By: Karan Bhasin
The election of Donald Trump as U.S. president – and his focus on attempting to reduce U.S. trade deficits – has thrown into uncertainty the details of U.S. trade policy. Many fear that this heightened uncertainty is likely to persist at least throughout the remainder of the current year – and very likely into the next year. That would have adverse effects on existing supply chains as countries navigate the prospects of trade disruptions or tariffs.
However, the readout of the first call between Trump and Indian prime minister Narendra Modi hinted at the prospects of expanding India-U.S. trade. A trade deal in the form of well-defined tariffs on trade would be considerable progress in resolving uncertainty surrounding the trade policy. A trade agreement can be supplemented with an investment treaty that encourages bilateral investments in areas of common strategic interests. Some kind of trade deal between the two countries has been proposed in the past, and there is a considerable and shared interest across industries in the two countries to deepen trade relations. There were ongoing negotiations during the first Trump presidency and a deal seemed likely in early 2020. The deal was ultimately rejected by Trump who preferred a bigger and more comprehensive deal. Political realities in both countries continue to make a comprehensive deal less likely. The recent Trump memo on America First Trade Policy mentions the prospects of the United States negotiating agreements on a bilateral or sector specific basis, which is a positive development as India was willing to sign the mini deal negotiated in early 2020.
A small trade agreement today will help end uncertainty, allowing firms from both countries to make significant investments in reorienting supply chains. Given that the United States has surpassed China as India’s largest trade partner, there is little justification for not having such an agreement. Bilateral trade is now roughly $120 billion. India imports roughly $40 billion worth of goods from the United States, meaning that India runs a relatively modest trade surplus with the United States, even as India’s overall trade balance is negative.
India has achieved significant success in recent years as it has entered trade deals with Australia, Mauritius, the United Arab Emirates, and the European Free Trade Association (EFTA). Each of these agreements focus on prioritizing areas where there is consensus while continuing to engage on more sensitive sectors where there is less interest in reducing tariffs. Recently concluded trade deals are in contrast with the traditional approach adopted by India towards trade agreements – primarily due to prior experiences – including with Japan, South Korea, and the Association of Southeast Asian Nations (ASEAN) – that led to a further widening of trade deficits. In addition, there remains a large imprint of the balance of payments crisis in the early 1990s that makes Indian policymakers conservative. However, times have changed, and India no longer has a fixed exchange rate regime. New economic realities and India’s comparative advantage provides a viable alternative to companies looking to diversify their supply chains. Trade agreements are therefore a natural enabler as they reduce the prospects of future unilateral tariff changes.
A perfect trade deal does not exist, and any resulting agreement will require some compromise from both sides. The growth of India-U.S. trade has reflected the natural economic realities of both countries. These advantages should be leveraged to further deepen this partnership. Some easy ways to balance trade might include India’s import of oil and liquified natural gas (LNG); aircraft and related equipment; and medical equipment and machinery. Automobiles may also be an area where reduction in duties would be mutually beneficial. U.S. automobile exports could benefit Indian consumers, even as Indian auto-component manufacturers explore the U.S. market and integrate with existing supply chains. In exchange, India would benefit from the export of textiles, electronics, refined petroleum, and other related products as a part of the trade deal. Although all of these items are already part of the trade basket between the two countries, a preferential trade agreement between these two countries can significantly broaden cooperation.
Trade deals are always complicated and involve significant negotiations. But a good trade deal would, at a minimum, reduce duties and remove barriers to goods for which there is a mutual agreement while establishing a reciprocity agreement for all other items on which a consensus is hard to achieve. There will remain some categories of items that are too sensitive for both sides and can be left outside a Phase I trade agreement. But locking in an imperfect deal sooner would be better than trying to resolve everything at a later date.
Karan Bhasin is a Non-Resident Fellow at ORF America.