U.S. Commerce Secretary Gary Locke traveled to India earlier this month for a six-day tour focused on enhancing bilateral high-tech trade and cooperation. The first U.S. Cabinet officer to come to India since President Obama’s state visit last November, he brought with him representatives from 24 U.S. companies, including Boeing, Lockheed Martin and Westinghouse. The trip resulted in an agreement on closer collaboration in the area of energy technology as well as an announcement about the further easing of U.S. export controls on India. As one senior U.S. official accompanying Locke stated: “We have agreed to an unprecedented level of technology transfers to India and we can go even further.” Judged by the usual standards of such trade missions, the visit was not unproductive. Yet by the time Locke’s sojourn ended, one had the feeling that he nonetheless missed a good opportunity to significantly advance the bilateral economic agenda.
Just how large a miss this was became clear a few days later, when Indian and Japanese Cabinet officials gathered in Tokyo to sign a comprehensive economic partnership agreement (CEPA). This accord provides a stark counterpoise to Locke’s visit, exemplifying the imaginative initiatives that should have been on his brief. The Indian-Japanese pact not only eases the movement of goods but also the flow of services, capital and labor. It promises to increase the value of bilateral trade 150 percent over the next few years and has been received with great enthusiasm by the Indian business community. Indeed, the agreement is an apt economic expression of the growing partnership that the two countries are forging in the geopolitical realm.
Indian trade diplomacy is on a tear. Just days after the deal with Tokyo, New Delhi signed a similar arrangement with Kuala Lumpur, which will further deepen India’s involvement in Southeast Asia’s dynamic economy. And Commerce Minister Anand Sharma has raised expectations that trade negotiations with the 27-nation European Union will soon be concluded. India has also concluded free trade accords with South Korea, Thailand and the ten-country Association of Southeast Asian Nations (ASEAN) in recent years, and has launched bilateral trade negotiations with China and Canada.
Suggestions have been floated about crafting a U.S.-India free trade agreement (FTA), an idea that would certainly result in significant economic gains for both countries. Despite dramatic increases over the past decade, the bilateral economic relationship is far from achieving critical mass and will require purposeful nurturing to reach its full potential. Trade and investments flows between the two countries remain a small fraction of the U.S.-China level, and China recently eclipsed the United States as India’s top trading partner. Indeed, it is a telling indicator that President Obama’s visit to India netted trade deals worth some $10 billion, while Chinese Prime Minister Wen Jiabao’s trip just a month later resulted in $16 billion in business deals – this despite the increased diplomatic tensions that color India-China relations. Moreover, the two countries used the Wen visit to announce an ambitious effort to nearly double their trade in the next five years to $100 billion annually. For all of the spectacular improvement in U.S-India ties, India is still only the 14th largest trading partner for the United States and India remains a comparatively minor destination for U.S. investment flows.
So a far-reaching multi-dimensional U.S.-India FTA deserves an important spot on the bilateral agenda, though one must also admit the difficulties in forging one. Given that Washington and New Delhi are at loggerheads in the Doha Round negotiations, as well as the unpromising political climate in the United States regarding trade policy, the prospects for a broad-based bilateral FTA are not strong in the foreseeable future. Moreover, the agricultural access issues that will need to be included are highly problematic for both sides. Consider, for example, that India’s negotiations with the European Union have lasted nearly four years and since the EU is not a large exporter of farm products, agricultural issues have not been the major obstacle in the EU-India FTA talks that they would be in an U.S.-India negotiation. At best, Washington and New Delhi should announce a commitment to signing such an accord by 2015, even if it is one whose provisions take effect over an extended period. An excellent opportunity to make such an announcement is in early April, when the next round of the U.S.-India Strategic Dialogue convenes in New Delhi.
But even as Washington and New Delhi hash out the terms of a broad-based FTA, trade officials should focus the bulk of their energies on an accord that promises a large payoff in the immediate term. A sweeping initiative aimed at capitalizing on mutual synergies in the area of high-technology trade would do just that.
The high-tech sector plays a critical – and largely complementary – role in the economies of both nations, and the United States has been a prominent factor in the spectacular development of the Indian IT sector. Yet overall bilateral trade in advanced technology products is surprisingly low and important synergies remain untapped. And unlike a more comprehensive FTA – entailing prolonged negotiations, unwieldy bargaining tradeoffs and protracted coalition-building at home – an arrangement with a limited but sharp focus on the innovation economy could likely be formulated relatively quickly, and its self-evident “win-win” features would override bureaucratic timidity and domestic opposition.
A model for such an initiative exists in the 1997 Information Technology Agreement (ITA), which eliminated tariffs on a range of capital goods, intermediate inputs and final products in the information and communications technology sector. The agreement was negotiated by 29 original countries (then representing about 80 percent of the global IT trade). Although conducted under the auspices of the World Trade Organization, the agreement was formulated quickly outside of its normal (and cumbersome) negotiating process. The final agreement was quickly joined by other countries (including India) and currently has over 70 participants (collectively representing 97 percent of the global IT trade). The ITA is credited with spurring world trade in IT products, currently estimated at $4 trillion annually, and remains the only industry-specific comprehensive free trade agreement ever signed.
While the ITA is still in effect, its value has been significantly diluted by a series of technological developments in the period since its creation. Specifically, disputes have arisen among the signatories over how to apply the agreement to hundreds of new IT products that were not foreseen a decade ago and on addressing the issue of non-tariff barriers. Moreover, multi-party negotiations to update the ITA have been stalled for years.
In light of these problems, the United States and India should launch a bilateral effort to further liberalize trade and deepen engagement in the IT field or, even more one that covers the entire range of advanced technology products and services. This agreement could then be opened to the participation of other like-minded countries. Given the vital role of the high-tech sector in the American and Indian economies, not to mention the broader world economy, such an initiative would pay robust commercial dividends. Additionally, with Washington and New Delhi at odds in the Doha Round talks, this initiative would have great political value, further solidifying the U.S.-India partnership and providing an important example of joint leadership in the global economy between developed and emerging nations. Finally, it would be a good down payment on the Obama administration’s pledge to double U.S. exports over the next five years, as well as India’s effort to double its own trade levels.
An effort focused on crafting a bilateral free trade mechanism relevant to the advanced technology sectors would instill a level of momentum in bilateral ties that has been noticeably missing since George W. Bush left the White House. The Obama state visit succeeded in righting a relationship that had been adrift for the better part of two years. But with the civilian nuclear accord now a done deal, officials in both governments are still searching for a bold, creative initiative capable of driving relations forward. An exchange that occurred at the start of the Obama administration is instructive. In January 2009, Richard Boucher, then U.S. Assistant Secretary of State for South Asia, suggested to Shivshankar Menon, then India’s Foreign Secretary and now Prime Minister Singh’s National Security Advisor, that both capitals needed to find “the next big idea” to animate bilateral affairs. Menon concurred, noting that in the absence of something that captures the imagination “Indians were beginning to view the relationship with the U.S. as only about political-military and nuclear issues.”
Focusing on the high-tech agenda would be a very good way to stir imaginations in both countries. It would underscore the critical role that economic engagement has played in launching the new era in U.S.-India affairs. Indeed, increased private-sector ties will be one key in securing the growth of broad-based, resilient relations over the long term, since they work to limit the risk that momentary political and diplomatic frictions could escalate and disrupt the overall bilateral partnership.