Building Bridges: India and USA’s Journey to a Bilateral Trade Agreement

Context

• India and the United States (USA) have agreed to negotiate the first stage of a Bilateral Trade Agreement (BTA) by fall 2025.
• The agreement aims to boost economic cooperation, reduce trade barriers, and enhance investment between the two nations.
• India and the USA have set a target to increase bilateral trade to $500 billion by 2030 under the ‘Mission 500’ initiative.
• The negotiation comes amid global economic shifts, geopolitical challenges, and the need for a balanced trade relationship.

What is a Bilateral Trade Agreement (BTA)?

A Bilateral Trade Agreement (BTA) is a trade pact between two countries that sets rules for trade and investment between them.

Objectives of a BTA

• Enhancing economic cooperation between two nations.
• Eliminating trade barriers such as tariffs, quotas, and restrictions.
• Encouraging foreign direct investment (FDI) and technology transfer.
• Ensuring fair competition and dispute resolution mechanisms.

Key Components of a BTA

A typical BTA includes:

1. Customs Duties & Tariffs – Reduction or elimination of import/export taxes.
2. Regulatory Framework – Trade policies, fiscal measures, and commercial laws.
3. Market Access Provisions – Conditions for goods and services exchange.
4. Investment Protection Measures – Ensuring security for foreign investors.

Core Principles in Most BTAs

• Reciprocity – Equal trade benefits for both countries.
• Most-Favoured-Nation (MFN) Treatment – Extending benefits given to one country to others.
• National Treatment – Equal treatment for domestic and foreign firms in trade-related policies.

India-USA Trade Relations

1. Trade Volume and Trends

• The USA was India’s largest trading partner, with trade peaking at $120 billion.
• China overtook the USA as India’s top trading partner in FY24.
• India had a trade deficit with nine out of its top ten trading partners in 2023-24.
• Under ‘Mission 500’, India and the USA aim to double bilateral trade to $500 billion by 2030.

2. Major Indian Exports to the USA

• Pharmaceutical products
• Electrical machinery and equipment
• Semi-precious stones and jewelry

3. Major Indian Imports from the USA

• Crude oil and petroleum products
• Gems, stones, and jewelry
• Nuclear reactors and electrical machinery
• Medical and scientific equipment

4. Investment Relations

• The USA is the third-largest investor in India, with FDI inflows of $65.19 billion (April 2000 - March 2024).

Challenges in Implementing the India-USA BTA

1. Compliance with International Trade Laws

• Governed by WTO & GATT – India and the USA, both WTO members, must ensure that the BTA aligns with WTO and GATT provisions.
• WTO’s Most-Favoured-Nation (MFN) Rule – If a country grants preferential trade terms to another, it must extend similar treatment to all WTO members.

2. WTO Law and Limited Tariff Reductions

• If India and the USA reduce tariffs only on selected products, they must ensure WTO compatibility to avoid violations.

3. Coverage of ‘Substantially All Trade’

• Article XXIV.8(b) of GATT mandates that FTAs eliminate barriers on substantially all trade within the agreement.
• The India-USA BTA must cover a wide range of products and services to be legally valid.

Possible Solutions and Way Forward

1. Interim Agreement as a Step Towards an FTA

• India and the USA can initially sign an ‘Interim Agreement’, paving the way for a Free Trade Agreement (FTA).

Provisions of a GATT Interim Agreement:

• Article XXIV of GATT allows interim agreements before an FTA.
• Article XXIV.5 states that such agreements must include a clear plan and schedule for full FTA formation.
• The agreement must be completed within 10 years.

2. WTO’s ‘Enabling Clause’ for Developing Nations

• The WTO’s Enabling Clause allows developing nations to receive preferential treatment without violating MFN rules.
• India, as a developing country, may negotiate special access for its products in the USA.

3. Strengthening Economic Ties

• The India-USA BTA should focus on:
  • Reducing trade barriers for critical sectors.
  • Encouraging foreign investment and technology transfer.
  • Expanding cooperation in emerging fields like renewable energy, AI, and semiconductors.

Conclusion

The proposed Bilateral Trade Agreement (BTA) between India and the USA is a crucial step toward strengthening economic cooperation and achieving the ‘Mission 500’ trade target. However, WTO regulations, trade barriers, and legal frameworks must be carefully navigated. Through strategic negotiations and phased implementation, both nations can establish a comprehensive and mutually beneficial trade partnership.