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The U.S.-India trade deal fell through. What happens now?

Future negotiations will have to deal with even more controversial issues.

- March 5, 2020

Last week, President Trump’s whirlwind 36 hours in India included a huge cricket stadium rally in Ahmedabad that recalled Houston’s “Howdy Modi” joint appearance last September with Prime Minister Narendra Modi. The trip generated photo ops in Sabarmati Ashram, where Mohandas Mahatma” Gandhi once lived and worked; in Agra at the Taj Mahal; and at a state dinner in Trump’s honor.

Here’s what didn’t happen: The United States and India failed to produce a trade agreement, although there were repeated hints that the two sides were racing to complete the deal. Despite Trump’s assurance that negotiators are working on “the big deal for later on,” the absence of even a limited trade agreement reveals the difficulties inherent in trading with India.

What happened, and where are the bilateral negotiations likely to go from here?

1. Why was a trade agreement necessary?

U.S. trade officials have been pushing to negotiate a “mini trade deal” with India as a way to address a litany of market access disputes that have arisen in recent years.

The primary U.S. complaints stem from India’s use of tariff and non-tariff barriers to shield agricultural producers and select manufacturing industries. India has historically maintained prohibitive tariffs on a broad swath of agricultural goods to protect nearly 126 million small, inefficient farmers — the government fears foreign competition would significantly disrupt the livelihoods of these farmers.

Over the past three years, India has increased tariffs in violation of World Trade Organization commitments on information and communications technology products. India maintained price controls on coronary stents and knee-replacement hardware, and it added additional import duties on medical devices in the 2020 Union Budget. India alleges that the United States maintains anti-competitive practices and points to Trump’s unilateral steel and aluminum tariffs and the use of anti-competitive subsidies for U.S. domestic dairy producers.

In April 2018, the U.S. Trade Representative’s Office initiated a review of India’s eligibility for the Generalized System of Preferences — which allows eligible developing countries to export duty-free goods to the United States — on the grounds that India had denied sufficient access to agricultural and dairy markets, and had placed prohibitive price controls on medical devices.

The Trump administration announced in March 2019 that it would officially revoke India’s GSP status, after deciding India had failed to make sufficient improvements. Termination of GSP benefits removed special duty treatment for $5.6 billion worth of exports to the United States, affecting India’s export-oriented sectors, such as pharmaceuticals, textiles, agricultural products and automotive parts, in particular.

The U.S. government expected the “mini deal” would resolve these disputes in return for tariff reductions on steel and aluminum, and reinstatement of GSP benefits for India.

2. Was an agreement ever attainable?

Yes — negotiators had reportedly come to a consensus on pricing models for medical devices, tariff reductions on select agricultural products and a commitment to coordinate on intellectual property protection. In the run-up to the president’s visit, news reports claimed U.S. Trade Representative Robert E. Lighthizer would head to New Delhi to finalize the agreement.

But Lighthizer abruptly canceled his mid-February trip, and the mini-deal negotiations apparently foundered after the two sides were unable to make sufficient progress on outstanding issues.

3. Why a trade agreement remains elusive

Unlike the United States, India lacks an influential domestic lobby to promote liberal trade policies. Industry remains largely focused on servicing the large domestic market, while decades of protectionist policies have sheltered firms from competing on international markets. Consequently, India exports far less than other markets of comparable size, and domestic consumption is the primary driver of economic growth.

India’s sizable but inefficient agricultural sector has little reason to support the entry of global competitors. U.S. Department of Agriculture analysts, however, see India’s limited ability to meet growing domestic demand as an opportunity for U.S. agricultural exporters.

In the absence of pro-trade voices, the Modi government has increasingly turned to protectionist barriers and import substitution to spur domestic industry and manufacturing. Modi is also under pressure to provide employment opportunities for India’s swelling population — two-thirds of Indians are below age 35.

Modi’s impulses aren’t that dissimilar from Trump’s domestic imperatives, but they directly clash with India’s WTO commitments. And Modi’s trade objectives are at odds with the Trump administration’s zero-sum view of international trade.

Where do we go from here?

The failure to produce even a mini trade deal is a major setback for the bilateral commercial relationship. Manageable trade disputes such as agricultural market access and price controls on medical devices now appear intractable — despite a Feb. 25 joint statement from the two leaders noting that “they agreed to promptly conclude the ongoing negotiations, which they hope can become phase one of a comprehensive bilateral trade agreement.”

Trump hinted at a “big deal” to come, but a free-trade agreement does not now seem likely, especially as India’s economy continues to struggle and the United States heads into a presidential election.

Without a mini deal to cement some goodwill, emerging differences in fundamental approaches to the digital economy and individual privacy also appear likely to escalate bilateral disputes in the near future. Pending legislation in India threatens to restrict the international flow of Indian data, impose disproportionate costs on U.S. firms operating in the Indian market, and establish potentially sweeping state access to private company and consumer data. These issues will likely force negotiators to broaden the scope of future negotiations to encompass a substantially more controversial set of issues.

For now, Modi has little incentive to initiate potentially unpopular structural economic overhauls necessary to satisfy Trump. Will the U.S. trade representative take a more forceful approach in the future, akin to the administration’s tough stance on China? Despite the president’s assertions that “America loves India,” the future of the bilateral trade relationship remains more uncertain than ever.

Trevor Cloen is an assistant director in the South Asia Center at the Atlantic Council.

Irfan Nooruddin (@irfannooruddin) is a professor in the School of Foreign Service at Georgetown University and director of the South Asia Center at the Atlantic Council.