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With the Office of the US Trade Representative (USTR) reported to be considering a downgrade of India, trade ties between the two countries are even rockier than usual. Worse, the decision could be announced soon after a newly elected Indian government takes office in May, potentially starting a new relationship on a very sour note.  Arvind Subramanian, a senior fellow at CGD and the Peterson Institute, recently warned about these risks in a piece in India’s Business Standard

It sounded pretty serious to me, so I invited Arvind and CGD senior fellow Kimberly Elliott, author of Delivering on Doha: Farm Trade and the Poor  to join me on the Wonkcast to help me better understand what troubles the US-India trade relationship. 

At the core are disputes about intellectual property rights, in particular, pharmaceuticals.

“India-US economic relations have been deteriorating quite a bit in the last few years,” says Arvind. If the US does downgrade India (the confusing technical term is “Priority Foreign Country status”), India would be grouped along with the most egregious countries in terms of not doing enough to respect intellectual property rights, Arvind explains.

At stake for the US pharmaceutical industry (known to its critics as “Big Pharma”) is not just India’s own vast market, but potentially markets in other developing countries as well, Arvind says. “What India has been doing with intellectual property is potentially a model for other developing countries to emulate,” he says. “If that happens, there are consequences for Big Pharma all around the world.”

If India is violating intellectual property rights rules, why not bring a case at the World Trade Organization (WTO)?  According to Arvind, “the US is not willing to do that, partly because it feels like it might lose that case and therefore its legitimacy would be undermined.”

Kim explains that at the heart of the dispute are differing interpretations of international trade rules about what constitutes a violation of intellectual property rights. US interests favor a stringent interpretation, while developing countries such as India argue that that the rules provide for a lot of flexibility. Rather than file a WTO case and risk losing, the US might prefer to bring the issue into the political arena by downgrading India’s status.

Kim agrees that such a risk exists, and she welcomes Arvind warning against it. But she doesn’t consider it likely. Priority Foreign Country designation is “pretty rarely used, and the USTR is pretty careful about when and how they use it,” she says.

Since this clash in interpretations over intellectual property rights stretches far beyond US-India ties, I ask Arvind and Kim to state their views on the dispute in a broader framework of global access to medicines.

“I think the core problem with trying to negotiate global rules,” Kim explained, “is that intellectual property is all about striking a balance—you want to incentivize innovation, on the one hand, but the societal benefits come from spreading those innovations as broadly as possible.” This balance should be stuck differently in rich and poor countries, she argues. “It costs a lot to develop a new and effective drug… developing countries with small, poor markets can’t afford those prices. You need a different set of rules for poor countries to ensure global access.”

I ask whether part of the argument is that small, poor markets are not going to provide much incentive for development of new medicines anyway, since investors will base their decisions on expected market in the large, rich markets.

Arvind agrees, saying that “the balance between what you should do to incentivize and what you should do to provide cheaper drugs is different when you’re small and when you’re big.”

But he emphasizes that markets change as countries grow—in the past 20 years Brazil, India, and China have all become very large markets. Their influence changes as they become richer and larger, in part because they become able to pay a fairer share of R&D.

When asked about what advice they would give the USTR about its upcoming decision on India’s status, both Kim and Arvind agreed that it was a tricky situation.

Kim suggests that the USTR should not downgrade India but instead bring parts of Indian law that seem to be in violation of international rules to the WTO.

Arvind says: “Don’t even get close to naming India as a Priority Foreign Country. Let a new government come into power, [and] start a new dialogue on broader trade issues.”

He emphasizes that “there is much more to the relationship than pharmaceuticals” and the US-India relationship should not be dragged down by intellectual property disputes.

Listen to the full Wonkcast for more on US-India trade ties and intellectual property rights rules.

My thanks to Aaron King for recording the Wonkcast, and to Kristin Sadler for a draft of this blog post.