India and the U.S. agreed to negotiate a multi-sector Bilateral Trade Agreement, which must comply with WTO rules including the MFN principle and FTA requirements. An interim agreement may reduce tariffs, while avoiding reciprocal tariffs that violate bound tariff obligations, S&DT, and the enabling clause, ensuring legal and fair trade.
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India-U.S. Trade Agreement and the Test of World Trade Organization (WTO) Laws.
During Prime Minister Narendra Modi’s visit to the United States on February 13, 2025, India and the U.S. agreed to negotiate the first stage of a mutually beneficial, multi-sector Bilateral Trade Agreement (BTA) by the fall of 2025.
The BTA’s compliance with World Trade Organization (WTO) rules, particularly the General Agreement on Tariffs and Trade (GATT), is essential for both nations.
The WTO operates on the MFN principle, which mandates that member countries must not discriminate between their trading partners. This means that if a nation grants a particular trade benefit to one WTO member, it must extend the same advantage to all other members. This rule ensures fairness and equality in international trade relations.
FTAs create exceptions to the MFN principle but must meet specific criteria outlined in Article XXIV.8(b) of the General Agreement on Tariffs and Trade (GATT).
The most crucial requirement is the elimination of tariffs and other trade barriers on "substantially all the trade" between the participating countries. While the term is not precisely defined, it generally implies a significant portion of trade, often considered to mean around 90% or more of the total trade between the members of the FTA.
Under Article XXIV.5 of GATT, countries can enter into an "interim agreement" if it is necessary for forming a free trade area, which allows nations to reduce tariffs and trade barriers in phases, with the goal of eventually forming a full-fledged FTA within a reasonable timeframe, generally not exceeding 10 years.
An interim agreement would allow India and the U.S. to engage in tariff reductions and other trade liberalization measures while working toward a more comprehensive FTA.
WTO law provides an exception to the MFN principle in the form of what is known as the "enabling clause." This arrangement allows WTO countries to deviate from the MFN principle if it is meant to provide better market access to the products of developing countries.
However, since the proposed India-U.S. BTA involves both sides lowering tariff rates on each other’s products, it likely cannot be called an arrangement falling under the enabling clause.
S&DT allows developing countries to offer less than full reciprocity in their tariff commitments toward developed countries. This principle recognizes the economic constraints of developing nations and provides them with more flexibility in trade policies.
Nations have bound tariff rate obligations at the WTO, which cap the maximum tariffs they can impose under their commitments. Any deviation from these bound rates would violate WTO rules.
If the India-U.S. BTA reduces tariffs on select products without extending similar benefits to other WTO members, it would contravene the MFN principle.
To remain legally valid under WTO law, the agreement must either encompass substantially all trade between India and the United States or be structured as an interim agreement leading to a full-fledged FTA.
India and the U.S. may consider structuring the BTA as an interim agreement, which would allow them to reduce trade barriers gradually while working toward a comprehensive FTA.
However, this approach requires a genuine intention to eventually establish an FTA and cannot be used merely to bypass WTO rules temporarily.
The U.S. approach of "reciprocal tariffs," involves increasing tariff rates to align with the tariffs that other countries impose on American goods; which directly conflicts with WTO principles of MFN and S&DT.
India must ensure that its trade agreements comply with international rules and do not set an example for arbitrary bilateral deals that undermine WTO norms.
The proposed India-U.S. BTA negotiations represent both an opportunity for economic cooperation and a significant challenge to maintain compliance with international trade law.
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