It’s Time for a U.S.-India Trade Deal

Ignore the conventional wisdom in Washington and New Delhi that the U.S.-India trade relationship is likely to deteriorate during U.S. President Donald Trump’s second term: The two countries in fact have a huge opportunity to expand trade and a realistic path forward for doing so.

Though U.S.-India economic ties have grown steadily in the 21st century, this cooperation has underperformed relative to the extraordinary advances in virtually every other aspect of the bilateral relationship. Over the years, the United States has accumulated a growing trade deficit in goods and services with India, reaching more than $45 billion in 2022. India’s high barriers to trade led Trump to label the country the “king” of tariffs. Indeed, Indian Prime Minister Narendra Modi has used high tariffs to protect domestic industries, attract foreign investment, and promote his “Make in India” policy.

As Trump proclaims his own fondness for tariffs, skepticism has set in among U.S.-India experts about the prospects for bilateral trade. Trump has promised to impose a 10 to 20 percent tariff on all imports and to hit a select group of countries—including India—with even higher tariffs. If he goes forward with this pledge, some might respond with retaliatory tariffs. These circumstances might make one question whether the United States and India can negotiate a substantial trade agreement—something that they have never done before—in Trump’s second term.

Yet there are reasons to be optimistic. Trump loves the art of the deal and would like to improve the U.S. economy. His tariffs may well be designed as leverage to open foreign markets for U.S. companies, thereby creating U.S. jobs related to exports and lowering bilateral trade deficits. Modi is a strategic thinker who is focused on growing India’s economy and expanding its role in the world.

The United States and India both want to enhance their economic influence in the Indo-Pacific region and blunt China’s economic primacy. The time is ripe and the incentives are in place for these two leaders to beat the odds and make a major deal.

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EARLY IN TRUMP’S first term, when one of us served as the U.S. ambassador to India and the other as assistant U.S. trade representative for South and Central Asia, the United States put on the table its willingness to negotiate a broad trade agreement with India. While U.S. officials thought that the Indian government had signaled general interest in such an agreement, there did not seem to be the concrete follow-through in terms of the mutual concessions required to conclude any such large deal.

Over time, the necessary trade-offs by each side did not materialize, and the two parties were not even able to negotiate a smaller deal that would maintain India’s benefits under the U.S. trade program known as the Generalized System of Preferences (GSP), created by Congress in 1974 to spur U.S. ties with developing countries. The GSP eliminates tariffs on hundreds of products imported from countries such as India, with the requirement that the beneficiary country provide adequate market access for U.S. products.

The mechanics of U.S.-India negotiations on the GSP were put into motion in 2017, after the U.S. medical devices and dairy industries filed petitions about India’s restricted market access with the Office of the U.S. Trade Representative (USTR). USTR subsequently undertook a review of these sectors and widened it to goods across other sectors, including IT products. Negotiations on a trade agreement continued into early 2019, but the parties’ efforts were unsuccessful, and USTR had no choice but to end India’s GSP benefits in March 2019.

Even after USTR determined that India no longer qualified for the GSP, the two sides continued to negotiate what was termed a “small” trade deal to try to restore the program for India. When Trump traveled to the country in February 2020, Indian officials finally signaled that they might be willing to conclude such an agreement. By that time, however, Trump was in the final year of his first term and wanted either a big deal or no deal—which resulted in the latter.

The two countries have since focused on minor fixes to trade irritants and sidelined ambitions for a groundbreaking agreement, even as the value of bilateral trade grows and the overall bilateral relationship deepens. This should be understood in a broader context: Under former President Joe Biden, the United States was unwilling to offer any country further access to its market and did not enter into any substantial new trade agreements. Instead, the Biden administration sought to develop a different model for trade negotiations that addressed concerns over the impact of market openings on U.S. workers and what it saw as new rules for the 21st-century economy.

