India and USA have agreed to negotiate the first stage of a mutually beneficial, multi-sector Bilateral Trade Agreement (BTA) by the fall of 2025.
What is Bilateral Trade Agreement(BTA)?
Bilateral Trade Agreement - It is a deal between two countries to set the terms and conditions for trade between them.
Objective - These agreements are designed to encourage economic cooperation and remove barriers like tariffs, quotas, or import restrictions.
Components of BTA - These include stipulations governing customs duties and other levies on imports and exports, commercial and fiscal regulations, transit arrangements for merchandise, customs valuation bases.
Most bilateral trade agreements, either explicitly or implicitly, provide for
Reciprocity
Most-favoured-nation treatment
National treatment of nontariff restrictions on trade.
What is the trade relationship between India and USA?
Largest trading partner - India’s was once the largest trading partner of US, accounting for almost $120 billion in trade.
But now China overtakes US to become India’s top trading partner in FY24
India and USA agreed to more than double bilateral trade to $500 billion by 2030, as part of ‘Mission 500’.
India’s export to USA – It is mostly semi-precious stones, electrical machinery , Pharmaceutical products to USA
India’s import from USA - India gets crude oil and related products, gems and stones, nuclear reactors and electrical and medical equipment.
Investment - USA is the 3rd largest investor in India with cumulative FDI inflows of US$ 65.19 billion from April 2000-March 2024.
What are the challenges in implementing BTA between India and USA?
International trade regulations - A significant portion of international trade law is codified in the General Agreement on Tariffs and Trade (GATT) and governed by the World Trade Organization (WTO).
Since both the U.S. and India are members of the WTO, their bilateral trade dealings must align with the standards set by WTO law.
MFN principle - The WTO system operates on the most favoured nation (MFN) principle, which prohibits discrimination between trading partners.
Therefore, an FTA that grants preferential access to certain countries violates the MFN rule.
Countries can still establish FTAs under specific conditions.
WTO law - If India and the U.S. reduce tariff rates on each other’s limited products, as part of some bilateral deal, without extending similar treatment to other countries, it would violate WTO law.
Inclusion of all trade - Article XXIV.8(b) of the GATT, requires member countries to eliminate customs duties and other trade barriers on “substantially all the trade” within the FTA.
Therefore proposed BTA between India and the U.S. must cover “substantially all trade” to be legally valid.
What can be done?
Interim agreement – India and the U.S can notify the agreement as an ‘interim agreement’, leading to the formation of an FTA.
GATT Interim Agreement
Article XXIV of GATT permits them to sign ‘interim agreements’ that pave the way for an eventual FTA, subject to specific conditions
Under Article XXIV.5 of GATT, countries can enter into an ‘interim agreement’ if it is necessary for forming a free trade area.
This ‘interim agreement’ must include a plan or schedule for establishing an FTA within a reasonable timeframe, which should typically not exceed 10 years.
Enabling Clause -WTO law provides another exception to the MFN principle in the form of what is known as the ‘enabling clause’.
As per this arrangement, WTO countries can deviate from the MFN principle if it is meant to provide better market access to the products of developing countries.
Way Forward
The proposed Bilateral Trade Agreement (BTA) between India and the USA aims to deepen economic connections and reach the "Mission 500" trade target. Challenges include WTO compliance and trade requirements.
Solutions involve interim agreements and careful negotiation to address barriers and promote growth for both countries.
