Put the Champagne on Ice until 2027: A Look at the $500 Billion U.S.-India Trade Target

By Maria Philip

Detergent container in the soil of Jharkhand, India. Source: Premasager’s flickr photostream, used under a creative commons license.

Over the past three years, it has become popular for business leaders and policymakers – U.S. and Indian alike – to profess their confidence that annual goods and services trade between the United States and India will reach $500 billion in the foreseeable future. Their projections rely on a previous decade of remarkable growth largely attributable to an expansion of India’s Information Technology (IT) and Business Process Management (BPM) sectors. Trade data, however, suggests a need to temper expectations on reaching the $500 billion goal. While the absolute value of U.S.-India trade has increased, growth in trade – particularly services trade – has yet to return to the impressive rates that preceded the 2008-2009 global financial crisis (GFC). Evidence shows that the $500 billion trade target for the United States and India is simply not achievable in the short term. 

The $500 billion trade target was first proposed by Harold “Terry” McGraw III, outgoing Chairman of the U.S.-India Business Council (USIBC), in April 2012. McGraw posited that the passage of a bilateral investment treaty (BIT) would push the value of annual economic exchange between the United States and India from just under $100 billion to $500 billion by 2020.

It was Vice President Joe Biden’s remarks at the Mumbai Stock Exchange in July 2013, however, that truly inspired the quest for $500 billion in total trade. Biden noted that bilateral trade between the United States and India had increased fivefold from 2000 to 2013 and wondered if it could quintuple once more. When U.S. president Barack Obama and Indian prime minister Narendra Modi “committed…to increase trade another fivefold” from $100 billion to $500 billion in their September 2014 joint statement, the figures became dogma in U.S.-India relations.

Unfortunately, $100 billion was and remains the starting point for U.S.-India trade. According to U.S. data, bilateral goods and services trade increased five times from $19.05 billion in 2000 to $96.54 billion in 2013. Only in 2014 did the total value of two-way trade cross the $100 billion threshold, hitting $102.84 billion. Trade in services accounted for $36 billion, with computer services the top-earner at $11.35 billion. Thus, trade between the United States and India has not gained enough ground to confirm that another period of exponential increase is feasible.

Bullish predictions on the future value of U.S.-India trade look at growth over the last 15 years (from 2000 to 2014) as a single unit. But historical growth must be divided into pre- and post-GFC periods to understand the full, more complex story on trade growth.

Both U.S.-India goods trade and services trade grew robustly in the pre-crash years between 2001 and 2008. Overall trade grew at year-over-year rates of 27.4 percent, 22.9 percent, and 27.8 percent in 2005, 2006, and 2007, respectively. Trade in services was particularly steep and grew at 39.9 percent, 36.4 percent, and 36.8 percent over the same period. The global recession of 2008 brought contraction. In 2009, total U.S.-India trade decreased by 9.5 percent from the year before (although trade in services shrunk only 2.2 percent).

Since nose-diving in 2009 and climbing to its post-crash peak in 2010, growth in U.S.-India trade slowed and appears to have leveled off in the last three years. Although the growth rate in 2010 was 23.4 percent, the comparable figures were 7.9 percent in 2012, 3 percent in 2013, and 6.5 percent in 2014 – low when compared to pre-crash rates. This slowdown is especially true for services trade, which once drove growth in trade between the two countries. Bilateral services trade grew at 6.6 percent in 2012 and 5.9 percent in 2013, far less than in the 2001 to 2008 period.

U.S.-India goods and services total trade figures overlay with the bilateral trade's year-on-year growth rate. Source: Graphic prepared by CSIS Wadhwani Chair based on U.S. Bureau of Economic Analysis data.

U.S.-India goods and services total trade figures overlay with the bilateral trade’s year-on-year growth rate. Source: Graphic prepared by CSIS Wadhwani Chair based on U.S. Bureau of Economic Analysis data.

How off the mark, then, are policymakers who set short timelines for U.S.-India trade reaching $500 billion? To hit the target in five years, U.S.-India trade would have to grow at a whopping rate of 37.2 percent per year; to hit it in 10 years, it would have to grow an annual 17.13 percent. The average growth rate of total trade from 2000 to 2014 is 12.45 percent. If growth continues at this historical rate, U.S.-India trade will reach $500 billion in approximately 13.5 years, or by mid-2027. Given that recent years have failed to see the growth rate return to pre-crash levels, U.S.-India trade is unlikely to experience continued 12.45 percent growth without dramatic policy changes.

Recycled talking points that assume the proximity of the $500 billion trade target are driven by an incomplete interpretation of recent trade history. The only way to shorten the time to reach that goal is if U.S.-India relations are invigorated by a BIT or widespread sectoral liberalization in India. Until then, rhetoric on U.S.-India trade could benefit from a more realistic perspective.

Ms. Maria Philip is a researcher with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

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