India-US Trade Agreement: An Analysis

The recent trade agreement between India and the United States has drawn political criticism in India, with concerns of a "wholesale surrender" of national interest. Key themes include economic implications, trade barriers, and strategic autonomy.

Criticism and Economic Perspective

• Political Criticism: Farmers have protested, and security experts warn of a loss of strategic autonomy due to reduced Russian oil imports.
• Mercantilist View: The view that exports are beneficial and imports are detrimental is flawed. The real benefits of international trade are imports and the enhancement of Indian firm productivity and economic growth.

Impacts of Trade Agreements

• Reduction of Trade Barriers: High tariffs on intermediate goods and machinery increase production costs for Indian firms. Reducing tariffs can enhance productivity.
• Lerner Symmetry Theorem: This concept states that a tax on imports is effectively a tax on exports. Lowering import barriers can improve the competitiveness of Indian exporters.
• Tariffs on Food: These are considered regressive taxes, disproportionately affecting the poor, who are net buyers of food.

Inconsistencies in Trade Policy

• Investment Facilitation for Development (IFD): While India seeks to attract investment bilaterally, it blocks initiatives at the World Trade Organization (WTO) aimed at streamlining investment procedures.
• Digital Economy: India emphasizes cooperation on digital technologies in bilateral agreements but opposes permanent moratoriums on customs duties on electronic transmissions at the WTO.

Challenges and Future Directions

• Interim Agreement: The current agreement is an interim step with intent but lacks legal obligations, posing risks in the changing global context.
• Non-Tariff Barriers: There is a need to evolve the approach towards non-tariff barriers with binding clauses and specific timelines for regulatory harmonization.
• Rules of Origin: As supply chains shift from China, the US will demand strict verification, requiring Indian firms to adapt to transparency and compliance burdens.

Modernizing Indian Trade Policy

• Deep Trade Agreements: The agreements with the European Union and the United Kingdom should evolve into genuine "deep trade agreements."
• US Trade Representative Document: India should use this document as a guideline for modernizing its trade policies to reduce friction and boost GDP growth.

Author: Researcher at XKDR Forum

Disclaimer: These views are personal and do not reflect the opinion of Business Standard.