Media365
India and the United States are very close to concluding what could become one of their most consequential economic agreements in recent years.
But recent reports suggest that a “Sunset Clause” into the proposed interim bilateral trade agreement may be negotiated between New Delhi and Washington.
Officials on both sides
have indicated that negotiations are in their final stages, with reports suggesting that much of the framework has already been agreed upon.
What is a Sunset Clause?
A sunset clause is a legal provision that places an expiry date on an agreement unless all parties involved decide to extend it.
Rather than allowing a treaty to remain in force permanently, the mechanism requires governments to revisit the agreement after a predetermined period and decide whether it should continue, be modified, or be allowed to lapse.
For decades, most free trade agreements were designed with permanence in mind. Governments and businesses generally preferred stable arrangements because long-term predictability encouraged investment decisions, supply-chain planning and market expansion.
A sunset clause changes that underlying assumption.
Instead of treating a trade agreement as a permanent commitment, the provision effectively transforms it into an arrangement that must periodically justify its continued existence through measurable outcomes.
Supporters argue that such provisions provide governments with flexibility in a rapidly changing economic environment. Critics, however, often contend that they can create uncertainty for businesses that rely on stable market-access commitments.
The mechanism is no longer merely a theoretical concept.
One of the most prominent examples is the United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement. The agreement contains a 16-year sunset provision and requires mandatory reviews every six years. The first major review under that framework is scheduled for July 1, 2026.
More recently, the European Union incorporated a similar approach into its own trade arrangement with Washington. The agreement approved by the European Parliament includes a provision under which tariff preferences expire on December 31, 2029, unless both sides agree to renew them.
European lawmakers also built safeguards into the arrangement covering areas such as steel, aluminium derivatives, industry and agriculture.
For India, these examples demonstrate that major economies are increasingly seeking mechanisms that allow them to reassess trade commitments if economic or political circumstances change significantly.
Why is India pushing for a review mechanism now?
The timing of India’s interest in a sunset clause is closely linked to developments in the United States over the past year.
Trade negotiations are usually based on assumptions regarding market access, tariff rates and regulatory conditions. However, those assumptions become less reliable when policies are frequently revised or challenged.
Indian policymakers have watched as tariff announcements, modifications, suspensions and legal disputes have altered the trade landscape in the United States. As a result, New Delhi appears reluctant to rely solely on assurances that current conditions will remain unchanged throughout the lifespan of the agreement.
The underlying concern is not necessarily the trade deal itself but the possibility that circumstances could change after India has already made substantial commitments.
A sunset clause would effectively provide an institutional mechanism for both countries to revisit the arrangement if the economic foundation on which it was negotiated changes significantly.
In practical terms, the provision would function as a safeguard against future policy shocks.
How did changes in American trade policy increase India’s concerns?
One of the most significant developments influencing India’s thinking occurred on February 20. On that date, the US Supreme Court issued a 6-3 ruling that altered the legal framework surrounding tariff-setting authority in the United States.
The decision concluded that the executive statute previously relied upon to impose certain reciprocal bilateral tariffs was not authorised, effectively restoring tariff-setting powers to Congress.
The ruling had important implications because it changed assumptions that had previously underpinned trade discussions. Earlier expectations regarding a relatively predictable tariff structure became less certain following the judgement.
The United States subsequently shifted toward a different tariff framework while continuing to rely on various trade enforcement mechanisms.
Among the most important of these are Section 301 investigations, which remain active instruments of American trade policy.
The Office of the United States Trade Representative initiated investigations in March focusing on structural excess capacity and manufacturing-related concerns. These inquiries cover multiple economies and can potentially result in additional trade measures if Washington concludes that certain foreign policies adversely affect American commerce.
For India, this creates uncertainty. Even if tariff concessions are negotiated today, future trade actions arising from investigations or other policy decisions could alter the commercial value of those concessions.
Public hearings connected to these investigations are scheduled for July 7, highlighting the possibility that the tariff environment could continue evolving even after a trade agreement is signed.
A sunset clause would not prevent the United States from using its domestic trade laws. What it would do is provide India with a formal opportunity to revisit commitments if the original economic bargain changes substantially.
What is at stake in the current India-US trade negotiations?
On tariffs, discussions have focused on reducing duties affecting Indian exports while simultaneously expanding access for American products in the Indian market.
The United States is seeking broader opportunities for products including tree nuts, fresh fruits, soybean oil and animal feed such as sorghum.
India, meanwhile, has attempted to preserve protections for politically and economically sensitive sectors including wheat, rice and dairy.
The negotiations also extend beyond traditional goods trade. Energy and technology have emerged as major components of the discussions.
Washington hopes to expand exports of American energy products while also securing access to the Indian market for advanced technological equipment, including data-centre hardware and graphics processing units (GPUs).
India, in turn, is expected to strengthen its integration into American technology supply chains through reduced duties on products such as electronic components, aircraft parts and pharmaceuticals.
However, these opportunities come with obligations. Reports indicate that India could commit to purchasing as much as $500 billion worth of American goods over a five-year period.
Such commitments would require long-term planning and potentially significant adjustments in procurement patterns, including a gradual reduction in reliance on Russian crude oil imports.
This is one of the central reasons why India is reportedly seeking additional safeguards.
Could Indian industry face challenges under the agreement?
One area of concern involves expanded access for American industrial goods, advanced machinery, information and communication technology hardware, and medical devices.
Many argue that greater access to high-quality equipment can improve productivity, support industrial modernisation and enhance competitiveness. However, there are also concerns regarding the effect on Indian manufacturers that are currently expanding under government-backed industrial programmes.
Particular attention has been directed toward enterprises benefiting from Production Linked Incentive (PLI) schemes. Many of these firms are still scaling up production and building capabilities in sectors considered strategically important.
If imports increase rapidly following tariff reductions, policymakers may wish to assess whether domestic industries are being adversely affected.
A sunset clause could provide a structured review point after three to five years, allowing authorities to evaluate the agreement’s impact on industrial development, investment patterns and manufacturing competitiveness.
Rather than relying on assumptions, policymakers would be able to examine actual outcomes before deciding whether existing commitments should continue unchanged.
Will this give India an edge over competing countries?
India is reportedly seeking preferential access to the American market that provides an advantage over competing economies in Asia. This objective is particularly important for sectors such as textiles, leather, engineering products, chemicals and food processing.
These industries often operate on thin profit margins, meaning that even small differences in tariff treatment can influence purchasing decisions and determine which suppliers secure contracts.
According to reports, New Delhi has sought terms that would place Indian exporters in a stronger position relative to regional competitors, including Vietnam and several Asean economies.
The concern is that a trade agreement negotiated today could lose value if the United States subsequently grants more favourable treatment to other countries.
Emerging reports suggest that Washington has considered different tariff categories for various developing economies under ongoing trade processes.
India reportedly faces the possibility of a proposed additional duty of 12.5 per cent under certain frameworks, while countries such as Indonesia and Pakistan have been associated with a 10 per cent category.
For Indian exporters, such differences could have meaningful commercial consequences.
A sunset clause would not eliminate competition, but it would ensure that India has a contractual opportunity to revisit the agreement if competing countries eventually secure significantly better access to the US market.
With inputs from agencies
