NEW DELHI — A trade deal between India and the US would likely take some time
but will materialise by the fall 2025, according to a Morgan Stanley report
released on Tuesday.
While India is exposed to direct tariff risks, the global
brokerage believes that on balance, the country is less exposed to global goods
trade slowdown considering that it has the lowest goods exports to GDP ratio in
Asia.
The report highlighted that significant uncertainty still
remains on the quantum of the tariff increase that India would be subjected to
given the US administration has yet to fully clarify how reciprocal tariffs
would be imposed.
According to the report, while India can eventually reach
a trade deal with the US, it would be relatively more challenging given the
multiple bilateral trade issues.
“As it is, officials have guided for a Fall
(September-November) 2025 timeline for a possible US-India free trade
agreement. This would imply that India would not be able to avoid reciprocal
tariffs scheduled for April 2nd and that tariffs could likely go up in the
meantime until at least the trade deal is reached,” it further stated.
The report underscored that WTO’s most-favoured-nation
principle also prevents India from adjusting its tariffs on US imports first
without extending this to other WTO members, unless this happens under a
free-trade agreement.
Under the WTO agreements, countries cannot normally
discriminate between their trading partners. Grant someone a special favour
(such as a lower customs duty rate for one of their products) and you have to
do the same for all other WTO members.
Some exceptions are allowed. For example, countries can
set up a free trade agreement that applies only to goods traded within the
group — discriminating against goods from outside. Or they can give developing
countries special access to their markets. Or a country can raise barriers
against products that are considered to be traded unfairly from specific
countries. And in services, countries are allowed, in limited circumstances, to
discriminate.
But the agreements only permit these exceptions under
strict conditions. In general, MFN means that every time a country lowers a
trade barrier or opens up a market, it has to do so for the same goods or
services from all its trading partners — whether rich or poor, weak or strong,
the report observed.
It further states that from a tariff risk perspective,
India is among the more exposed economies to further tariff escalation (i.e.
reciprocal tariffs) within Asia given India imposes very high tariff rates on
select imports, existence of high non-tariff barriers and the size of its goods
trade surplus with the US.
Additionally, India is also moderately exposed to
potential tariffs on pharmaceutical product exports. President Trump has
indicated he will likely impose tariffs on this product category which account
for 2.8 per cent of overall exports and 0.3 per cent of GDP.
