India and US pave way for initial trade package

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The grounds for a free trade agreement between India and the US may have been laid this month.

It is believed that India and the US have held talks to discuss implementing an 'initial trade package', something that typically paves the way for a full free trade agreement.

Let's take a look at why this might have come about and what it could mean for international diplomatic relations as India apparently looks westwards for its trade partnerships.

Meeting in Washington

Indian union commerce and industry minister Piyush Goyal and US trade representative Robert Lighthizer met up in Washington this month and the two are said to have had fruitful discussions on how to create equitable market access between their respective nations.

A US delegation is now set to travel to India to look in more detail at what could pave the way for a major trade pact.

A rocky road to an FTA

The suddenly close relationship between India and the US may have come as a surprise to many, as a number of issues had cropped up lately to turn relations decidedly frosty.

In 2018, the US imposed high customs duties on Indian steel and aluminium products, arguing that such imports threatened domestic American industries.

That same year, the US also withdrew Generalized System of Preferences status from 3,600 products exported by India, claiming they should not be eligible because India should not still be designated as a developing country.

In retaliation, India applied high customs duties on a range of products coming from the US, including almonds.

Withdrawal from RCEP

However, there has now been a major turning point in the form of India's dropping out of negotiations for the Regional Cooperation and Economic Partnership (RCEP) that covers large parts of Asia.

Indian prime minister Narendra Modi recently announced in Bangkok that the country would no longer be a part of the pact, citing a lack of suitability given India's terms and conditions.

It seems that with this loss of trade in mind, India is now looking elsewhere to build economic relationships - and it is starting with the US.

Key considerations of an FTA

Little has yet been made public concerning any specificities of a potential FTA between the two countries, but it is understood that India would want the removal of last year's tariffs applied by the US, as well as the restoration of its preferred status or some equivalent legislation.

Meanwhile, it has been predicted that the US is likely to want better access to Indian markets for dairy products and medical devices, as well as lower tariffs on IT products.

US president Donald Trump said at a recent rally in Texas that he would bring 'Made-in-America' products to India and also establish India as an alternative business hub in the Indo-Pacific region should a deal be signed.

However, India may find it difficult to lower its historically-low tariffs without damaging its own producers, while non-tariff barriers to trade such as customs delays will also have to be addressed to make any FTA run smoothly.

Relations with RCEP

Any strengthening of ties between India and the US could weigh heavily on the RCEP nations, as India had been expected to play a key part in countering America's protectionist stance in the future, alongside its old nemesis China.

It is also likely to be a blow to Japan, which had seen an open economic system like RCEP putting pressure on the US to return to a trade framework, at the same time as keeping an often-volatile China in check.

Looking more widely, some analysts have suggested that India's withdrawal from RCEP and approaching of the US could influence other countries' opinions of the pact and potentially discourage them from joining should it aim to extend its reach later on.

Meanwhile, both India and the US will no doubt be looking forward to a smoother trade relationship going forward if their FTA does come to fruition.

US-India bilateral trade in goods and services is currently about three per cent of US world trade, according to the US Congressional Research Service, while the US is India's second-largest export market - and it will be interesting to see if these figures rise in the coming years.