Repairing U.S.-Indian Trade Relations

Via Wall Street Journal

By E Ashley Wills

U.S. Vice President Joe Biden is in India this week, at a time when the U.S.-Indian relationship is at a crossroads. The two countries have developed an increasingly close economic and strategic relationship that benefits both and promotes stability and prosperity throughout South Asia. But there have recently been troubling indications that India is willing to take advantage of that relationship to benefit its own economy at the expense of America's. Mr. Biden should use his visit to urge India to put its trade policies in better order.

Beginning in 1991, India embarked on a series of historic economic reforms that opened the country to foreign investment and began a two-decade period of steady growth and development. I was fortunate to have a front row seat for much of this rebirth as a U.S. diplomat in the region. Billions of dollars in foreign investment poured into India—and why not? India was a huge, newly opened market freed from four decades of autarky, with a large, talented, English-speaking workforce and a relatively stable democratic political system.

But there are signs that India's boom is slowing. After growing at better than 11% during 2010, India's gross domestic product grew at 7.7% in 2011 and just 5% in its 2012-13 fiscal year. That pace would be cheered today in the U.S., but 5% growth is the lowest in a decade for India. Meanwhile, inbound foreign direct investment fell 67% last year.

As far as India has come, it may fail to recognize its true economic potential if it doesn't reform some of its protectionist policies. As the Office the United States Trade Representative said in a report this year, "there are serious questions regarding the future condition of the innovation climate in India across multiple sectors and disciplines." The report added that difficulties protecting and enforcing intellectual property rights "are growing." In many ways, India is seeking to have its cake and eat it too—by opening its markets only grudgingly or honoring intellectual property only when it suits its short-term interests.

For instance, India has selectively failed to grant patents to foreign companies or has effectively overridden patents that companies already hold. Novartis, NOVN.VX -1.47% Pfizer PFE -0.68% and Bayer all experienced this over the past year. Their patent rights on various medicines were stripped or ignored, with Indian pharmaceutical companies poised to take advantage of these self-serving government acts. The Indian government has also adopted or is considering similar anti-innovation policies in the clean technology and information technology sectors.

According to the U.S. trade representative, India maintains an excessive tariff system, with rates of 100% to 300% on agricultural products (among the world's highest). India places equity limitations or restrictions on foreign investment in sectors including financial and legal services, insurance, telecom and retail. And it has required local sourcing of a broad range of technology products, though New Delhi recently said it would reconsider parts of that policy.

The Indian government's actions may yield short-term benefits in the form of less expensive products or the gratitude of domestic Indian companies, but they could seriously undercut the country's future economic growth. Partially closed markets and weak intellectual property protection discourage entrepreneurs and businesses from developing the sorts of innovations that build domestic wealth. They also depress investment and trade.

While India infringes on intellectual property and opens its markets only selectively, its neighbors are moving forward with robust trade commitments in the Trans-Pacific Partnership being negotiated by the United States and many other Asia-Pacific nations. Unless India reforms, it risks falling further behind.

India and the U.S. would both benefit from increased bilateral trade and investment. The U.S. remains a generally open market, with Indian firms expanding their presence in America. U.S. imports from India totaled $36.2 billion in 2011, a 238% increase since 2000. Indian investment in the U.S. is at $11 billion and growing, and Indian biopharma firms generate a large portion of global generic sales from the U.S. market. But in the Indian market, American firms don't enjoy the access or protections they should.

As the highest-ranking U.S. official to travel to India since 2010, Vice President Biden has an opportunity to stress the importance that America places on fairness in trade and openness to innovation. For the sake of the U.S.-Indian partnership, and to add economic ballast to a growing strategic relationship, Mr. Biden should make clear that India must reverse its trade failures.

Ainsley Shea