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The US Economic Relationship with India & Pakistan

The U.S. Economic Relationship with India and Pakistan

Josette S. Shiner, Under Secretary for Economic, Business, and Agricultural Affairs
Address to the Heritage Foundation
Washington, DC
February 24, 2006

"I would define the objective of transformational diplomacy this way: To work with our many partners around the world to build and sustain democratic, well-governed states that will respond to the needs of their people and conduct themselves responsibly in the international system. . . This is a strategy rooted in partnership, not paternalism in doing things with other people, not for them. We seek to use America's diplomatic power and our foreign assistance to help foreign citizens to better their own lives, to build their own nations, transform their own futures, and to work with us to combat threats to our common security "

Secretary Rice, Georgetown University, January 18, 2006


* In a few days, President Bush will make historic visit to both India and Pakistan, two countries that are critical to this vision of transformational diplomacy, and with which we have developed close partnerships in the last few years.

* Our relationships with both India and Pakistan are complex, broad, and deep, now covering dozens of global, regional and bilateral issues.

* The President's trip will highlight how far these relationships have come since 2001. Nowhere is this more evident than on the economic side.

* Our economic relationships are now a foundational part of these partnerships. Our economies are increasingly interlinked, bringing innovation, trade, opportunity, and prosperity to all our peoples.


* When I was recently in Davos for the World Economic Forum, I saw a sign in the Zurich airport that said, "India: World's Fastest Democracy."

* President Bush has made a fundamental judgment that strategic partnership with India will be central to the future success of American foreign policy in South Asia and around the world. The visit of Indian Prime Minister Manmohan Singh to Washington last July marked a watershed in our relationship; the President's visit there next week will be another major step.

* These visits, and the initiatives we have launched, showcase the fact that the U.S.-India bilateral relationship has emerged from a long period of "unproductive estrangement."

* This new relationship began 15 years ago, when India's leaders including current PM Manmohan Singh decided to initiative serious economic reforms. But only in the past 3 years can we say the "planets aligned" for a significant transformation in U.S.-India relations.

* A strong, democratic India is an important and natural partner for the United States. We expect India to play an increasingly important leadership role in 21st Century Asia, working with us to promote democracy, economic growth, stability and peace in that vital region.

* Our relationship with India has been transformed across the board: in trade, energy, education, agricultural cooperation, scientific research and in other areas.

* We have launched strategic dialogues or concluded agreements on: + Airline access and open skies + Trade in sensitive technologies + Environment + Commercial issues and more

* And, of course, the civilian nuclear agreement we are working to complete.

* These initiatives showcase our common values and our shared commitment to preserve and promote open societies. We are interested in developing a strategic partnership that advances shared interests and enhances global security; and we look to strengthen cooperation in all areas important to the well being of both nations.

Why Now?

* President Bush and former PM Vajpayee took the initial steps to transform the U.S.-India relationship. And we have moved even farther with PM Singh.

* Private Americans and Indians have worked hard to bring our countries closer together, though commercial, educational, cultural, scientific, and other ties.

* Indians are a very influential presence in Washington, on Wall Street, and in the media. 2 million people of Indian origin are in the U.S. There are over 85,000 Indian students in the U.S., more than from China.

* 25 percent of Silicon Valley firms were founded or are led by people of Indian origin. Polls in India show a remarkable 75percent favorable view of the U.S.

The Economic Relationship

* The U.S.-India economic relationship is poised to take off. The bilateral Economic Dialogue is the cornerstone of our economic cooperation, and the main avenue for addressing issues of the greatest importance to our private sectors.

* Since the early 1990s, India has progressed far in liberalizing its tariff regime and investment environment, and these major changes have fueled the growth and increased prosperity of recent years.

* By 2025, India's economy is expected to be one of the five largest in the world. It will soon be the world's most populous nation, with an increasingly young, skilled labor force.

