It’s Time for America and India to Talk Trade

With the war in Ukraine raging, news about the Indian-U.S. relationship tends to focus on Prime Minister Narendra Modi’s reluctance to criticize the Russian invasion. But the frustration the Biden administration has voiced over that position obscures the broader trajectory of the countries’ bilateral relationship: over the past 22 years, the United States and India have steadily widened and deepened their partnership to cover almost every area of human endeavor, ranging from defense and counterterrorism to health and education. There is, however, one area that has repeatedly caused friction: trade.

Flows of goods and services between the two countries are well below the levels one would expect for the largest and sixth-largest economies in the world, especially given their economic complementarities and the strong link created by members of the Indian diaspora in the United States. Out of context, the numbers look robust: trade between the United States and India has risen from approximately $19 billion in 2001 to almost $160 billion in 2021. But that represents only around two percent of total U.S. trade and just 12 percent of total Indian trade. Moreover, there have been frequent trade squabbles and nagging disputes between the two countries. These are due, in part, to long-standing U.S. concerns regarding market access in India and India’s sensitivities about agricultural imports and the access of its skilled professionals to the U.S. market.

The fact that efforts to advance the bilateral trade agenda have frequently fallen short does not mean either country should give up. Enhanced bilateral trade is important for growing both economies and providing long-term ballast to the U.S.-India partnership. To promote their commercial and strategic objectives, the two countries must also play a central role in developing the economic framework for a free and open Indo-Pacific. Failing to do so would provide opportunities for other countries, such as China, to create a trade order that would leave India and the United States on the outside looking in.

Heading for the Exits

In recent years, the United States and India have pulled back from shaping the Asian trade landscape. In February 2016, the United States signed the Trans-Pacific Partnership (TPP) agreement, a trade pact among 12 countries, including Australia, Canada, Japan, Malaysia, Mexico, and Vietnam. The TPP never went into force, however, because in early 2017, newly elected U.S. President Donald Trump abruptly withdrew the United States from the pact. Under Japan’s leadership, the remaining 11 signatories revived the agreement and created a successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

India also withdrew from a regional trade agreement. From 2013 to 2019, India was one of 16 Asian nations—including the large economies of China, Indonesia, Japan, and South Korea—forging the Regional Comprehensive Economic Partnership (RCEP). As negotiations were wrapping up in November 2019, however, India pulled out, arguing that the deal would lead to a flood of imports from China, with which India already registered a sizable trade deficit. The other 15 nations signed the RCEP in late 2020, and the agreement went into effect on January 1 of this year, among ten of the signatories. (South Korea and Malaysia have subsequently joined, bumping the number to 12.)

The U.S. exit from the TPP and India’s withdrawal from the RCEP negotiations were driven, in large part, by a growing sentiment in both countries that trade deals have hurt their domestic manufacturing industries and cost middle class workers their jobs. Those concerns may well be legitimate, but failing to pursue trade deals handicaps both countries’ ability to tap foreign markets, participate in developing regional trade rules, and advance their broader objectives in the Indo-Pacific.

China, meanwhile, has pursued an expansive regional economic agenda. It was one of the first countries to ratify the RCEP agreement and encouraged others to follow suit. Last September, it unexpectedly submitted a formal application to join the CPTPP. Soon thereafter, it applied to join the regional Digital Economy Partnership Agreement, which is aimed at facilitating digital trade; its current signatories are Chile, New Zealand, and Singapore. China’s Belt and Road Initiative, moreover, includes investments in regional infrastructure that will strengthen Beijing’s influence in Indo-Pacific countries and across the globe. The common denominator for China in all these initiatives is the ability to shape the rules for trade and investment while promoting integration with its neighbors and increasing their dependence on Beijing.

Fits and Starts

China’s assertive approach is a major reason why both India and the United States seem to be rethinking their economic and trade strategies, despite the domestic political headwinds: U.S. and Indian leaders understand that ceding the region to China may have irreversible consequences. Together, the U.S trade representative and India’s minister of commerce and industry have revitalized their Trade Policy Forum to discuss “the full range” of issues affecting their trade relationship. India also recently signed a trade deal with Australia and an economic partnership agreement with the United Arab Emirates, as well as launched or revived bilateral negotiations with Canada, the European Union, Israel, and the United Kingdom. At the same time, the Biden administration is putting the finishing touches on its new Indo-Pacific Economic Framework (IPEF) to economically reengage with this dynamic region.

This does not mean the two countries are on the verge of a bilateral breakthrough. On several occasions, the United States and India have been on the cusp of agreeing on a package of trade measures only to come up short. This occurred most recently in 2019, when the Trump administration terminated India’s designation as a beneficiary under the Generalized System of Preferences (GSP) program, which gives duty-free treatment for imports of thousands of products from developing countries. To justify the move, Washington pointed to the fact that New Delhi had not provided the United States with “equitable access” to its market—one of the criteria for participation in the GSP.

