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The big picture on India-US trade deal

Being part of global value and supply chains remains critical for Indian firms to become more competitive over time and extract greater value.

With US President Donald Trump's India visit coming to an end, it's time to step back and reflect on its significance against the larger interests of US and India as the two sides try to finalise a free trade agreement.

Limited trade deal

A bilateral trade deal between the countries, likely to be a $10 billion ‘limited trade deal’, is critical for their business and trade interests, and also significant for regional economic conditions in South Asia and the Indo-Pacific region at large.

Why is that the case? One, bilaterally, US is India's largest trade partner now. It is also one of the countries that India has a trade surplus with, which stood at $16.85 billion in 2018-19.

China was India's largest trade partner between 2013-14 and 2017-18. A limited trade deal agreement between US and India is likely to restore the General System of Preferences (GSP) scheme for India in return for dismantling retaliatory tariffs on American almonds, walnuts and pulses apart from reducing duties on farm products and luxury goods like Harley-Davidson motorcycles.

However, a trade surplus with the US does not necessarily mean that Indian exporters have had a larger pie of business in the US. Trade agreements today go beyond a negotiation on tariffs and quotes (much lower than in the past).

Their importance lies in implicit and explicit incentives offered in areas as part of behind-the-border form of regulations, offering greater convergence in factor mobility (labour, capital, etc) and in terms of policy clarity and consistency (on matters like intellectual property rights, taxation, data security, etc).

These are all areas where a deeper association between India and the US can benefit both nations' economies and its agents. Indian firms need greater access to American markets for a deeper market integration process to ensue in areas of services and technological development, where India might have a competitive advantage.

A deal can also allow (skilled) Indians better mobility to and from the US for professional development and higher income. On investments, a deeper US-India engagement can provide a useful alternative to American firms vis-à-vis China, which is otherwise seen as the factory of the world.

India's large domestic market and relatively weak domestic private investment scenario offer greater prospects to US firms interested in large volume investments in manufacturing and/or services.

Global value chains

Another important question emerges as to what extent a comprehensive trade deal with the US can enable the Indian export market (and trade position) to improve with respect to the rest of the world? Being part of global value and supply chains remains critical for Indian firms to become more competitive over time and extract greater value.

Partnerships with US firms that enjoy a higher presence in the global value chain can broadly increase India's competitiveness.

This competitive environment for Indian firms operating in the US, and vice-versa, can also help develop more attractive investment and capacity-building opportunities within industries of the future like artificial intelligence, renewable energy, edutech and healthtech.

India can contribute to these industries. Why? If one looks closely, India is currently experiencing a rapid (more structural) phase of premature deindustrialisation, which is likely to make it difficult for existing industries like textile, leather, and iron & steel, to become competitive at a global level. Deindustrialisation, as argued before, refers to a waning effect of the manufacturing sector's impact on a nation's growth via contributions to the processes of employment generation, wage growth mobility and total output added (measurable via GDP).

Gateway to the world

In conventional economic wisdom, manufacturing growth over a period of time presents itself in an inverse Ushaped trajectory, where long-term deindustrialisation is seen as a natural phenomenon as the average income of citizens rises, allowing service growth to pick up over time.

In India, a slowing manufacturing sector — measurable in terms of its contribution to both total output and valueadded — is aiding a rapid wave of deindustrialisation, imposing significant economic and social costs (employment loss and higher wage inequality).

Most of these effects are also likely to worsen over the coming years, unless a miraculous coordinated effort revives India's ailing manufacturing sector.

Indian businesses need to develop long-term partnerships with American firms and industrial actors in technologies and areas where market design and its integration is likely to expand not only at a bilateral level, but at a global level for these countries in the future.

At the same time, for India to even consider the possibility of encouraging US firms to invest, it is important that its political economic climate remains conducive. A breakdown in social cohesion or in an ecosystem of high mistrust between the state and citizenry, a craftily designed trade deal can end up doing very little to actualise higher investments.

It is likely to be seen in the nature and scope of the US-India trade deal based on the underlying environment in which it takes shape.

(Courtesy of Mail Today)

Also read: Trump's visit to India: After hugs, let's talk economics

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