Date: 23/02/2023

Relevance: GS-3: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests, India and its neighborhood- relations.

Key Phrases: Global Supply Chain, Tariffs, Imports, Production Linked Incentives, Indo-Pacific Economic Framework, Generalized System Of Preferences, Free Trade Agreement, Labour, Environmental Standards.

Context:

• The US is making direct efforts to reduce its reliance on Chinese supply chains, and India is pursuing a similar strategy with initiatives such as Production Linked Incentives (PLI).
• This provides a window of opportunity for India to enter into emerging supply chains. Both India and the US are working together on this front through an increasing number of state visits by senior leaders from both countries.

Background:

• The US Air Force shot down a balloon recently, alleging that it was a Chinese espionage tool. This development has further complicated an already tense relationship between the US and China.
• In addition, their trade relationship has been challenged by a range of issues in recent years, including disputes over trade deficits, the theft of intellectual property, and the transfer of technology.
  • The Russia-Ukraine war has made matters worse, with developed nations raising the old industrial policy playbook.
• For decades after the Reagan-Thatcher revolution and the establishment of the Washington Consensus in the 1980s, economic orthodoxy was against policies that involved "picking winners" instead of leaving decisions to the market.
  • However, in their attempts to restructure the current global supply chains, the US has enacted two significant pieces of legislation - the Chips and Sciences Act and the Inflation Reduction Act.
• While the Chips and Sciences Act aims to build a domestic semiconductor industry and push forward America’s scientific supremacy over China, the Inflation Reduction Act aims at reducing healthcare costs and encouraging clean and green energy transmission in a big way.
• The US is making a concerted effort to reduce its reliance on Chinese supply chains .This presents a significant opportunity for India to participate in developing supply chains. India and the US are collaborating on this endeavor to strengthen their positions.

India-US Trade Relations:

• Despite post-liberalization improvements in India-US trade, several obstacles have prevented a comprehensive trade agreement.
  • Both nations worry about their overreliance on Chinese imports, but they have divergent views on agriculture, labour standards, climate, and human rights.
• These are reflected in the current Indo-Pacific Economic Framework for Prosperity (IPEF), which tries to build regional cooperation on trade, supply chains, clean energy (Decarbonisation and infrastructure), tax and anti-corruption.
• Supply chains and clean energy are particularly promising sectors, given recent policy developments in both countries, such as green hydrogen.
  • These offer numerous opportunities for complementary initiatives that could help create robust global value chains, however, India has yet to join the trade component of this framework.
• The US removed India from the GSP programme, citing concerns over trade practices and failure to provide equitable and reasonable market access to US companies
• Service Sector: The US wants more access to Indian education and insurance markets, while India wants more US labour access. Hence, more than the merchandise segment, there are more complementarities between India and US in the services segment.
• Labor and environmental standards have been a major source of conflict. While the US believes that aligning these standards is critical for safeguarding global welfare, India's limited capacity has prevented it from initiating discussions on this issue.

Way forward:

• Hence, a lot of groundwork must be done to build India-US trade relations. As a first step, both nations could work on the following:
  • Reinstatement of India in the Generalized System of Preferences (GSP).
  • Start negotiating on services trade outside the framework of comprehensive free trade negotiations.
  • Start an intellectual-level exchange of ideas on labour and environmental standards.
• GSP made Indian exports to the US more competitive and helped increase trade between the two countries. India was, in fact, the largest beneficiary of the GSP system.
  • Reinstating India into the GSP programme will be a good way to enhance bi-lateral ties.
• Given the complementarity that services trade offers for both nations, a standalone services agreement could offer a swift opportunity for both countries to finalize a deal.
  • There are numerous "low-hanging fruit" possibilities, such as US investments in the advanced GIFT City and the expansion of India's fintech innovations, such as UPI and RuPay, to the US.
• Labor and environmental standards remain a crucial issue in India's ongoing negotiations with the EU, UK, Canada, and Australia for a comprehensive trade deal.
  • Therefore, it is essential for India to involve experts and the research and academic community in discussing these standards and conducting cross-country comparisons.

Conclusion:

• The future of global trade seems to be heading towards division among blocs, with the US and China leading the way. It is expected that free trade will exist within a bloc, but trade between blocs will be limited.
• The US's efforts to rebuild supply chains with more cooperative nations will have a significant impact on industrialization in developing countries.
• Therefore, demonstrating quick progress in negotiations is crucial for both the US and India. A partnership between the US and India has the potential to greatly redefine global trade and the geopolitical landscape

Source: The Hindu BL

Mains Question:

Q. A US-India partnership could significantly redefine global trade and the geopolitical map. Reinstating India into the Generalized System of Preferences programme will be a good way to enhance bi-lateral ties. Comment (250 words).