Rethinking an India-US trade deal
The India-US joint statement requires India to purchase $500 billion of US goods and services over the next five years. This would further exacerbate the depreciation crisis
On February 20, the US Supreme Court declared reciprocal tariffs to be illegal, thereby undermining the basis for the 18 per cent reciprocal tariffs. The India-US Interim Agreement for trade is back in the spotlight. Sergio Gor, the US Ambassador to India, has said that the deal is 99 per cent complete. Officials are ironing out a few issues and are reportedly finalising the deal during June 1-4.
On February 6, both countries had issued a joint statement announcing that they had reached a framework under which the US would reduce reciprocal tariffs on India from 25 per cent to 18 per cent, while India had committed to reducing or eliminating tariffs on most US agricultural and industrial exports. As part of the Bilateral Trade Agreement, India may also be required to align its economic policies and laws, including those in the digital sector and intellectual property rights, with US interests. Much, however, has changed over the past four months.
On February 20, the US Supreme Court declared reciprocal tariffs to be illegal, thereby undermining the basis for the 18 per cent reciprocal tariffs. Subsequently, the US imposed 10 per cent tariffs across the board on most countries. As these tariffs are due to lapse on July 24, the US has already proposed a tariff of 12.5 per cent against India for labour issues under Section 301 investigations. These illegal tariffs could go even higher after the investigations on excess capacity are concluded.
In this negotiating environment, India could be compelled to accept an Interim Agreement which, in reality, may not be balanced and equitable. Further, if any action of India, including the purchase of Russian oil or any other policy decision, is perceived by President Donald Trump to be against American interests, he may not hesitate to impose higher punitive tariffs, thereby undermining tariff predictability.
Then there is the rapid depreciation in the value of the rupee, with the widening trade deficit being one of the triggers. The India-US joint statement requires India to purchase $500 billion of US goods and services over the next five years. This would further exacerbate the depreciation crisis. Any increase in India’s exports resulting from the Interim Agreement may not be sufficient to offset this.
The case put forth by some commentators is that the Interim Agreement will boost India’s exports from labour-intensive sectors such as textiles and clothing to the US and create employment. This may well be true, provided India faces a tariff in the US which is substantially lower than that faced by its competitors, including Bangladesh, China and Vietnam. However, concessions by India in the area of agriculture are likely to push a far greater number of farmers out of employment, including through tariff concessions on almonds, apples, apple juice, cotton, orange juice, red sorghum and soybean oil among other products.
An important demand of the US is that its partner countries mandatorily allow imports of dairy, meat, and poultry products from the US if they are accompanied by health certificates from the relevant American authorities. If India agrees to this, its farmers would be adversely impacted by low-priced and subsidised imports of these products. Finally, the livelihood of millions of Indian farmers of rice and wheat would be jeopardised if the US leverages the Interim Agreement and secures changes in India’s Minimum Support Price Scheme, an objective that it is pursuing aggressively at the WTO.
If India’s continued bilateral trade engagement with the US is premised mainly on avoiding ever-increasing and illegal tariffs on labour-intensive products, then we must be prepared to face the adverse consequences of a deal that is likely to be substantially tilted against the country. At a time when many countries are seeking to diversify their export destinations, by firmly tethering its economic policies and prospects to the political and commercial interests of the US, India runs the risk of narrowing its options. An urgent rethink of India’s approach to the Interim Agreement is called for.
Das is an international trade expert. The views expressed are personal
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