As US President Donald Trump’s new set of tariffs takes effect from August 7, there is a question that is resonating in New Delhi’s policy circles: What does a bad trade deal look like?
The new trade deal signed by the United States with the European Union perhaps qualifies. Critics of this pact, including politicians in EU member countries such as France, are now openly lambasting the US-EU trade agreement, claiming that “while one side got a deal, the other side got a bill!”
There is a growing sense within sections of India’s government that rushing in to sign a deal on Trump’s terms has its perils, and could lead to such a lopsided trading arrangement. Also, in the Trumpian scheme of things, the countries that have been called “friends” have gotten it worse than others. Being soft has been construed as a sign of weakness by the US administration. From New Delhi’s perspective, it might also be better to wait out till China signs on the dotted line, to discern in comparative terms if India is getting something favourable out of the headline tariff numbers being offered as part of a deal.
Lopsided EU deal
What the EU deal effectively does is that it forces the 27-nation bloc to pay a 15 per cent baseline tariff on most of its exports to the US. In exchange, Washington DC gets more access to the EU market at far lower tariff rates, and has pretty much made no concessions for that access. On top of that, Brussels has promised to ramp up investment in the US to the tune of 600 billion Euros, alongside a promise to buy more energy from America to the tune of 750 billion Euros over the next three years.
How did the EU end up with this deal? This surrender has a predictable build-up to it, which is typical of the tactic that the US administration has followed with most others who rushed in to sign up early, including South Korea and Vietnam. At the start of negotiations, Brussels was offering zero-for-zero tariffs, and then at some point, it looked like they sweetened the deal by pitching zero-for-10 per cent tariffs, with some exceptions for certain sectors such as automobiles. Then came the letter last weekend from Trump, threatening a 30 per cent tariff if there was no deal reached by August 1. That seems to have been the final trigger for this final deal, which Ursula von der Leyen, the President of the European Commission, said was the best agreement under the given circumstances.
When Trump’s tariff action started in March, it was widely believed that the US President had only had one thing in sight – a headline tariff number being thrashed out with each country. Progressively, the deals signed closer to the August 1 deadline have been broadbased to include investment commitments such as in the EU deal. Japan too has committed to invest $550 billion, and the UK has pledged to adopt a “structured, negotiated approach” in investments, while South Korea has committed to investing $350 billion in the US in projects “owned and controlled by the United States” and “selected by President Donald Trump”. All this while agreeing to let in most American goods duty free into each of their countries, in return for the 15 per cent tariff. The build-up too has been predictable in all these cases – concessions being offered by the respective side, followed by a threat of a big tariff number as a deadline loomed, and eventual capitulation.
According to Deborah Elms, Head of Trade Policy at the Hinrich Foundation in Singapore, while some “napkin deals” were locked in headline rates of 15 per cent, others were less successful. Even with a deal, Vietnam got 20 per cent and an additional 20 per cent on trans-shipped goods, while others in ASEAN with no deal got 19. Switzerland had early agreement but got whacked with 39 per cent while the UK, despite its trade deficit with the US, got tariffed at 10 per cent. “All rates can be changed at any point, so this doesn’t really ensure stability”.
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What is striking is that those without a deal in ASEAN got a better tariff deal as compared to those who signed early, such as Vietnam. Then there is the practical aspect of these deals: beyond the headline tariff number, there are question marks over whether the other provisions included in the deals will ever come to fruition. The detailed text is not out for most of the deals signed so far.
Even when the details trickle out, there is a chance that these terms will be fiddled with, tweaked and rewritten, to make them implementable. Trade deals typically run to thousands of pages and take months, if not years, to negotiate. This fast-tracked method of signing up multiple deals over a span of weeks is really mind boggling. The only deals where some degree of actual negotiations have taken place so far seem to be the one with China, and the extended talks with India.
Implementation woes, legal challenges
Then there is the question of the legality of what Washington DC is doing, and the implication for its trading partner too. The US threatening to, or imposing additional tariffs forcibly on goods from another country, are a violation of Article I of the General Agreement of Tariffs and Trade, apart from being in contravention of its own bound tariff commitments under Article II of GATT, which entails an assurance that tariffs will not exceed the rates mutually agreed upon by the two parties. On the other hand, the concessions that the EU has given to the US could be up for challenge from other countries, if these sops are not in line with the World Trade Organisation (WTO) trading rules. This is because under WTO rules, if the US has now been given some sort of preferential access to the EU market, Brussels needs to offer the same terms to others or could be deemed to be violating international trade laws. Then there is also the domestic legal challenge that Trump’s trade-linked executive orders are facing in the US.
Lastly, there is the practicality aspect. Do the EU member countries really have the scope to ramp up energy imports from the US by 750 billion Euros over the next three years? And, can the Commission guarantee that 650 billion Euros of investments into the US, given that much of this is not public spending, but private sector spending by individual companies.
Then there is the big question mark over the ability of American customs department and trade officials being able to effectively monitor, police and implement these multiple country-specific provisions. The reason why the rollout of the July 31 tariffs have been delayed till August 7 was to ostensibly give time for the American Customs department to prepare for these new tariff rates. It is unlikely to be a smooth process at major US ports, given the short lead time.
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