Economic Implications of a Potential Free Trade Agreement between India and the United States

This paper explores the economic implications of a potential free trade agreement between India and the United States. A series of simulations is conducted assuming 100 percent ad valorem equivalent tariff cuts for goods and 50 percent cuts for services. The overall impacts are likely to be positive for the United States and India. While gains from trade creation are offset by trade diversion on the import side, both countries appear to gain from improved access on the export side. The United States is likely to gain largely through terms of trade improvements for its goods and services, as initial protection in India is particularly high. India would experience an expansion of exports and output, especially in textiles and apparel. As the United States and India are negotiating other free trade agreements, such as the Trans-Pacific Partnership and India's agreement with the Association of Southeast Asian Nations, the paper also explores how the effects of an India-United States free trade agreement are affected by prior free trade agreements. Adding an India-United States free trade agreement to prior agreements tends to bring additional welfare benefits to both countries. India would also gain substantially if it concluded a free trade agreement with the United States and then extended it to other partners. The results suggest that an India-United States free trade agreement might become a building block toward more liberal trade regimes.