US and India's different approach to FTA can lead to challenges: Study

The US and India are major bilateral trade partners. India is the 9th largest goods trade partner of the US, while the US is the 2nd largest goods trade partner of India.

Any US-India bilateral trade deal as mentioned by President Donald Trump will encounter challenges given the lack of convergence between the two sides on trade issues and their different approach to free trade agreement (FTA) negotiations, according to a research paper released by a Singaporean think-tank here.

The US and India are major bilateral trade partners. India is the 9th largest goods trade partner of the US, while the US is the 2nd largest goods trade partner of India.

The paper, written by Amitendu Palit of Institute of South Asian Studies, has highlighted that India needs to be cautious about the US plans to use the Free Trade Agreement (FTA) talks to curb China's economic influence, especially when the trade war between the US and China do not show any signs of meltdown.

"They (negotiations) could further complicate the US' intention of using its bilateral FTAs to isolate China," said Palit, who is a senior research fellow at the ISAS, in the paper released on Tuesday.

The paper highlights that any bilateral agreement talks between the two would encounter challenges given the lack of convergence between the two sides on trade issues and their different approach to free trade agreement (FTA) negotiations.

Palit said that the US' intention of correcting imbalances with major trade partners through bilateral talks highlights such possibilities with respect to India.

From an Indian perspective, trade relations with the US are particularly significant, not just because of the large size of the trade (USD 126.2 billion in 2017, including both goods and services), but also the prominent trade surplus (USD 27.3 billion in 2017, including both goods and services) it enjoys.

This is one of the rare bilateral trade relations that are a net foreign exchange earner for India, said Palit.

From the US perspective, trade relations with India need to be 'corrected', given that deficit trade is inimical to America's economic interests, he noted.

Trump's description of India as 'tariff king' leaves little doubt about his intention of extracting greater access in the Indian market for American products and thereby altering the trade balance in favour of the US.

This is a strong motivation on part of the Trump administration to persuade India into talks on a bilateral FTA, much like it has done with Japan, believes Palit.

But he also highlighted the rough ride ahead.

Notwithstanding the large bilateral trade, India and the US hardly have common ground on trade issues.

They have locked horns at the World Trade Organisation on several occasions.

The US' dissatisfaction with Indian trade policies ranges from food grain procurement at cheap rates to the demand for local content in solar panels for government consumption, according to Palit.

India's latest grievances against the US include tightening H1-B visa rules and the hike in steel and aluminium tariffs.

Successive US administrations have had major issues with India's intellectual property (IP) rules and their shoddy enforcement noted Palit.

India's emphasis on data localisation policies run into conflict with the commercial interests of US businesses like Walmart, Amazon, Facebook and Google that have penetrated into the Indian economy.

These issues are bound to affect the progress in the FTA talks, said Palit.

The talks could become more cumbersome due to differences in the approach to FTA negotiations by the two countries.

These include government procurement, rules for state-owned enterprises, ambitious IP protection conditions, investor-state-dispute rules, e-commerce and digital trade regulations, and labour and environment standards.

Indian FTAs do not include these and focus more on traditional trade issues like tariffs, non-tariff barriers, rules of origin and trade facilitation.

Even on trade in services, a common interest for both, the US' approach to negotiations is based on the negative list, that is, indicating a negative list for only those sectors that are restricted for market access, whereas India is used to dealing with a more restrictive 'positive list method.

The US' insistence on a wider scope and different approach to negotiations would be a challenge for India, according to Palit.

Even in traditional trade areas, the US demand for greater market access in 'sensitive' sectors, like agriculture and automobiles, which are heavily protected by tariffs, would be a political challenge for India, he said.

The research paper highlights about the recently concluded US-Mexico-Canada Agreement (USMCA), which explicitly provides for termination of the FTA by any of its members if any of the other enterers into an agreement with a 'non-market' economy.

The purported intention of keeping the other partners of the USMCA away from possible FTAs with non-market countries is clearly an effort to scuttle their trade engagements with China, believes Palit.

The possibility of future bilateral US FTAs including such a provision cannot be overlooked, Palit noted.

(With inputs from agencies.)