likely to continue. The consequence will be more preferential trade with India through differential tariffs with those economies. In fact, if the trade policies of the last two administrations have shown anything, it’s that tariffs still matter. We can expect a less level playing field for US-India trade if these trends are not offset by direct bilateral negotiations on tariffs that will also help integrate US-India supply chains in critical sectors.

Whether or not the next US administration favors a slower, incremental approach or a more ambitious negotiation on tariffs and non-tariff barriers sooner than later, the goal of very real and meaningful change in the US-India trade relationship does not necessarily require working toward a comprehensive free trade agreement (FTA). In fact, the Trump administration provided an interesting model in its US-Japan Trade Agreement (USJTA) concluded in 2020. While this agreement has some features of an FTA by cutting tariffs between the two countries in several important sectors, it was never identified as an FTA, submitted to Congress for approval, or notified to the WTO. This could be the future of US trade negotiation, so long as a compromise could be worked out with the Congress on new tariff-cutting authority.

The Trump campaign has been clear that it will raise tariffs. There have been no signals that any country would escape a first wave unscathed. Accordingly, we can expect Trump to raise tariffs with India, and India to retaliate, yet most likely with the objective of taking up bilateral negotiations as a top priority in the subsequent trade policy agenda.

Yet alongside this, there is another, more immediate, option that might revive the Trump administration’s negotiations with India related to GSP. The deal under discussion at that time could have covered as much as US$10 billion in annual trade and could be even more substantial in the next administration, if Congress were to get its act together to reauthorize the GSP program, which has strong bipartisan support.

In contrast, a Harris trade policy is clear as mud at this point, which actually is a positive, as a Harris administration could more objectively consider the strategic and economic benefits of negotiating a first-ever substantial trade agreement with India.

A sustained and committed effort to negotiate a trade agreement or trade agreements with India could include new areas that are specifically relevant to the times, such as tools for better responding to supply chain disruptions, alignment of export control measures, and mutually beneficial approaches on industrial subsidies, including preferential treatment under the IRA. Of course, there are other options available, and the next administration should seriously consider those that are most likely to yield substantial benefits for both the United States and India strategically and economically.

These options, all of which would move the United States and India in the direction of becoming true strategic trade partners, should include the following key components:

Prime Minister Narendra Modi and the victor in the US Presidential election, either Kamala Harris or Donald Trump, must provide leader-level commitment and direction to the future bilateral trade relationship, including a long-term vision whether or not it is an FTA.

Each side must ensure strong inter-agency buy-in and participation, coordinated by a lead agency or ministry that has a strong track record in bringing all players to the table (presumably the Office of the US Trade Representative (USTR) with the Departments of Commerce and State on the US side, and the Ministry of Commerce and Industry with the Ministry of External Affairs on the Indian side).

It is essential that there be new, creative approaches for private-sector involvement on an ongoing basis and at more operational levels. The US-India CEO Forum has worked well enough for the US-India Commercial Dialogue, but a negotiating process requires a more hands-on approach from the private sector and other interested stakeholders, including labor and environmental groups.
The trade negotiating agenda should be broad, yet specific enough to ensure balance in ironing out a full range of bilateral trade irritants, so that it might produce strong commitments on both sides. While cooperative approaches can be useful, the ambition should be for negotiated agreements that resolve many existing barriers, extend rules to avoid new ones, and provide for effective enforceability mechanisms.

Like it or not, the world is transitioning from a system first put into place after the Second World War to something completely different. The United States and India should be at the forefront of shaping this new era together, rather than relying on structures and institutions that can promise only more disappointment and frustration.

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