A vision for U.S.-India economic partnership

The current focus on differences between the United States and India regarding Russia’s invasion of Ukraine has obscured the broader trajectory of the bilateral relationship. Over the past 22 years, the United States and India have steadily widened and deepened their partnership to cover almost every area of human endeavour. There is, however, one area that has repeatedly caused friction — trade.

Enhanced bilateral trade is important for growing both economies and providing long-term ballast to the U.S.-India strategic partnership. But flows of goods and services between the two countries are well below the levels one would expect from the largest and sixth-largest global economies. The two countries must also play a central role in developing the economic framework for a free and open Indo-Pacific or watch as others, particularly China, do so.

In recent years, the United States and India have pulled back from shaping the Asian trade landscape. In early 2017, the U.S. withdrew from the Trans-Pacific Partnership (TPP) and, in 2019, India pulled out of the Regional Comprehensive Economic Partnership (RCEP) negotiations. These moves were driven, in part, by a growing sentiment in both countries that trade deals have damaged their domestic manufacturing industries and hurt the livelihoods of middle class workers. Those concerns may well be legitimate, but failing to pursue trade deals handicaps both countries’ ability to tap foreign markets, participate in developing regional trade rules, and advance their broader objectives in the Indo-Pacific.

China, meanwhile, has pursued an expansive regional economic agenda through its participation in RCEP, its applications to join the TPP’s successor Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Digital Economy Partnership Agreement, and its Belt and Road initiative. The common denominator in all these initiatives is the ability for Beijing to shape the rules for trade and investment while promoting integration with its neighbours and increasing their dependence on Beijing.

China’s assertive approach is a major reason why both India and the United States seem to be rethinking their economic and trade strategies: Leaders in both countries understand that ceding the region to China may have irreversible consequences. Together, they have revitalised the Trade Policy Forum. India also recently signed a trade deal with Australia and an economic partnership agreement with the United Arab Emirates, as well as launched or revived negotiations with other key partners. Meanwhile, the Biden administration is putting the finishing touches on its new Indo-Pacific Economic Framework (IPEF) to economically reengage with this dynamic region.

This does not mean the two countries are on the verge of a bilateral breakthrough. On several occasions, the United States and India have been on the cusp of agreeing on a package of trade measures only to come up short. The U.S. Congress now appears poised to renew the Generalised System of Preferences (GSP) programme, which would provide the Biden administration with the authority to reinstate India’s GSP benefits and generate momentum to resolve outstanding bilateral issues and lay the groundwork for a more forward-looking engagement to take centre stage.

Washington’s launch of the IPEF also provides an important opportunity to build economic ties. At this point, India may not be ready to be a full member of the IPEF, but it may choose to participate in certain pillars, such as infrastructure and resilient supply chains. For this regional economic initiative to be most meaningful, broad Indian participation should be the goal.

Another way to shape the regional economic architecture and counter China’s influence would be to expand the mandate of the Quad to establish a working group devoted to trade, albeit with reasonable expectations. Trade has been noticeably absent from the Quad agenda. This may be because a trade discussion would reveal differences among members and not readily lend itself to tangible results. However, the United States already has bilateral trade agreements with Australia and Japan; those two countries, moreover, concluded an economic partnership agreement seven years ago. India has long had a similar agreement with Japan and has just signed an interim trade agreement with Australia.

These agreements could provide the foundation for a Quad working group to begin by considering relatively easier issues, such as trade facilitation, the behaviour of state-owned enterprises, and liberalisation of services sectors, and gradually take on more challenging matters. The four partners would need to be mindful of India’s different level of development by providing India longer transition periods on opening its market to imports.

Because trade is both strategic and filled with esoteric detail, trade negotiators would benefit from having Quad leaders engaged to help them make the tough political decisions, keep the larger picture in mind, and delicately provide impetus for a pragmatic plan on trade that can help shape the regional architecture.

Despite efforts in recent years to strengthen the U.S.-India trade relationship, it remains a weak component of the strategic partnership. However, by making the political commitment to solve bilateral irritants, as well as work together on the IPEF agenda and in the Quad, the two sides can make tangible progress. Over time, they could engage a broader set of Indo-Pacific partners – including those in the Association of Southeast Asian Nations and the CPTPP — to create a robust economic architecture for the region.

By jointly announcing this vision for a new economic and trade strategy, and proceeding with a building block approach, the United States and India could reposition themselves geopolitically in the most dynamic region of the world and provide further impetus for their growth and prosperity.