Trade

Why an India-US Free Trade Agreement Would Require New Delhi to Reorient Key Policies

Modi should use trade talks to draw a red line around India’s critical interests in agriculture, namely, food security and rural livelihoods.

For some years now, there have been discussions on the sidelines that India and the US would enter into negotiations for a free trade agreement (FTA). 

In the last few weeks, there has also been some speculation that such an augury is in the offing, which has been strengthened by President Donald Trump’s statement that a “key announcement” would be made during his meeting with Prime Minister Narendra Modi. 

While nothing was announced on Sunday night at the NRG Stadium in Houston, it appears more than likely that something is in the offing.

An FTA between some of the world’s largest economies arouses considerable interest, especially because of the nature of these agreements are in the realm of comprehensive economic partnership agreements, which usually cover every possible area of economic, social and environmental policies.

However, India and the US seems to have had considerable differences on a wide gamut of trade and related economic policies, which must be addressed before any move towards a possible FTA is taken.

Deteriorating trade relations

Trade relations between India and the US have been deteriorating since the spring of 2018. This was after the US unilaterally increased tariffs on steel and aluminium, by 25% and 10% respectively, on its imports from several countries including India. The argument used was that imports from these countries threatened US’s domestic industries and that higher tariffs could protect them for “national defence” and “national security”. Such unilateral measures were adopted despite these being against the rules of the World Trade Organization (WTO). 

Like most affected countries, India initiated bilateral negotiations with the US to resolve the issue. This move having failed, India raised its tariffs on select US products using WTO rules, and then approached the dispute settlement mechanism to initiate consultations prior to the initiation of a formal dispute. When almost six months of consultations bore no fruit, India sought the establishment of a dispute settlement panel for resolving its dispute with the US.

Under the GSP, which has been in place since 1971, products exported by developing countries are granted duty-free access in the markets of developed countries. Photo: Reuters

A few months ago, the US took yet another unilateral measure to restrict the entry of Indian products into its market, by denying concessional market access under the generalised system of preferences (GSP). A presidential proclamation announced the list of 94 products from the developing countries which would not receive duty-free access into the US, of which 50 were those being imported from India.

Under the GSP, which has been in place since 1971, products exported by developing countries are granted duty-free access in the markets of developed countries. In other words, developed countries granted unilateral concessions to the developing countries for increasing their exports. 

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The GSP row got worse this year in June when the US withdrew the GSP preferences enjoyed by 3,600 products exported by India. The United States Trade Representative (USTR) announced the termination of India’s designation as a beneficiary developing country under its GSP programme for its failure to provide the US with “assurances that it will provide equitable and reasonable access to its markets in numerous sectors”.

The US decision was based on an eligibility review conducted by the USTR on “concerns” related to India’s compliance with the GSP market access criterion, but more importantly, on two petitions related to the same criterion. The petitions were filed by the US dairy industry and the US medical device industry requesting the USTR to withdraw India as a beneficiary country, given India’s “trade barriers” affecting US exports in those sectors. The latter petition was regarding the price controls that the government of India had introduced for coronary stents and knee implants aimed at making these devices affordable in the country. 

Linking GSP benefits to market access opportunities provided by India was a violation of the GSP rules, since developed countries grant these preferences unilaterally to developing countries.

To be developed or not?

Denial of GSP preferences should be seen as a part of a larger design of the US administration to get India de-recognised as a “developing country” in the WTO. In a substantial paper submitted to the WTO in February, the US argued that since countries like India and China have climbed up the development ladder, they should not be designated as developing countries. 

More recently, President Trump issued a memorandum on Reforming Developing-Country Status in the WTO, the key point of which was that “China and too many other countries have continued to style themselves as developing countries, allowing them to enjoy the benefits that come with that status …”.

As a developing country, India enjoys a number of benefits, including the space to grant higher levels of agricultural subsidies and to maintain higher levels of protection as compared to the developed countries. For instance, developed countries can subsidise their agriculture up to 5% of their value of agricultural production, while the corresponding figure for developing countries is 10%.

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Equally importantly, India, as a developing country, has a food subsidy programme like the one that the National Food Security Act has put in place. This programme would have to be discontinued if India loses its developing-country status.

As a developing country, India enjoys a number of benefits, including the space to grant higher levels of agricultural subsidies and to maintain higher levels of protection as compared to the developed countries. Photo: Reuters

Over the years, the US has sought plenty of changes in India’s trade and investment policies for it found that they were not serving American commercial interests. India has frequently been probed by federal agencies, the last of the major investigations by the US International Trade Commission (USITC): ‘Trade, Investment, and Industrial Policies in India: Effects on the U.S. Economy’. This report published in 2014 examined “trade, investment, and industrial policies in India that restrict US exports and investment, and estimates the effects these policies have on US companies, US workers, and the US economy”. 

One of the more extensive commentaries on India’s policies was on its Patents Act, which, according to this report “limits patents for incremental innovation, compulsory license provisions, and onerous patent processes are a deterrent to US companies, especially in IP intensive industries”.

For exactly two decades, the USTR has been “investigating” India’s Patents Act using Section 301 provisions of its Trade Acts of 1974 and 1988. This “investigation” has continued even after India had enacted a patent regime compatible with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

The USITC report was alluding to several public policy provisions that the country’s lawmakers had included in the Indian Patents Act to keep the prices of medicines affordable. India denies patents on mere formulations or new uses for existing products and can issue compulsory licences when the patented drugs are sold at prices way beyond the means of the common people. These are important provisions for a country that has substantial income inequalities.

As mentioned earlier, India had imposed price caps on coronary stents and knee implants, resulting in the lowering of prices by 85% and 65% respectively. The US administration has consistently argued that the Indian government must abandon these policies, which are providing affordable healthcare solutions to its citizens

The other critical area in which the US is seeking substantial changes in India’s policies is agricultural subsidies, in particular, those granted to the two principal cereals: rice and wheat. The US has argued in the WTO’s Committee on Agriculture that India has been giving market price support to these crops way above the level that it is committed to providing. Thus, Washington DC’s stance is not exactly supportive of India’s critical interests in agriculture, namely, food security and rural livelihoods.

It is clear that the US wants a comprehensive re-orientation of Indian policies; seeking to shift the focus of India’s laws away from serving the interests of its citizens.

Interestingly, while engaging international processes, the US administration’s sole aim has been to serve the interests of its workers, farmers, ranchers and businesses: The Trump-Modi summit could possibly help the US understand that its partner country aims to do similarly.

Biswajit Dhar is a professor at the Centre for Economic Studies and Planning, JNU and K.S. Chalapati Rao is Visiting Professor, Institute for Studies in Industrial Development.