Why India Should Not Sign A FTA With The United States

India’s decision to begin a multi-sectoral trade agreement with the US aims to secure a trade deal that minimises the potential adverse impacts of the US’ reciprocal tariffs and trade plans. Both countries aim to increase their bilateral trade from US$ 200 billion to US$ 500 billion by 2030. 

Some policymakers, policy experts, geopolitical experts, and civil society organisations contend that an FTA between India and the US is imperative to deepen their economic and trade ties.

This will help both countries take their relationship forward and build greater synergies in crucial areas of collabouration, such as clean technologies, supply chain disruptions, critical minerals, and semiconductor manufacturing.

However, the moot question in the context of a multi-sectoral or comprehensive trade agreement is whether India should sign an FTA with the US. 

A comprehensive trade agreement is not only about tariff liberalization; it includes a range of complex and inextricable issues such as services, investment, intellectual property rights, rules of origin, digital trade, labour, and environmental standards.

A sound legal and economic analysis of a trade agreement should include all of these issues in a consolidated manner to understand the potential economic and trade implications. Of course, one can also include both geopolitical and strategic dimensions. Let us examine some of key areas of concerns for India and its implications.

Under the circumstances explained below, India's best bet would be to try work out a smaller transactional deal rather than any ambitious agreement where we may stand to lose more than we bargained for.

First, tariff liberalisation commitments under the India-US FTA will be a major challenge for India. India has a trade-weighted average import tariff of 7.7 per cent on US goods, while the US’ trade-weighted average tariff rate is 2.8 per cent for Indian goods.

This demonstrates that India must significantly reduce its import tariffs to accommodate the interests of the US. A significant reduction in import tariffs will adversely impact industrial and agriculture sectors.

Wither India's Self-Reliance?

Moreover, it may impact India’s existing efforts to improve its domestic manufacturing under the Self-Reliant India initiative. On the other hand, the US has little to lose in terms of tariff reduction commitments under a bilateral trade pact with India. The potential economic gains from trade liberalisation commitments are significantly higher for the US than India.

Second, the US’ interest in FTA with India is not only about gaining better market access to goods, but its core interest lies in areas such as government procurement, intellectual property rights, digital trade, environmental goods, labour, and environmental standards. It is important to understand that the US’ reciprocal tariffs and trade plans are all about forcing its trading partners to bring them to the negotiation table.

India’s inability to offer competitive tariff cuts under an FTA will allow the US to ask for better market access in other areas, such as government procurement, digital trade, environmental goods, and clean technologies. For example, the size of government procurement in India accounts for approximately 30 per cent of India’s $3 trillion gross domestic product.

The US is keen to obtain better market access for government procurement under a bilateral trade pact, as it will enable US firms to participate in government tenders. Given the financial resources and technological capabilities of US firms, it is unlikely that Indian firms will be able to compete in government procurement.

This will significantly impact the business interests of domestic firms, especially MSMEs who are favoured in many procurement procedures,  and increase imports. Furthermore, trade negotiations in areas such as government procurement, digital trade, and IPRs demand considerable changes in the domestic regulatory landscape, which will significantly undermine our policy space.

Will Trump Keep His Word?

Third, it is important for Indian trade policymakers to understand that Trump is disregarding its own negotiated international trade agreements. In his previous term 2017-2021, he replaced the North American Free Trade Agreement with the US-Mexico-Canada Agreement (USMCA). He ensured that the legal text of the USMCA not only protects the US’s economic interests but also provides a competitive edge to US firms.

Despite comprehensive revisions in the trade agreement, the US is still imposing tariffs on Canada and Mexico, thereby violating its own international trade commitments.

This gives a clear message to the world and Indian policymakers that any trade deal with the US at this stage will be purely transactional. Given Trump’s idiosyncratic trade policy stance, India should avoid negotiating a comprehensive trade pact with the US.

In view of changing global trading environment driven by the US, trade policymakers and negotiators need to understand that a trade agreement with the US at this juncture may not be of our economic interest.

It will not only cause harm to our industry and farmers but will curtail our policy space to pursue catch up policies in new areas such as clean technologies and digital products.

The best strategy to deal with the US is to adopt a transactional approach. A retaliatory approach is sometimes required in international trade policy.

(The writer is an Associate Professor, Jindal School of Liberal Arts and Humanities, O P Jindal Global University, Sonipat. Views are personal)