* U.S. exports to India grew 30 percent last year; Indian exports to the U.S. grew over 20 percent. Since 1997, bilateral trade has grown from $10 billion to almost $30 billion in 2005.

* While outsourcing has become a controversial issue, the U.S. actually enjoys a healthy surplus in trade in services with India. In 2004, the U.S. exported $4.6 billion worth of services to India, a surplus of $1.8 billion.

* Despite its impressive record of economic growth during the last decade, India still struggles with many of the persistent challenges faced by developing countries: insufficient and underdeveloped infrastructure, inefficient markets for goods and agricultural products, and minimal access of credit and capital among the urban and rural poor.

* In addition, India still suffers from a shortage of foreign capital and investment, which can bring in key, new technologies, create jobs, and modernize industries.

* While annual FDI to India is growing, India's FDI is still one-tenth of that of China.

* Our near term energies will focus on several sectors where we believe further liberalization and reform are needed, including the financial sector, the retail sector, and improved IPR protection. And we need to resolve legacy commercial disputes that are important to U.S. and Indian companies.

* In addition, we are working with India on a broad range of energy issues in the U.S.-India Energy Dialogue, which is aimed at strengthening energy security and promoting the development of stable and efficient energy markets in India.

Civil Nuclear Agreement

* In their July 18 Joint Statement, President Bush and Prime Minister Singh committed to work with Congress and with our international partners toward full cooperation with India in civil nuclear energy. India for its part committed to take a number of important nonproliferation steps that will bring it closer to international non-proliferation practices.

* The goal of the initiative is to provide India access to the technology it needs from the U.S. and elsewhere to build a safe, modern, and efficient infrastructure that will promote a cleaner, more secure global energy supply to support India's growing economy. At the same time, the additional nonproliferation commitments India made as part of the Joint Statement will, once implemented, strengthen the international nuclear nonproliferation regime.

* We are also working closely with India on issues in the WTO to propose solutions and forge agreements that can translate the promise of the WTO's mission and the new era of U.S.-India relations into reality. India's voice carries weight and credibility in many areas of the world, and many developing countries look to India as a leader in major global issues. This continued effort will take hard work on both sides, and we look forward to this opportunity to engage India seriously, on behalf of both our peoples.


* As the President said in his speech on Wednesday, Pakistan now has the opportunity to write a new chapter in its history. And the United States wants to build a broad and lasting strategic partnership with the people of Pakistan.

* At their June 2003 meeting at Camp David, President Bush made a commitment to develop with Pakistan a long-term, broad-based partnership as evidenced by the five-year, 3 billion dollar commitment.

* We look forward to building on that commitment, developing our shared interests in promoting prosperity, peace, security, mutual understanding and tolerance in the region and across the globe.

* We also intend to strengthen cooperation on counter-terrorism and security including striking at the conditions that give rise to extremism and terrorism, such as poverty, ignorance, and hopelessness.

* As the President stated on Wednesday, the United States will continue to work with Pakistan to strengthen the institutions that help guarantee civil liberties and help lay the foundations for a democratic future for the Pakistani people. The United States and Pakistan both want the elections scheduled for next year to be successful. This will be an important test of Pakistan's commitment to democratic reform, and the government in Islamabad must ensure that these elections are open, free and fair.

* Our partnership with Pakistan will increasingly build on expanded bilateral commercial links, particularly greater trade and investment, and also cooperation aimed at fostering expanded commerce within the region including with Afghanistan and Central Asia. The U.S. is Pakistan's largest partner for both investment and trade.

* We hear from many sectors of Pakistan's economy an eagerness for increased trade with the U.S. We have encouraged Pakistan to further diversify exports away from a heavy reliance on textiles in order to be less susceptible to economic shocks and in order to have more opportunity to expand and take advantage of its plentiful, skilled workforce. One of our assistance programs is focused on helping Pakistan improve its competitiveness in dairy, gems and jewelry, and marble (sectors identified through public-private dialogue).

