Channel: Trade

Thursday, 9 December 2010
India US FTA: Tough nut to crack
Indo-US Free Trade Agreement (FTA) is struggling for its existence as the two nations are not able to negotiate and conciliate over FTA terms and polices.

With US and India entering into a strategic partnership, the Free Trade Agreement (FTA) between the two nations has become a natural route to go forward. As trade and investment are becoming the axis of political relations, the two countries are bound to increase the level of economic engagement. So, while the situation is ripe for a free trade agreement between India and US, the differences have simply refused to settle down. In this situation the big question is - Can India and US reach into an agreement?


Despite growing Indo-US relations, the two sides have not been able to bridge the gap on the issue of market access. Unfortunately India & US have locked horns in WTO negotiations as well. Since the bilateral trade is growing with a CAGR of 16%, a free trade agreement can actually bring it to a new record level. Though there are not many bottlenecks for a FTA, agriculture has emerged as the most complicated issue.


India and US both have signed a number of Free Trade Agreements (FTA) with other nations. India has signed free trade agreements with Sri Lanka (1998) and Thailand (2003) plus a number of preferential trade agreements (tariff concession schemes) with countries/blocs such as Afghanistan, Nepal, Chile and Mercosur. In June 2005, the government signed a Comprehensive Economic Cooperation Agreement with Singapore, what many consider India's first "comprehensive" FTA.India signed FTA with the ASEAN in 2009. Currently, bilateral FTA negotiations are going on with the GCC, Bangladesh, Colombia, Uruguay, Venezuela and Mauritius. As a new development, only since 2007/2008, India commenced FTA talks with industrialized powerhouses like Japan, EFTA (European Free Trade Association) and the EU. The government is in various stages of considering talks with Indonesia, Malaysia, China, Korea, Israel, Egypt, SACU (Southern African Customs Union), Russia, New Zealand, Hong Kong and Australia.


The problem with India-US FTA is India's sensitivity to agriculture. US wants access for its agricultural products whereas India has clearly expressed its inability to do so. India did not face this problem while dealing with ASEAN and EU as EU and ASEAN are not a major agricultural producer. India-EU FTA also encompasses substantial trade but US wants almost 100 per cent coverage. So if India desires a FTA or economic cooperation, it will have to allow a zero duty market for everything, including highly-sensitive agricultural products.


So for now, it's a wait and watch situation for the US. The successful implementation of India-EU and India-ASEAN FTA might provide the needed impetus for India-US FTA. While currently US has shown its unwillingness to go ahead with a FTA excluding agriculture, it does not seem to be very easy in future, either. As India overtakes Japan in GDP (Purchasing power based) and continues to grow at a brisk pace of 8-9%, American companies will be at a disadvantage due to the absence of a FTA.


Regarding FTA the basic assumption has been that promulgation is easy when it is signed between countries with similar level of development. In this context, North-South FTA has met with resistance. In case of India-US FTA, India also has to look for a favorable agreement on TRIPS. The pharmaceutical is a crucial sector for India and so India needs to trade cautiously.


The Indian side is definitely trying to move ahead as FTA might provide India's service sector the much needed boost. The protectionism coming from various quarters of the world is a serious threat to India’s growing service sector.The role of American companies in India in some of the sectors is likely to be vital. India's growing infrastructure sector which is estimated to be around $1 trillion may get a considerable support from US investments. Likewise energy, insurance and agriculture supply chain are the key areas where India will gain the benefit of entry of US firms. So while a FTA can make the engagement of US companies much better in India, the gain for India comes not only at domestic front but also in outsourcing and other service sectors.


The policy makers in US have refrained to move ahead on FTA as any further gain by Indian companies in service sector in the US might lead to more loss of jobs. There is an added anxiety over the growing trade deficit of US with India.


Since the two sides have not been able to move forward on a broad FTA, there is a growing consensus that a limited number of sectors should be included in the FTA for now. Noting that achieving a comprehensive free trade agreement between India and the US would take time because of sharp differences on several issues involved, industry body FICCI has called for an Indo-US FTA excluding the contentious issues like agriculture. In fact, there are instances where the US has entered into a free trade agreement with countries excluding some of the contentious issues like agriculture. The prominent among these include HRD, energy, infrastructure and financial services. There are two driving factors behind US accepting this limited FTA. The first one is the intention to remain in competition with trade blocks like EU and second is to ensure a counter balance to the growing influence of China.


So now the million dollar question is - Will the two countries subside their differences and sign a FTA in near future? As of now the feeling is that India-US investment treaty might be the first step towards a FTA. So for now India-US FTA seems to be a pipe dream for thebusiness community in the two countries.


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