Interpreting US trade deal: Focus on the gains from import liberalisation

Amid political criticism, the India-US trade pact highlights how lower tariffs and deeper reforms could lift productivity and growth, if intent turns into binding change

The trade agreement between India and the United States (US) has generated political criticism in this country. It is said that there is a “wholesale surrender” of the national interest. Farmers have organised protests. Security experts warn that India is relinquishing strategic autonomy by stopping Russian oil purchases. 

The mercantilist view — that exports are the prize and imports are the price we pay — is economically flawed. At a fundamental level the prize in international trade is (a) imports (things that we get to buy from abroad) and (b) Indian firm productivity and economic growth. The value of each trade agreement is measured by reduction in Indian trade barriers. 

High tariffs on intermediate goods and machinery increase the cost of production for Indian firms. By protecting inefficient domestic sectors, we implicitly tax the efficient ones. The narrative that liberalisation is a “surrender” assumes that the status quo was optimal. It was not. The status quo was a high-cost, low-competitiveness equilibrium that hindered India’s integration into global supply chains and thus Indian economic growth. The commitment to eliminate or reduce tariffs on all US industrial goods is a productivity shock. When Indian manufacturers can import high-tech machinery, intermediate inputs, and components from the US without the friction of prohibitive duties, their landed costs decrease. 

Economists have a sweet phrase “the Lerner Symmetry Theorem” — a tax on imports is effectively a tax on exports. By lowering import barriers, we are improving the competitiveness of Indian exporters. We trigger a shift in the allocation of Indian labour and capital away from uncompetitive sectors and into the ones that India is really good at, which generates growth in gross domestic product (GDP). 

Tariffs on food are regressive taxes. They disproportionately impact the poor, who are net buyers of food. Political thinkers need to re-evaluate the size of the land-owning farming families group as against the number of poor people buying food. Food tariffs benefit large land holdings exactly as input subsidies and minimum support price do. The entire logic of positive externalities from improved nutrition for the poor translates into benefits from reducing trade barriers for food. 

A problem that will now come up is the inconsistency between the superior economics knowledge, in three recent Indian trade agreements (the US, European Union, and United Kingdom) vs the old Indian socialism that’s in force at multilateral level. India has long been a wrecker at the World Trade Organization (WTO). 

Consider the agreement on Investment Facilitation for Development (IFD) at the WTO. This initiative aims to streamline investment procedures and improve transparency. Yet, India has blocked its adoption. At the same time, the joint statement with the US highlights India’s intent to attract capital and technology, including the signalled intent to purchase $500 billion in US goods, comprising energy, aircraft, and technology products. It is incoherent to actively solicit investment bilaterally while structurally opposing investment facilitation multilaterally. 

A similar hypocrisy exists in the digital domain. The bilateral agreement emphasises cooperation on sensitive technologies, graphics processing units, and artificial-intelligence infrastructure. Yet, at the WTO, India continues to oppose making the moratorium on Customs duties on electronic transmission permanent. We seek to import the hardware of the digital economy — data-centre equipment and chips — while fighting for the right to tax the software and data flows that make that hardware useful. Perhaps the trade economists from all these teams need a nice off-site. 

The current agreement is an “interim” step, with a lot of “intent” but not legal obligations. In the Trump world this is dangerous. Further, we have to think more about who controls what. The commitment to purchase $500 billion in US goods over five years is a throwback to central planning. Governments do not buy goods, firms do. We hope officials don’t make purchase targets. 

The approach on non-tariff barriers needs to evolve. The current commitment is merely for a “six-month review” of standards and testing requirements in sectors like medical devices and information and communication technology. A review is not a reform. A high-quality bilateral trade agreement (BTA) requires binding clauses with specific timelines for regulatory harmonisation. The friction in trading medical devices or high-end electronics is often not the tariff, but the arbitrary testing and certification standards that act as de facto protectionism, as non-rule of law. 

Similarly, the digital economy requires more than just vague cooperation. India has committed to “negotiate” rules on digital trade but has not yet agreed to binding provisions on cross-border data flows or the prohibition of mandatory source code disclosure. In modern free-trade agreements (FTA), such as the US-Mexico-Canada Agreement, these are standard pillars. Without them, the “tech partnership” remains vulnerable to domestic regulatory whims and capricious Trump retaliation. 

There are hoops to jump on rules of origin. As supply chains decouple from China, the US will demand intrusive verification to prevent leakage. This will require Indian firms to accept a higher degree of transparency and compliance burden than they are accustomed to. Implementing this requires state capability. The verification process should not become a next layer of inspector raj, with delays, compliance costs and corruption. 

The FTAs with the European Union (EU) and United Kingdom (UK) and the trade agreement with the US are adding up to a good wave of Indian liberalisation. The agreements with the UK and EU, conducted in an amicable political environment, need to go up to becoming genuine “deep trade agreements”. 

We should pay heed to the document of the United States trade representative on Indian trade barriers. For us in India, it’s knowledge of modern trade economics that dissects and documents Indian protectionism. And, it’s the ever simmering problem that can induce a next Trump explosion. We in India should treat this document as a goal post to shoot for, in modernising Indian economic policy. What are all the changes required in this document, so that it shows an India that has sophisticated trade policy? By doing this, we gain twice. First, we will reduce trade friction with the US. Second, we will lay the foundations for high Indian GDP growth. 

The author is a researcher at the XKDR Forum