Needed: A US-India FTA

The former US Ambassador, Robert Blackwill, famously observed that the US-India economic relations were as flat as a chapati, in contrast with the remarkable recent growth in the political and security dimensions.

Ignoring the insult to our beloved phulka, which, when properly made, is as puffed up as any politician, it is worth asking what indeed might be done to deepen economic linkages between the two countries, now that each has a government at the beginning of its term.

One idea that has been circulating for some time is for India to negotiate a free-trade agreement with the US. I understand that this idea has been explored in the high-powered Aspen group, which brings together senior policy thinkers from both sides.

Exploratory work is certainly being undertaken within the CII, which serves as the Indian secretariat to that group. The most common formulation is that the two sides consider a bilateral agreement only covering trade in services.

This, for example was the recommendation of a task force on US-South Asia relations, sponsored by the Council on Foreign Relations and the Asia Society, which issued its report in 2003 ("New Priorities in South Asia: US Policy Toward India, Pakistan, and Afghanistan," Council on Foreign Relations, 2003, New York).

The NCAER has entered into a partnership with the Brookings Institution of Washington D.C. to publish an annual journal of commissioned papers on the Indian economy.

The head of Brookings is now Strobe Talbott, formerly Deputy Secretary of State in the Clinton Administration. The first volume of this joint venture, called the India Policy Forum, will be released shortly.

For this maiden volume, the editors asked a distinguished analyst of US trade policy, Professor Robert Lawrence of Harvard University, to undertake an analysis of the case for a US-India FTA.

His paper, jointly with my NCAER colleague Rajesh Chadha (henceforth LC), makes for fascinating reading [Robert Z Lawrence and Rajesh Chadha: "Should a US–India FTA Be Part of India's Trade Strategy," India Policy Forum 2004, NCAER and Brookings Institution Press, (forthcoming), Washington D.C. and New Delhi].

Most readers of this column would be aware that both India and the US were originally staunch supporters of the multilateral trading system. Partly in response to the rise of the European Economic Community (now the European Union), the US began to stray towards bilateral trade agreements, initially with Canada and Israel in the 1980s, and then regionally with the conclusion of the North American Free Trade Agreement (NAFTA) in 1993 under President Clinton.

The pace of such bilateral agreements has been pushed aggressively by the Bush administration, following the collapse of the ministerial meeting of the WTO at Seattle toward the end of the Clinton administration.

Agreements with Chile, Singapore, and Jordan have been implemented; those with the Central American Free Trade Area (CAFTA), Morocco, and Australia have been completed; numerous others are either under active negotiation or planned, even as the Doha round of multilateral liberalisation is under way.

India's romance with bilateral FTAs is both narrower and more recent, with agreements signed with Sri Lanka and Thailand, and framework agreements with members of the Association of South East Asian Nations (ASEAN) and the agreement to create a South Asian Free Trade Area (SAFTA). In addition, there is a long-standing trade agreement with Nepal.

However, talks are under way with a more geographically diverse range of partners, including Chile, the Mercosur trade bloc in South America, and South Africa.

Here, too, the main economic impetus has been to generate alternatives in case the multilateral system erodes, although the dominant motives seem to be diplomatic.

Economists typically analyse trade policies in terms of their effects on domestic welfare, incentives, and growth, both nationally and internationally. This framework usually leads to a preference for multilateral liberalisation.

While India has preferred unilateral liberalisation, there can be a gain in credibility if liberalisation commitments are locked in through reciprocal commitments, whether bilateral or multilateral.

This was the path used aggressively (and successfully) by China in the course of its WTO accession negotiations. The LC paper accordingly asks whether a US-India FTA would better support India's reform effort than a range of available alternatives.

The most obvious case for such an FTA would be to establish a legal and institutional framework for keeping trade in information technology (IT) services free. It might be argued that equal comfort can be obtained through the General Agreement on Trade in Services (GATS) agreement within the WTO.

The GATS, however, operates on a positive list approach, which can create some ambiguity as to what forms of market access have been bound. By contrast, services liberalisation in US bilateral agreements already uses a negative list approach: trade is allowed unless it has specifically been prohibited.

While such a services FTA is what interests India most, the paper is sceptical that such an agreement could be restricted to services alone. The US is unlikely to forego the opportunity of obtaining preferential access for its goods exports to the Indian market.

In addition, dropping all goods trade in an agreement with India would create a difficult precedent for other FTA negotiations where, with few exceptions, there have typically not been sectoral opt-outs. Thus, if an FTA is to be negotiated, it would most likely have to be a comprehensive FTA.

The bilateral FTAs that the US has already concluded include a negative list for services; investment provisions with a few sectoral exclusions; full national treatment for US companies; intellectual property rules that might be more comprehensive than those in the WTO; and additional provisions relating to labour, environment standards, technical barriers and government procurement.

While the phase-in periods may differ for the two sides, once the agreement is fully implemented (generally fifteen years), the obligations will be symmetric.

It is clear that the institutional changes needed in the Indian economy would indeed be deep. In most areas the agreement would prod Indian policy-makers to move in directions that are inherently desirable. A particular concern of Indian policy-makers would be the introduction of labour and environment standards in an FTA.

Recent US bilateral agreements place emphasis on each government enforcing its own domestic environmental and labour laws, and not weakening laws or reducing protection to encourage trade or investment. Equally, while these obligations are backed by the dispute settlement provisions of the agreements, trade measures may not be used to retaliate.

Could a successful conclusion of the Doha round deliver equivalent benefits to the cause of Indian reform? The paper notes that under the current rules of multilateral trade negotiations, a developing country may not actually need to undertake significant domestic liberalisation at all.

In addition, the two approaches are not mutually exclusive; indeed they reinforce each other. A US–India FTA would certainly make India a more attractive negotiating partner for third countries, in order to match the access obtained by US firms.

A comprehensive FTA with India would also be of strategic importance to the US in its current policy of competitive liberalisation.

The ultimate issues, as always, are political: the capacity to mobilise domestic interests across a broad front; the ability to sell such a deal to a wary and sceptical left; the geopolitical signalling to other groups, particularly the EU. For these reasons it is probably a very long shot. But if we are serious about liberalising and becoming a global force to equal China, the idea of a comprehensive US–India FTA has much to commend it.

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