INDIA-US INTERIM TRADE DEAL: NAVIGATING TARIFF WARS AND STRATEGIC AUTONOMY

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Picture Courtesy:  INDIAN EXPRESS

Context

India is strategically engaging with the United States through an "Interim Trade Arrangement" to secure market access for its exports and protect its economy from global protectionism and trade disputes.

Evolution of India’s Trade Philosophy

Era of Insulation (1947–1990): Post-independence, India's trade policy prioritized stability and self-reliance over open competition. 

• Trade was largely controlled by state-owned entities like the State Trading Corporation (STC). 
• A key example is the rupee-ruble barter system with the Soviet Union, where goods like tea were exchanged for machinery. 
• While this provided certainty, it limited economic competitiveness.

The 1991 Reforms: A severe balance of payments crisis triggered the dismantling of protectionist policies, resulting in export growth and the rise of the IT services sector, proving Indian industry's global competitiveness.

Era of Purposeful Engagement (2014–Present): India has adopted a more proactive and aggressive trade policy,  reflected in the shift from "Look East" to "Act East" and the signing of several Free Trade Agreements (FTAs) with partners like the UAE, Australia, and the EFTA bloc (Switzerland, Norway, Iceland, Liechtenstein). 

• This new approach focuses on integrating India into Global Value Chains (GVCs) rather than isolating behind high tariff walls.

Significance of the India-US Interim Arrangement

Avoiding High Tariffs: The deal offers India a competitive edge, avoiding high US tariffs by setting rates at 18%.

Securing Key Export Sectors: The US is India’s largest trading partner, with merchandise exports reaching $86.5 billion in 2024-25. The deal secures zero-duty access for vital sectors:

• Generic Pharmaceuticals: India meets 40% of the generic drug demand in the US.
• Gems and Jewellery: A major source of employment.
• Aircraft Parts: Supports India's growing aerospace manufacturing ecosystem.

Preventing Capital Flight: A stable trade relationship with the US boosts investor confidence, prevents the outflow of foreign investment, stabilizes the Indian Rupee, and protects the nation's Foreign Exchange Reserves.

Global Challenges Driving India’s Strategic Shift

Decline of Multilateralism

The World Trade Organization (WTO) is facing a crisis. Its Dispute Settlement Body is non-functional, and the "Doha Development Agenda" has stalled. This has forced nations like India to pursue bilateral agreements for trade stability.

Rodrik’s Trilemma

This economic principle states a country cannot simultaneously have deep globalization, national sovereignty, and democratic politics. 

By opting for a managed trade deal, India and the US are prioritizing sovereignty and democracy over hyper-globalization.

The "Spaghetti Bowl" Effect

Economist Jagdish Bhagwati coined this term for the complex web of overlapping bilateral trade deals. In the absence of a strong WTO, these agreements offer the only predictability for global trade.

Impact on India's Strategic Autonomy

Enhanced Sovereignty

Integration with the US economy provides India with technology and capital, strengthening domestic defense and manufacturing capabilities and thus enhancing its sovereignty.

Buffering Against Sanctions

Deepening economic ties with the US provides a cushion against potential secondary sanctions, such as those under CAATSA (Countering America's Adversaries Through Sanctions Act), related to India's continued defense and energy trade with Russia.

Case Study: India vs Bangladesh

What are the Domestic challenges to Maximizing this Deal?

Contract Enforcement: Delays in the judicial system and poor contract enforcement remain major concerns for foreign investors.

Dispute Resolution: A credible and efficient arbitration framework is necessary. While the International Arbitration Centre in GIFT City (Gujarat) is a positive move, its acceleration is needed, using models like the Abu Dhabi Global Market (ADGM).

Logistics Costs: India's logistics costs are high at 8-9% of GDP (developed nations average 6-7%). Despite infrastructure efforts like PM Gati Shakti, these costs harm export competitiveness. (Source: LEADS Report)

Way Forward

Implement Deeper Reforms

Act on the recommendations of panels like the N.K. Singh Committee to ensure fiscal discipline and structural reforms that boost competitiveness.

Strengthen Arbitration Mechanisms

Develop GIFT City into a world-class hub for international dispute resolution to attract more US investment.

Diversify the Export Basket

Use policies like the Production Linked Incentive (PLI) schemes to move up the value chain into high-tech manufacturing areas such as semiconductors and electric vehicles (EVs).

Conclusion

The India-US interim trade arrangement is a pragmatic move that balances India's economic interests with global geopolitical realities.

Source:  INDIAN EXPRESS