 "Trade")
It is now close to 60 days since “liberation day” and the subsequent announcement by United States President Donald Trump of a 90-day stay on the implementation of reciprocal tariffs. Notwithstanding this, tariff threats by the US President against not just “countries of concern” but also allies and domestic firms continue almost on a daily basis. While this uncertain trade policy context makes it difficult to discern trends, some early signs of how global trade is evolving may be worth outlining.
First, while the exemption from reciprocal tariffs for United States-Mexico-Canada Agreement-compliant products and value added in case of auto/ auto products was an early acknowledgement of the irrational specification of reciprocal tariffs by the US, it was not surprising as it involved allies and partner economies in a regional trade agreement.
The turnaround with China, however, tells a different story. The negotiations — easy and short over a weekend in Geneva — led to a significant cut in additional tariffs by the US from 125 per cent to 10 per cent for the next 90 days for China. This was a clear admission by the US trade team that, given China’s centrality in global value chains (GVCs), the imposition of stupendously high tariffs on Chinese imports would be, first and foremost, detrimental to the US economy itself. China continues to be at the centre of GVCs and the largest exporter and importer of parts and components, despite the tariff, export, and technology-restrictive measures adopted during Trump 1.0 and further intensified during the Biden administration.
Second, the proclamation by President Trump and expectations of the likelihood of the 90-day stay period being packed with fast-paced negotiations towards trade deals with the US seem belied. Well beyond the halfway mark in this period, there are only two trade deals that the US has accomplished, with the United Kingdom and China. Other major trading partners of the US like the European Union, Japan and South Korea — all of which had been eager to negotiate early trade deals following the “liberation day” announcements — have chosen to wait and watch, perhaps to tailor their negotiating strategies in response to any further reduction in tariffs by the US.
Already, it is evident that Japan and the EU have adopted relatively firm stances over the last month. Japan, which has to negotiate from steeper tariff levels relative to the UK, has been firm about its demand for elimination of tariffs on metals (aluminium and steel) as well as auto and auto parts. The recent reversal in President Trump’s campaign position on the longstanding Japanese demand for a partnership between Nippon Steel Corporation and US Steel Corporation may now ease the negotiation for a US-Japan trade deal. The EU continues to counter the US tariff threats with its own while simultaneously accelerating its pace of trade agreements beyond the US, with its other major trading partners.
Third, the trade deals that are being negotiated with the US are ones with limited coverage, or “mini-trade deals”. They are invariably sector-specific, focused on existing or likely future targets of reciprocal tariffs, strategic sectors, agricultural commodities, and digital trade. The US-UK Economic Prosperity Deal, for example, reduces tariffs mainly on meat exports from the US and automobiles exports from the UK. Trade deals with limited sectoral coverage — given that they are easier to negotiate and can yield concrete outcomes — may have an advantage in these uncertain times. However, it needs to be recognised that mini trade deals with the US are agreed through executive order and not congressional approval. Hence, while ensuring speed, they are also easily retractable or subject to being reneged upon. Furthermore, by not covering substantially all trade and invariably not including a declared intent for subsequent full-fledged free trade agreements (FTAs), they are clearly not in compliance with World Trade Organization (WTO) norms. Mini-trade deals are thereby initiating a trend that is significantly at variance with the quarter-century-long trend of WTO-compliant FTAs facilitating global trade.
Fourth, another trend likely to consolidate is the possibility of an increase in global average level of tariffs. The continued base tariff of 10 per cent in both the US-China and US-UK trade deals indicates that it will stay and, in all probability, be extended across other trade deals. This by itself would make the average US effective tariff rate four times the rate prevailing in January 2025. When other tariffs, such as on metals and those related to fentanyl are added, the current US average effective rate stands at over 20 per cent.
Additionally, the possibility of some retaliatory tariffs by other countries cannot be overlooked. This is especially so as trade deals may not happen as envisioned, or are delayed or reneged upon at a later date, as the US President is prone to doing. The EU and China, for example, in response to delayed negotiations and US threats of higher tariff imposition, have made clear their intention to undertake retaliatory action. In addition, given the imperatives of building resilient supply chains, it will not be unreal to expect increased use of protectionist trade instruments as also subsidies, especially by export reliant countries, to bolster their manufacturing sectors. South Korea, for example, has extended support to its domestic auto and chip manufacturers.
A further perpetuation of these trade trends, if left unregulated, will lead to a chaotic global trade environment. It is, therefore, critical at this juncture, to rethink global trade governance in terms of both format and institution. Two options, not mutually exclusive, may be explored further. These include:
First, taking forward the alternatives of “variable geometry” and plurilaterals as likely future formats to negotiate and formulate appropriate provisions on new-age trade issues such as green energy, AI, e-commerce, and digital trade. Fundamental to this option would be the need for greater thought towards ensuring their legal fitment with the WTO.
The second option is to shift focus away from trade deals with the US to the expansion of rules-based trade at the global level. In this context, the idea of deeper engagement between the EU and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) being revived now after a tepid response in 2023, when it was first proposed by the Swedish National Board of Trade, is noteworthy. The large membership and commitment to high-grade trade provisions by both — the CPTPP and the EU — can be the harbinger of the future global trading system.
In sum, therefore, it is time for collective and collaborative action among like-minded economies to initiate reforms in global trade governance appropriate to the times, rather than get caught in the turmoil of Trump tariffs.
The author is professor, School of International Studies, JNU, and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views are personal
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