It was against this backdrop that the United States rebuffed India’s new interest in exploring a U.S.-India free trade agreement early in Biden’s term. Modi’s government also declined to participate in one of the four pillars of Biden’s Indo-Pacific Economic Framework for Prosperity (IPEF). The IPEF focused on nonbinding commitments among 14 countries on supply chain resilience; clean energy, decarbonization, and infrastructure; tax and anti-corruption measures; and selected trade issues, not including market access. India participated in negotiations on the first three pillars, which resulted in agreements on principles and cooperative mechanisms. The trade pillar, which included all countries but India, failed to produce any consensus.

India recently signed a flurry of targeted free trade deals with other countries, including Australia, the United Arab Emirates, and the EFTA states (Iceland, Liechtenstein, Norway, and Switzerland). But India still has never locked in the benefits of preferential trade in goods and services with its largest and most significant partner, the United States. The Biden administration resolved seven outstanding disputes in the World Trade Organization (WTO) with India, but the idea of a bigger trade deal between the two countries never got off the ground.

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TRUMP AND MODI should now be ambitious and seek to negotiate a significant trade and economic arrangement. The new Trump administration will be laser-focused on lowering India’s trade barriers in a variety of sectors, including the ongoing concerns in the medical devices, agriculture, and IT sectors. For its part, India will want to secure continued growth in bilateral trade in goods and services and restore GSP benefits, if Congress reauthorizesthe program, which expired at the end of 2020.

Once the Trump tariffs (and possible Modi retaliatory tariffs) go into effect, the United States and India should view this as only the beginning of the trade and economic dialogue. Both leaders and their advisors should see the logic of aspiring to conclude a broader deal. After all, Trump and Modi are drawn to high-profile initiatives and prefer bilateral deals to multilateral ones.

In short, neither leader is averse to thinking big. Trump showed during his first term that he is willing to sign trade deals, as he did with Canada, the European Union, Japan, and Mexico—and even in an initial phase with China, though its objectives were not realized. The negotiation of a GSP agreement with India was one of the few trade priorities for which Trump was not able to cross the finish line. Some of Modi’s initiatives have also been bold, such as his overtures to Pakistan early in his first term. Moreover, Modi’s trade negotiating agenda with other countries is unprecedented for India.

The current political climate in Washington and New Delhi, including a focus on promoting domestic manufacturing, would almost certainly not support negotiating a full-blown free trade agreement. However, the U.S.-Japan Trade Agreement (USJTA) negotiated under the first Trump administration in 2019 could provide a compelling model. The USJTA is not a free trade agreement, but it has some key features of one, particularly involving tariff cuts in several sectors on both sides.

Normally, any preferential tariff arrangements violate the WTO’s requirement that trade between members must be conducted on a nondiscriminatory or “most favored nation” basis, unless these arrangements are formulated as large-scale free trade agreements. Yet such deals can be cumbersome and difficult to negotiate. First, WTO rules require that free trade agreements cover “substantially all trade,” which can make it difficult for trading partners to exclude their most sensitive sectors from tariff cuts.

Second, U.S. negotiators require special trade negotiating authority from Congress before they can submit a free trade agreement for an up-or-down vote by both houses. This means that there cannot be amendments to the terms already negotiated with a trading partner by the executive branch. Congressional votes on free trade agreements are rarely straightforward. Furthermore, utilizing trade negotiating authority from Congress is the only practical way to obtain the legislature’s approval for a comprehensive trade agreement—yet that authority expired in 2020.

While the USJTA included tariff concessions on both sides, the first Trump administration chose not to submit the agreement for congressional approval or notify the WTO. At the time, this raised some concerns among lawmakers that it was an end-around of congressional oversight, and there were questions about whether the USJTA violated WTO rules. Nevertheless, the agreement has endured and, in some respects, cemented the economic component of the broader U.S.-Japan strategic partnership. It even includes a groundbreaking side agreement on digital trade, which highlighted that nearly all sectors rely on the digital exchange of information and digital transactions.

A U.S.-India deal could certainly follow the USJTA model. The natural starting point would be to address most of the issues that the parties left on the table during Trump’s first term, when they came close to reaching an agreement. Such a deal now would require substantial tariff reductions by New Delhi because it has much higher tariff rates than Washington; Trump believes in some degree of reciprocity. But this market liberalization would solidify India’s economic relationship with the United States and enhance its prospects for becoming a supply chain hub.