India US Bilateral Trade Agreement

Context

The decision by India and the United States to negotiate a multi-sector Bilateral Trade Agreement (BTA) by the fall of 2025 is a significant step in strengthening economic ties between the two nations. However, this agreement must align with international trade law, particularly the General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO) principles. 

Understanding Free Trade Agreements under WTO Law

• The MFN Principle: The WTO is based on the Most Favoured Nation (MFN) principle, which demands equal treatment for all trading partners with one another. This principle, enshrined in Article I of GATT, ensures that any preferential treatment granted to one country must also be extended to all WTO members.
• FTAs as Exceptions to MFN: FTAs bring exceptions to the MFN principle under Article XXIV.8(b) of GATT. FTAs require countries to abolish tariffs and barriers on “substantial all the trade” between the countries. Though this term has not been defined clearly, it generally means to have covered around 90% or more of trade.
• Implications for the India-U.S. BTA: Scope of the proposed BTA remains questionable as it does not quite epitomize itself as an FTA. If it does not bring down tariffs on quite a range of goods and services, it would be against WTO law unless justified under some provisions.

Legal Considerations for the India-U.S. BTA

MFN Compliance: Noncompliance with one of the serious legal issues for BTA is the MFN principle. If India and the US agree to reduce tariffs with reference to one another’s products, and give no such treatment to other WTO members, this could amount to a violation of WTO rules.

Structure of the BTA: FTA or Interim Agreement?

• FTA Requirement: As per GATT Article XXIV, an FTA must eliminate barriers to trade on “substantially all trade”. If the BTA does not meet this threshold, it cannot claim qualification as an FTA.
• Interim Agreements: Article XXIV.5 brings in the possibility of countries entering into interim agreements, as steps toward formation of an FTA. Such a provision is available to phased tariff reductions, spreading over a reasonable timeframe (normally within 10 years). It is hence possible to structure BTA as interim agreements, while India and the US are working toward comprehensive FTA.

Potential WTO Violations and Political Challenges

• Risk of Discrimination: If BTA focuses on tariff reductions limited to a small number of goods or services and makes no wider commitments, then this most probably will be interpreted as discrimination against other members of the WTO and hence may lead to a legal challenge from excluded countries.
• Political Considerations: India has internal bilateral commitments to fulfill while at the same time keeping its promises multilaterally under WTO rules. Politically, India has to face pressure to see to it that any agreement does not impinge on India’s trade policy or compromise its negotiating position in the global trade process.

Strategic Importance of Compliance

• Role of India in Maintaining WTO Norms: India has been a proponent of rules-based international trading systems, and this prospective BTA will be an avenue through which India can demonstrate how serious it is about WTO principles even as it pursues economic prosperity.
• Policy Changes: The U.S. under the present administration has adopted a policy of aggressive trade measures through such means as reciprocal tariffs that violate WTO norms such as Most Favored Nation Status and Special and Differential Treatment. For India, making its way through these while still keeping the multilateral rules would be essential.

The Way Ahead

Designing a Legally Sound Agreement

To ensure compliance with WTO principles:

• The BTA should either qualify as an FTA by eliminating barriers on “substantially all trade” or be structured as an interim agreement under Article XXIV.
• Tariff reductions should be phased in a manner that aligns with GATT requirements.

Balancing Bilateral and Multilateral Commitments: India must remain vigilant against any attempts to dilute core WTO principles such as MFN and S&DT. A balanced approach will ensure that the BTA strengthens global trade frameworks rather than undermining them.

Conclusion

The proposed India-U.S. BTA presents both opportunities and challenges. While it could enhance economic ties and promote trade, careful structuring is essential to ensure compliance with WTO regulations. By adhering to international norms and strategically negotiating terms, India can leverage this agreement to boost its economic growth while maintaining its commitment to a fair and transparent global trading system.

Source: Financial Express

UPSC Mains Practice Questions 

Q. Discuss the key aspects of the India-US Bilateral Trade Agreement and analyze its impact on various sectors of the Indian economy. What are the major challenges in strengthening trade ties between the two countries? Suggest measures to enhance bilateral trade relations. (250 words)

Download as PDF