India-US Trade Relations - Navigating the New Normal

Context:

The recent meeting between Prime Minister Narendra Modi and US President Donald Trump covered key issues, with a strong focus on setting ambitious trade targets. The meeting took place amid global trade uncertainties and shifting trade norms.

Mission 500:

• Towards a $500 billion trade target:
  • India and the US have agreed on a Bilateral Trade Agreement (BTA) under the broader framework of COMPACT (Catalysing Opportunities for Military Partnership, Accelerated Commerce, and Technology).
  • The ambitious goal is to achieve $500 billion bilateral trade by 2030.
• How to achieve this mega partnership for prosperity? PM Modi emphasized deeper economic ties to achieve this trade expansion.

Sectoral Trade Potential and its Significance:

• Strong intra-industry trade potential exists in key sectors:
  • US strengths: Plastics, base metals, precision instruments.
  • India's strengths: Vegetable products, processed foods, stone, and plaster.
• This sectoral trade may help in reducing the bilateral trade deficit.

Understanding the Bilateral Trade Agreement (BTA):

• About: The BTA will aim to adapt an integrated approach for deepening trade across the goods and services sector.
• BTA vs FTA:
  • A BTA is less complex than a Free Trade Agreement (FTA), focusing on tariff reductions, non-tariff barriers (NTBs), and trade facilitation.
  • Unlike an FTA, a BTA is a flexible sector-focused agreement that does not cover "substantially all trade" and incorporates simplified Rules of Origin (RoO).
  • The agreement aligns with World Trade Organization (WTO) rules while allowing preferential trading arrangements.
• Key objectives:
  • Reduce tariffs and NTBs.
  • Enhance market access.
  • Strengthen supply chains. 

Global Trade Shifts and the MFN Principle:

• Trump's policies are shifting global trade away from the Most-Favoured Nation (MFN) principle.
  • Through the idea of MFN, WTO members extend any trade advantage granted to one trading partner to all other partners.
  • It was in 1947 that MFN was incorporated as a guiding principle for global trade in the General Agreement on Tariffs and Trade (GATT).
  • This framework was strengthened and absorbed when the transition from the GATT to the WTO was made.
  • So far, the non-discriminatory MFN trading principle has remained a cornerstone of global trade.
  • The WTO’s Integrated Database (IDB) in January 2025 shows that more than 80% of world merchandise trade is conducted under MFN terms.
• The US move towards bilateral and preferential trade arrangements challenges the WTO’s non-discriminatory trade framework.
• China has approached the WTO against additional US tariffs, citing violations of MFN obligations under GATT.

Key Takeaways for India:

• Quick adaptation: India must proactively respond to evolving trade dynamics. The PMO should lead trade negotiations with greater agility.
• Leveraging COMPACT: India should use COMPACT to overcome NTBs and enhance market access, while learning from US trade instruments like Tariff-Rate Quotas (TRQs).
• Strengthening the MFN framework: India should work with Global South nations to uphold MFN principles, ensuring a stable and inclusive trade architecture.

Conclusion:

The India-US BTA marks a significant step in deepening economic ties. However, India must strategically navigate shifting global trade rules while ensuring its long-term interests in a rules-based trade system.

Q1. What is the significance of the Bilateral Trade Agreement (BTA) between India and the US?

Ans. The BTA aims to enhance trade by reducing tariffs and non-tariff barriers, strengthening market access, and fostering economic interdependence.

Q2. How does the ‘Mission 500’ initiative contribute to India-US trade relations?

Ans. Mission 500 sets an ambitious target of $500 billion in bilateral trade by 2030, focusing on sectoral complementarities and leveraging COMPACT for trade expansion.

Q3. What challenges does India face in navigating the evolving global trade norms under the Trump administration?

Ans. India must adapt to shifting trade policies that move away from the MFN principle, address tariff and non-tariff barriers, and maintain its global trade commitments within WTO frameworks.

Q4. How can COMPACT help India overcome trade barriers with the US?

Ans. COMPACT provides a structured framework to address NTBs, improve market access, and integrate India into US trade mechanisms such as Tariff-Rate Quotas (TRQs).

Q5. Why is the MFN principle crucial for global trade, and how is it being challenged?

Ans. The MFN principle ensures non-discriminatory trade among WTO members, but recent US policies prioritizing bilateral agreements and preferential tariffs are undermining this foundational rule of global trade governance.

Source: IE