The United States and India have pulled back from shaping the Asian trade landscape.

The U.S. Congress now appears poised to renew the overall GSP program, which would provide the Biden administration with the authority to reinstate New Delhi’s GSP benefits and generate momentum for the reinvigorated Trade Policy Forum to resolve outstanding bilateral issues. This would clear out the underbrush in trade relations to allow for a more forward-looking engagement to take center stage. The two countries should also agree to a political standstill commitment to refrain from taking new trade-restrictive measures affecting each other, so that they do not end up in a situation where the deck is cleared only to be repopulated with new irritants.

In addition, Washington’s launching of the IPEF will set the agenda for U.S. economic engagement in the region, with a focus on four pillars: fair and resilient trade; infrastructure, clean energy, and decarbonization; supply chain resiliency; and tax and anticorruption. The United States is not aiming to negotiate a traditional trade pact, but rather is looking to work with multiple countries in the region on efforts to set high standards, adopt binding rules, and make softer commitments on cooperative efforts related to the four pillars.

At this point, India may not be ready to be a full member of the IPEF because of its own developmental constraints. But there may be opportunities for India to participate in certain aspects of the IPEF, such as infrastructure and resilient supply chains. For this regional economic initiative to be most meaningful, broad Indian participation should be an aspiration for both Washington and New Delhi.

The Quad

Another way to shape the regional economic order and counter China’s influence would be to expand the mandate of the Quadrilateral Security Dialogue—the grouping composed of Australia, India, Japan, and the United States known as the Quad. The Quad countries represent four of the largest and strongest economies in the region, with the United States viewing the Quad as “a premier regional grouping” that “delivers on issues that matter to the Indo-Pacific.” At this critical juncture, the Quad should get directly involved in designing regional rules and norms of commerce through the establishment of a trade working group, albeit with realistic expectations.

The Quad has carefully nurtured an expanding agenda of issues, ranging from humanitarian assistance to global health to critical and emerging technologies. Trade, however, is noticeably absent from the Quad’s agenda. This may be because a trade discussion would reveal differences among members and not readily lend itself to tangible results. But the United States already has bilateral trade agreements with Australia and Japan; those two countries, moreover, concluded an economic partnership agreement seven years ago. India has long had a similar agreement with Japan and has just signed an interim trade pact with Australia, with the aim of moving to a comprehensive agreement by the end of the year.

The U.S.-Indian trade relationship remains a weak component of the strategic partnership.

While Quad members are far from in sync on trade issues, these agreements provide the foundation for the Quad to begin work on select matters, adopting a building block approach. Because trade is both strategic and filled with esoteric detail, trade negotiators would benefit from having Quad leaders engaged to help them make the tough political decisions, keep the larger picture in mind, and delicately provide impetus for a pragmatic plan on trade that can help shape the regional architecture.

The trade working group could begin by considering relatively low-hanging fruit, such as trade facilitation, the behavior of state-owned enterprises, and liberalization of services sectors. Over time, the group could take on more challenging matters that originate from and build on the various bilateral agreements among the parties. The group could also address trade aspects of issues that are the focus of other Quad working groups or the IPEF, such as the digital economy, supply chains, and standards for critical and emerging technologies. To be sure, the four partners would need to be mindful of India’s different level of development. Given that a sizable portion of the Indian population lives below the poverty line, the Quad could agree to give India longer transition periods on opening its market to imports, so that farmers and family-owned businesses would have time to adjust to a steady increase of foreign products.

Some commentators have suggested that a better way to forge closer trade relations between the United States and India would be through a bilateral free trade agreement. But this would inevitably be a difficult and laborious process, with no guarantee of success. Even if India and the United States were able to hammer out such an agreement, they would still find themselves outside the economic integration underway in the region. In the meantime, China and other countries would be shaping the regional rules. As Indian Foreign Minister Subrahmanyam Jaishankar has pointed out in discussing the Indo-Pacific, “bilateralism has its own limits.”

Difficult, but Not Impossible

Despite efforts in recent years to strengthen the U.S.-Indian trade relationship, it remains a weak component of the strategic partnership. As a result, many current and former officials in both capitals have concluded that trying to enhance relations in this area is an exercise in futility. Undoubtedly, it will be difficult, but by making the political commitment to work together on the IPEF agenda and use the Quad as a vehicle to pursue closer trade ties, the two sides can make tangible progress. Over time, they could engage a broader set of Indo-Pacific partners—including those in the Association of Southeast Asian Nations and the CPTPP—to create a robust economic architecture for the region.

When Modi and U.S. President Joseph Biden held their first meeting in September of last year, Biden spoke of a bilateral relationship “destined to be stronger, closer, and tighter” that “can benefit the whole world.” By jointly announcing this vision for a new economic and trade strategy, and proceeding with a step-by-step approach to get there, the United States and India could reposition themselves geopolitically in the most dynamic region of the world and provide further impetus for their growth and prosperity.