President Trump heads to New Delhi next week. Whether or not a trade mini-deal emerges from the visit, one thing is clear: Fast-growing India is graduating from its old “developing economy” status. The Trump trade team should embrace this new reality and bring our two countries’ relationship to the next level where both sides can benefit.
Recent reports suggest that the United States might restore special developing country privileges on India in exchange for some $5 billion in farm sales. That would be a mistake.
India has benefited from its developing country status in two major ways. One is through duty-free access to the U.S. market for some of its goods through the Generalized System of Preferences, or GSP. In 2018, $6.31 billion, or 15 percent, of $41.77 billion in U.S. imports from India entered this way. The nonreciprocal treatment for certain products is estimated to be worth about $260 million a year.
Previous administrations flirted with the idea of India’s graduation but never followed through. President Trump pulled the trigger and terminated India’s GSP eligibility in June 2019, citing market access issues. In many ways, the GSP program worked as it was intended. India’s gold jewelry industry is an example. India took advantage of the program and escaped 13.5 percent tariffs when selling to U.S. buyers, scaled up, gained a foothold in U.S. and international marketplaces and became globally competitive. Market analysts note its significant role in the Indian economy, contributing 7 percent of GDP and 15 percent to exports.
Developing country status also granted India special treatment with regard to countervailing duty investigations. India previously had a higher threshold of tolerated subsidies before U.S. competitors could seek retaliation.
The end of India’s developing economy status for trade issues presents a key opportunity for both countries. From the U.S. perspective, it is a great opportunity to lock in rules on services and digital trade with the world’s fifth-largest economy.
U.S.-India trade is relatively services-intensive, relying on intellectual property, computer software and information services, research and development, travel and transport. In 2018, services were 43 percent of U.S. exports to India, compared to 32 percent of U.S. exports to the world. Free and fair trade rules on the buying and selling of services and cross-border digital flows would enhance goods trade, too. The World Trade Organization reports that trade in services expanded faster than trade in goods between 2005 and 2017. In other words, the future of trade is in services.
India and the United States are members of the WTO. But the WTO’s Trade in Services Agreement is going nowhere, and China may be going in a completely different direction. It is imperative that the United States reach consensus on good digital trade rules with our key economic and trading partners, and that includes India.
India has even more to gain with so many of its digital companies on the cutting edge and pushing up against the technology frontier. Transparent provisions on cross-border digital flows and trade in services would facilitate more investment and let India ride the tech wave even further. India is ripe for stronger cyber theft and trade secrecy protections, too. Multinational companies in India indicate that they would be more prone to undertake research and development projects aimed at the Indian market if stronger protections in these areas were in place.
Once again, President Trump’s fixation on the trade balance is a distraction. Congress should not sign off on simply reinstating special preference if India buys more American farm goods. Instead, Congress should push the Trump trade team to get the most out of this moment and make India a real economic partner. If we home in on a bilateral deal – one of the president’s fortes – we can probably expect a good one here. That means more than just an uptick in farm sales.
Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University.