The Economic Potential of an India-US Free Trade Agreement

Abstract

This paper explores the economic implication of a potential free trade agreement between India and the United States. The overall impacts are likely to be positive for the United States and India. While gains from trade creation would be offset by trade diversion on the import side, both countries would 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 remains relatively high. India would experience an expansion of exports and output, particularly in textiles and apparel. The paper explores how the effects of an India-United States free trade agreement might be affected by prior free trade agreements. Adding an India-United States free trade agreement to prior agreements would tend 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.