* Pakistan has experienced strong economic growth in the last five years. In 2005, Pakistan had the second fastest growing economy in Asia. Although it will need to continue economic reforms and contain inflation to continue these positive trends, Pakistan has taken great strides from its bleak performance in the late 1990s.

* Pakistan, guided by a strong team headed by Shaukat Aziz, the previous Finance Minister who is also now Prime Minister, engineered a stunning turnaround during which strong export growth lead to record foreign reserves in 2004, after teetering on the brink of economic disaster in the late nineties.

* Our engagement with Pakistan on building its economic future will grow in new and mutually beneficial ways. One that I can highlight today are our joint efforts to conclude negotiations for a high-standard Bilateral Investment Treaty, or BIT, which will increase investment opportunities in both of our countries.

* By fostering economic development and opportunity, we will reduce the appeal of radical Islam and demonstrate that America's a steadfast friend and partner of the Pakistani people.

* The American response to the needs of the Pakistani people after the recent earthquake is another sign of America's commitment to this partnership. Not only were American relief workers on the ground there almost immediately, but the United States has pledged more than a half a billion dollars for relief and reconstruction, including $100 million in private donations from our citizens.


The President spoke Wednesday about the great changes taking place inside India and Pakistan and how they are helping to transform the relationship between these important countries. He pointed out that good relations with America can help both nations in their quest for peace. He noted that Pakistan now understands that it benefits when America has good relations with India and that India understands it benefits when America has good relations with Pakistan. The President believes that India and Pakistan now have an historic opportunity to work toward a lasting peace and we are encouraged and optimistic because, as the President said, "Prime Minister Singh and President Musharraf have shown themselves to be leaders of courage and vision." The President concluded with the following words:

[W]e can proceed with confidence because we know the power of freedom to transform lives and cultures and overcome tyranny and terror. We can proceed with confidence because we have two partners two strong partners in India and Pakistan.

Some people have said the 21st century will be the Asian century. I believe the 21st century will be freedom's century. And together, free Asians and free Americans will seize the opportunities this new century offers, and lay the foundations of peace and prosperity for generations to come.

Civ-Nuke (IF ASKED)

Both India and the United States are taking steps to implement the civil nuclear cooperation initiative as spelled out in the July 18th agreement. The Government of India is currently working to create a credible and transparent plan for the separation of India's civilian and military nuclear facilities. Upon completion of such a plan, we hope to be able to secure the support of the U.S. Congress to adjust our legal frameworks to allow for full civil-nuclear cooperation with India. Similarly, we will work with our partners in the Nuclear Suppliers Group (NSG) to seek accommodation for India.

* The initiative faces challenges. India's plan for separation of its civilian and military facilities must be credible and defensible from a nonproliferation standpoint and be comprehensive enough to assure supplier states and the IAEA that materials and equipment will not in any way contribute to India's weapons program.

* We believe additional conditions such as implementing a moratorium on fissile material production, ratifying the Comprehensive Test Ban Treaty, and/or joining the NPT as a non-nuclear weapon state "would likely be deal-breakers." The Joint Statement commits India to work toward the completion of a multilateral Fissile Material Cutoff Treaty (FMCT) and we believe this is a significant step forward.

Iran and Non-Proliferation (IF ASKED)

* In September 2005 and earlier this month as well, India joined the majority of IAEA Board of Governors' members in supporting a resolution finding Iran in noncompliance of its safeguards obligations.

* These votes are important, as they demonstrate that India is taking a greater, more active role in strengthening nuclear non-proliferation regime. India sees it in its own interest, as well as the world's, to join the growing international consensus calling on Iran not to develop a nuclear weapons capability.

* Speaking of Iran, I should note that we do have concerns, with respect to India and some other countries, about investment in Iran's oil and gas sector, including aspects of energy cooperation with Iran such as pipelines and LNG exports. Proposals for a gas pipeline linking Iran with the Indian subcontinent are troubling. Our views on this are well-known and it remains an issue of our bilateral dialogue.

Released on March 19, 2006


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