For Prelims:

What: India and the United States have agreed to negotiate the first stage of a multi-sector Bilateral Trade Agreement (BTA) by the fall of 2025. The agreement's scope is currently unclear, and it has not been labeled as a Free Trade Agreement (FTA).

Why: The agreement must comply with World Trade Organization (WTO) regulations, particularly the Most Favored Nation (MFN) principle, which prohibits preferential trade treatment unless under specific conditions.

Who: Government of India, United States Government, World Trade Organization (WTO), trade policy experts, and economists.

For Mains:

GS III: Economy - International Trade, WTO Regulations

Highlights of the Article:

• India and the U.S. plan to negotiate a multi-sector BTA, with an unclear scope.

• The agreement must adhere to WTO rules, particularly the MFN principle.

• The WTO permits FTAs if they eliminate duties on "substantially all trade" within the agreement.

• A limited BTA may face legal scrutiny under WTO rules unless notified as an ‘interim agreement’ leading to an FTA.

• The ‘enabling clause’ allows trade benefits for developing nations but may not apply to this agreement.

• India must ensure compliance with WTO norms to maintain its advocacy for a rules-based trade system.

Context:

India and the U.S. have historically had trade disagreements, particularly concerning tariffs and market access. Given both nations’ WTO commitments, the structure and legality of the proposed BTA will be critical in shaping the future of their bilateral trade relations.

UPSC EXAM NOTES ANALYSIS:

1. Legal Framework under WTO

   • WTO’s MFN principle prohibits preferential treatment between trading partners unless an exception applies.

   • FTAs, as per Article XXIV of GATT, must cover “substantially all trade” to be WTO-compliant.

   • Limited preferential agreements may violate WTO law unless properly structured as ‘interim agreements’ leading to an FTA.

2. BTA vs. FTA Distinction

   • The proposed BTA is not labeled as an FTA but may still face WTO scrutiny if it offers preferential tariffs.

   • To comply with WTO law, India and the U.S. may notify it as an ‘interim agreement’ if it genuinely leads to an FTA.

   • Misusing ‘interim agreement’ provisions to justify a selective tariff reduction would be legally indefensible.

3. Potential Economic and Legal Implications

   • If India and the U.S. lower tariffs selectively without extending benefits to other WTO members, it may face legal challenges.

   • The U.S. previously pursued ‘reciprocal tariffs’ policies that conflict with WTO principles, making compliance a significant concern for India.

   • The agreement must also respect WTO’s special and differential treatment (S&DT) principle, which allows developing countries to maintain different tariff commitments.

4. Strategic Considerations for India

   • India must balance economic benefits with legal adherence to WTO norms to maintain its global trade credibility.

   • The negotiations provide India an opportunity to reinforce its commitment to a rules-based international trading system.

   • Ensuring WTO compliance will help India avoid potential disputes while securing favorable trade terms with the U.S.