Context

• The recent decision by India and the United States to negotiate a multi-sector Bilateral Trade Agreement (BTA) by the fall of 2025 marks a significant development in global trade relations.
• While such agreements primarily focus on economic benefits, it is essential to analyse them through the lens of international trade law, particularly the General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO) regulations.
• Therefore, it is crucial to examine the legal implications of the proposed BTA, the distinction between BTAs and Free Trade Agreements (FTAs), and the necessity for compliance with WTO principles.

Understanding Free Trade Agreements under WTO Law

• The WTO operates on the Most Favoured Nation (MFN) principle, which mandates equal treatment for all trading partners.
• FTAs, however, provide an exception to this principle, allowing participating nations to grant each other preferential trade benefits.
• According to Article XXIV.8(b) of the GATT, FTAs must eliminate tariffs and trade barriers on ‘substantially all the trade’ between the participating countries.
• Though the term is not precisely defined, it generally implies a high percentage of trade coverage.
• Since the proposed India-U.S. BTA is not labelled as an FTA, its scope remains unclear.
• If it does not eliminate tariffs on a broad range of goods and services, it risks violating WTO law unless justified under specific provisions.
• Thus, the negotiation process must ensure that the agreement either qualifies as an FTA or complies with WTO exceptions.

Legal Considerations for the India-US BTA

• Compliance with the MFN Principle
  • One of the most significant legal hurdles for the India-U.S. BTA is ensuring that it does not violate the MFN principle, which is a cornerstone of the WTO’s multilateral trade system.
  • The MFN principle, enshrined in Article I of the GATT, requires that all WTO members treat each other equally in terms of trade policies.
  • In practical terms, this means that any preferential treatment granted to one country must also be extended to all other WTO members.
  • In the context of the BTA, if India and the U.S. agree to reduce tariffs on a limited set of products, this reduction may constitute preferential treatment.
  • However, for the agreement to comply with WTO rules, this preferential treatment cannot be limited to only these two countries; rather, the benefits must be extended to all other WTO members as well.
  • If India and the U.S. decide to reduce tariffs only for each other’s products, without offering similar reductions or access to other WTO members, it would violate the MFN
• Structure of the BTA: Is it an FTA or Something Else?
  • As the India-U.S. BTA is not explicitly labelled as a FTA in the Joint Leaders Statement, it is crucial to understand the legal distinction between a BTA and an FTA in WTO law.
  • An FTA, under Article XXIV of the GATT, allows countries to reduce or eliminate tariffs and trade barriers within the agreement’s scope, but such agreements must adhere to the rule that they eliminate trade barriers on substantially all the trade between the parties.
  • The phrase ‘substantially all the trade’ is not defined in the agreement, but generally, it implies a significant portion of trade, often considered to mean around 90% or more of the total trade between the members of the FTA.
  • If the India-U.S. BTA does not aim to cover ‘substantially all trade’ between the two countries, it would fail to meet the requirements of an FTA and could run afoul of WTO rules.
• Interim Agreements: Article XXIV’s Flexibility
  • To navigate the challenge of non-compliance with the MFN principle, India and the U.S. may consider structuring the BTA as an interim agreement.
  • Under Article XXIV.5 of the GATT, countries can enter into an interim agreement that facilitates the creation of an FTA.
  • This provision 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.
• Potential WTO Violations and Political Considerations
  • If India and the U.S. enter into a BTA that reduces tariffs on a limited number of goods or provides preferential access only to each other’s markets, it could violate the WTO’s rules against discrimination.
  • This situation would lead to significant legal challenges, especially if other countries feel that they are being excluded from these benefits.
  • The challenge for India lies in navigating the delicate balance of achieving a mutually beneficial agreement with the U.S. without undermining its commitments to the WTO and its stance on multilateral trade.
  • Moreover, India faces political pressure to ensure that any such agreement does not lead to the weakening of its trade policy or compromise its position in the global trading system.

The Way Ahead

• The Need for Compliance with WTO Principles
  • Historically, the U.S. has taken an aggressive approach to trade policy.
  • U.S. President Donald Trump’s concept of ‘reciprocal tariffs’ sought to impose higher tariffs on imports from countries that had higher tariffs on American goods.
  • This approach directly conflicts with WTO principles such as MFN and Special and Differential Treatment (S&DT), which allow developing nations to maintain lower tariff commitments in recognition of their economic constraints.
  • Moreover, reciprocal tariffs could breach the U.S.’s bound tariff rate obligations, which cap the maximum tariffs it can impose under WTO commitments.
  • For India, the proposed BTA represents a test of its commitment to a rules-based international trading system.
  • As a nation that has traditionally championed WTO principles, India must ensure that its trade agreements comply with multilateral rules and do not set a precedent for arbitrary bilateral deals that undermine WTO norms.
• Need to Remain Vigilant
  • India must remain vigilant against any attempts to dilute core WTO principles such as MFN and S&DT.
  • As a key player in global trade, India’s approach to this agreement will reflect its commitment to a fair and transparent trading system.
  • Therefore, strategic and legally compliant negotiations are imperative to ensure that the BTA strengthens, rather than undermines, the global trade framework.

Conclusion

• The India-U.S. BTA negotiations present both opportunities and challenges.
• While the agreement could enhance economic ties and promote trade, it must be structured carefully to align with WTO regulations.
• If the BTA is intended as a precursor to a full-fledged FTA, it should be designed as a legally sound interim agreement.
• However, if it simply aims to lower tariffs on selective products without broader commitments, it risks violating WTO laws unless appropriate justifications are made.