Introduction
During Prime Minister Narendra Modi's visit to the U.S. on February 13, 2025, India and the United States announced negotiations for a multi-sector Bilateral Trade Agreement (BTA) by fall 2025. This trade pact aims to strengthen economic ties between the two nations. However, since both countries are members of the World Trade Organization (WTO), the proposed BTA must align with WTO trade laws, making it a critical agreement from a legal perspective.
Understanding Free Trade Agreements and WTO Laws
The WTO operates on the Most Favored Nation (MFN) principle, which prevents member countries from discriminating between trading partners. Free Trade Agreements (FTAs), which offer preferential access to specific countries, are an exception to this rule but must adhere to strict conditions under Article XXIV.8(b) of the General Agreement on Tariffs and Trade (GATT).
For the India-U.S. BTA to be legally valid under WTO law, it must:
Cover substantially all trade between the two nations.
Be notified to the WTO.
Ensure that tariff reductions do not violate MFN obligations.
If India and the U.S. reduce tariffs on selected products without extending similar benefits to other nations, it would be a violation of WTO law.
Can an Interim Agreement be a Solution?
A potential way for India and the U.S. to legally establish a BTA is through an 'interim agreement', as outlined in Article XXIV of GATT. This provision allows countries to sign agreements that gradually lead to the creation of an FTA under two key conditions:
The interim agreement must be necessary for forming an FTA.
It must contain a clear plan or schedule to finalize an FTA within a reasonable timeframe (typically 10 years).
However, India and the U.S. must not misuse the interim agreement clause simply to avoid WTO scrutiny. If the BTA does not genuinely intend to transition into a full FTA, it could face legal challenges.
Why the 'Enabling Clause' Does Not Apply
Another WTO exception to the MFN rule is the 'enabling clause', which permits preferential market access for developing countries. However, since the proposed India-U.S. BTA involves mutual tariff reductions, it does not qualify under this provision. The U.S. will receive better market access to Indian products, contradicting the 'enabling clause' principle.
U.S. Tariff Policies and WTO Violations
Under President Donald Trump, the U.S. has promoted a concept of 'reciprocal tariffs', where tariffs are increased to match those imposed by other nations. However, this approach violates core WTO principles, including:
MFN Treatment: Ensures equal trading conditions among WTO members.
Special and Differential Treatment (S&DT): Allows developing countries like India to maintain lower tariff commitments.
Bound Tariff Rate Obligations: The U.S. is legally bound not to exceed its committed tariff rates at the WTO.
The Road Ahead for India
As a champion of rule-based trade, India must ensure that the proposed BTA negotiations adhere to WTO laws and do not compromise its trade sovereignty. The India-U.S. trade agreement represents a significant test of India’s trade policy and commitment to global trade norms.
Conclusion
While the India-U.S. Bilateral Trade Agreement offers potential economic benefits, it must comply with WTO trade laws to avoid legal challenges. As negotiations progress, India must balance economic interests with international trade obligations, ensuring a transparent and legally compliant agreement.
For the latest updates on India’s trade policies and international agreements, visit Ministry of Commerce & Industry.
By Team Atharva Examwise #atharvaexamwise
