The United States and India: BIT and Beyond

At last week’s U.S.-India Strategic Dialogue in Washington, Secretary of State Hillary Clinton and her counterpart, External Affairs Minister S.M. Krishna, highlighted their commitment to deepen the U.S.-India economic partnership, improve investor confidence, and support economic growth in both countries. In contrast to past dialogues, the two leaders put a challenging proposal on the table to help accomplish this goal; they called for an “expeditious conclusion” to negotiations for a high-standard bilateral investment treaty (BIT).

The timing is right for reframing trade and investment relations with India. With the Doha Round multilateral negotiations in the World Trade Organization at an impasse, governments have begun to reassess national strategies for pursuing trade liberalizing agreements. As regional negotiations (such as the Trans-Pacific Partnership negotiations, already in progress) have taken on new energy, the United States has yet to decide how the changed environment will affect its trade agenda with the big emerging markets of India and Brazil.

While Brazil continues to hang back from bilateral negotiations with the United States, India has become vocal about its interest in pushing ahead on BIT negotiations.

Prospects for success were enhanced recently when the Office of the U.S. Trade Representative (USTR) and the State Department announced that they had finalized a new “Model BIT.” This new text enables the United States to launch negotiations with India and to be in a position to clearly outline U.S. objectives for the talks.

And none too soon. Several factors are converging to push a BIT with India higher on the U.S. economic agenda.

First, India holds great promise as a potential economic partner. Despite being on track to become the world’s 3rd-largest economy, India is only the 13th-largest trade partner of the United States. Secretary Clinton acknowledged this during her recent visit to India: “There is much more potential to unleash. We should be working toward having one of the world’s largest trading relationships, and we need to continue to reduce barriers and open our markets to greater trade and investment.” Beginning negotiations on a U.S.-India BIT would be a solid step in that direction.

Second, even as the volume of U.S.-India trade continues to grow—it is expected to surpass $100 billion for the first time this year—the share of Indian trade that involves the United States is dropping. According to India’s Ministry of Commerce and Industry, the United States accounted for 10.6 percent of all Indian trade in 2005. It dropped to 7.3 percent in 2010. Meanwhile, the U.S. share of total foreign direct investment (FDI) in India has declined even more dramatically, from 20.8 percent in 2005 to just 6 percent in 2011. A U.S.-India BIT could help reverse this trend.

Third, over the past two years, U.S. investors have had their expectations repeatedly raised about new opportunities in the Indian market, only to see those hopes dashed as a result of stalled economic reforms, inadequate measures to open up FDI, and most recently, retroactive decisions on tax laws in the U.S. budget. A determined effort by the United States and India to conclude a BIT could help assuage growing investor uncertainty in India.

Fourth, other countries are already trading with India. India has investment agreements with 80 countries, including all major European nations, the 10 member states of the Association of Southeast Asian Nations (ASEAN), Japan, and South Korea. The European Union is expected to finalize a free trade agreement with India this year. If the United States does not act quickly to solidify trade and investment ties with India, its focus could shift to other trading partners.

Finally, there is support on Capitol Hill for expediting U.S.¬-India BIT negotiations. Ten members of the Senate India Caucus, led by Senators Mark Warner (D-VA) and John Cornyn (R-TX), have written to President Obama urging him to move forward: “The tremendous potential of a BIT with India to protect and promote growth-producing American investments abroad, attract Indian investment into the United States, put our companies on equal footing with international counterparts in India and strengthen ties with a strategic partner is too significant to ignore.”

India has been vocal about its desire to move ahead with these negotiations. It believes the time is not only right for a U.S.-India BIT but has gone so far as to suggest that the two countries should envision something even more ambitious. As India’s foreign secretary, Ranjan Mathai, has said: “The United States is the only advanced economy in the world with which India has not concluded or is pursuing a Comprehensive Economic Partnership Agreement.”

Launching negotiations on something more comprehensive may be too much for the Obama administration to bite off in an election year, but placing formal BIT negotiations on a fast track for an “expeditious conclusion” would ensure that the U.S.-India Strategic Dialogue bolsters bilateral trade, investment, and business opportunities with more than just words.

Karl F. Inderfurth holds the Wadhwani Chair in U.S.-India Policy Studies, and Meredith Broadbent the Scholl Chair in International Business, at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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