Revisit tariffs to firm up trade pacts
The global trade arena is in turmoil as tariff hikes by the US on friends and enemies alike has put the world on guard. India, in particular, is keeping a watchful eye on the Trump administration’s new policies, even as it seeks to negotiate a new trade pact with the biggest economy. At the same time, it is trying to improve access to its largest export market in the European Union (EU) by pushing to finalise a free trade agreement. The fact that the EU is recognising the need to strengthen ties has been underscored by last month’s unprecedented visit by the EU commissioners. Led by European Commission chief Ursula von der Leyen, the delegation was a show of strength meant to emphasise a seriousness of intent in forging closer relations at a time when the world is more fractured than ever before.
A little-known fact is that the EU is actually India’s biggest trading partner. Bilateral trade with the 27-nation economic bloc is considerably more than with the US or China. As against roughly $119 billion of goods trade with each of these two countries in FY 2024, it was nearly $140 billion with the EU. Viewed in that context, it becomes even more important to ensure that access to the European market is made easier and vice versa.
For the EU, it is imperative to find alternative markets, given that the US is going to be increasingly restricted due to the protectionist policies being adopted by the Trump administration. The earlier focus on China, both in terms of investment as well as trade flows, is also set to change for various reasons. The first is the increasing rigidity in Chinese state policies during the Covid-19 pandemic and afterwards that made operating there increasingly difficult. Second, mounting US-China tensions over Taiwan as well as economic issues have prompted European firms and other multinationals to adopt the ‘China Plus One’ policy by making parallel investments in other locations.
And finally, the flood of subsidised Chinese goods, including electric vehicles (EVs), into global markets has created worries over the prospect of a fallout on the European industry. The brouhaha over Trump’s tariff pronouncements has obscured the tariff war going on between the EU and China. The former has levied high duties on Chinese EVs in a bid to protect domestic manufacturers. The argument is that the large state subsidies given to Chinese EV makers enable them to sell at cut-throat rates in international markets. The duties go as high as 35 per cent for some brands, on top of the basic 10 per cent customs duty on EVs. Even EVs made by Tesla and BMW plants in China have had to face higher tariffs.
The EU is thus betting on India’s huge domestic market to become a game-changer for the future. The interest is mutual as this country seeks to rebuild its economic and trade ties with the rest of the world. The reset is happening partly because of pressure by Trump to reduce duties but also because average applied tariffs have already been revised in free trade agreements with countries like Australia, the United Arab Emirates and Switzerland. It seems likely that any tariff cuts in the fresh treaties being negotiated with the US and the EU could mirror those given to other countries in recently concluded FTAs.
Progress will not be easy, however, with the US or the EU on tying up the trade pacts. Both are seeking an entry into the agricultural products segment that is sacrosanct for this country in view of the enormity of subsistence farming here. Indian trade diplomats will have to ensure that farmers’ livelihoods are not affected by any tariff changes. The dairy industry is also likely to face pressure as the EU seeks tariff cuts on cheeses and skimmed milk powder. But there are areas which can be opened up even in agro products. For instance, pulses continue to be in short supply here and zero duty has already been offered in other FTAs.
Alcoholic beverages is another segment where the industry can face duty cuts without too much pain. For instance, Indian gin and beer are now being rated among the best in the world. It may be time to expose them to competition. Similarly, irrationally high tariffs need to be eliminated, as was done recently for American bourbon whiskey where there is no domestic interest at all. Another sector where duties could be relaxed selectively is the automobile sector, where it makes no sense to protect the luxury segment.
India equally has certain key interests in both the US and the EU. This would include better access for industrial goods and textiles while easing sanitary and phyto-sanitary measures on agricultural goods. The sticking points in the case of the EU are likely to be their non-tariff barriers like carbon emission norms which could have a huge impact on steel and aluminium products. Improved mobility of skilled professionals is also needed and Europe must open up further in this regard. Data security is also on top of the agenda as India is not recognised as a data-secure country under the EU’s regulations.
As negotiations continue for both trade pacts simultaneously, there is bound to be some degree of give and take. The upside is the domestic industry may ultimately gain by getting easier access to large Western markets. Electronics manufacturers, in fact, are already prepared for zero tariffs with the US as it would help them compete against China.
The FTA with the EU could also help textile and apparel exporters currently facing competition from countries availing lower duties due to earlier bilateral agreements. In this backdrop, Indian commercial diplomacy faces its toughest test. Key economic interests must be protected, but there is no need to retain high tariff walls for robust sectors capable of weathering competitive headwinds. It is a pivotal moment for trade policy, which must be flexible to meet the needs of a fast-changing global economy.
