US President Donald Trump has, after months of obduracy and provocative comments from his Treasury and Commerce Secretaries, suddenly changed course and announced a trade deal with India. The tariffs on India will be reduced to 18% from 25%. While nothing specific was said in Trump's post about the removal of the additional 25% penalty tariffs on India for buying Russian oil, the US embassy in India has clarified to the media that the reduction of tariffs is from 50% to 18%. Trump claims that Modi has agreed not to buy Russian oil and that India will now buy American, and, potentially, Venezuelan oil. However, it is most unlikely that PM Modi would have made any such commitment. For, India's consistent position is that our decisions will be based on market forces, price factor, diversification of sources and energy security. This formulation gives us a lot of political latitude in our decisions.
Claims vs Facts
The claim in Trump's post that India will move to zero tariffs on US products is misleading, as India seems to have agreed to zero tariffs not across the board but on select US industrial products. That India will buy $500 billion of US energy, technology, agriculture and coal is Trump's tactic of making it appear that his demands have been met and how his coercive method of deal-making is always successful.
In any case, it was not to be expected that the US would give duty-free access to our labour-intensive exports, given that the US is applying 20% tariffs on Bangladesh's textile imports and 19% in the case of Pakistan. If the tariff on India is 18%, it gives us some marginal advantage. India has been demanding 15% tariffs on the grounds that we would be opening a vastly bigger market for US exports with zero tariffs for many industrial goods, as compared to what our two neighbours can offer. Nevertheless, with a zero-tariff regime with the EU facilitated by the India-EU trade pact and a minor advantageous regime with the US, we are well-placed.
Feeling Cornered?
In fact, it is the India-EU trade agreement that explains the sudden reversal by Trump to a large extent. The pact has wrong-footed the US. It is a major achievement with many very significant dimensions. The most obvious is the economic one. The agreement will undoubtedly lead to increased trade between the two sides. The EU is already our biggest trade partner in goods and the second biggest if services are included - the US being the biggest. This is a reality even without an FTA. With an FTA, the two-way trade is bound to increase. The FTA includes some services, so there should be gains there, too.
The prospective trade gains for India and the EU have been examined in detail in our media by economic experts and others. It may not, therefore, be necessary to cover this ground again except to highlight a few points.
The biggest gain for India would be the access to the EU market for labour- and employment-intensive sectors of our economy, such as textiles, leather goods, footwear, gems and jewellery, which had come under pressure because of reduced exports to the US under the 50% tariffs imposed by the Trump administration.
Of course, the benefits of zero tariffs on these goods will become operational only after the India-EU FTA enters into force. That will take about a year after some procedures are completed by the EU, including the ratification of the agreement by the EU Parliament.
What The India-EU Pact Does
What is important is that the FTA creates a level playing field for our textiles and other exports. While Bangladesh was enjoying zero tariffs as a 'Least Developed Country' (LDC), Vietnam has already signed an FTA with the EU, and Pakistan enjoys duty- and quota-free access for its textiles and garments. Both Bangladesh and Pakistan would have reason to be concerned about the impact of the India-EU trade pact on vital sectors of their own exports to the EU. If India can get its act together and forge an export policy with strategic intent, both our neighbours can be made to feel real economic heat indirectly.
If Trump has used high tariffs as a trade lever, the EU and India have done the opposite: use zero tariffs or progressively reduced tariffs as a lever to forge a mutually beneficial deal. The US tried to extract concessions from India by raising tariffs, while the EU has used the lifting of tariffs to obtain reciprocal concessions from India. Moreover, unlike the US, which has sought to breach India's red lines, the EU and India have respected each other's red lines. While the US has made the opening of India's agricultural and dairy sectors a make-or-break issue, the EU and India have agreed to exclude these sectors from the FTA. In the process, the EU has blunted the international effect of America's weaponisation of tariffs as a global trade strategy by negotiating a trade deal with India.
The US administration was clearly unhappy with the India-EU free trade pact. US Treasury Secretary Scott Bessent criticised Europe for not following the US's lead in imposing tariffs on India for buying Russian oil. Worse, it was buying Russian-origin oil from India, funding Russia's war in effect and working against its own interests in the Ukraine conflict.
America's Own Doing
If the US thought it could browbeat India into submission, the reality is that India has been induced to negotiate FTAs with several countries so that in a fractured trading system, with the WTO undermined, India could carve out favourable trade arrangements with select trade partners. India has already signed FTAs with the UK, the European Free Trade Association, Australia, the UAE, New Zealand and Oman. It is also negotiating deals with Chile, Peru and Israel, and FTA talks with Canada are being revived.
It is not only India that has felt the need to sign FTAs with countries of interest. Europe, too, is facing the pressure to do so because of the volatility of America's trade policies, Trump's openly anti-EU posture, the humiliation of Europe as a decaying power, and so on. If Trump's dealings with Russia on ending the Ukraine conflict over the head of Europe have been a major strategic blow to transatlantic ties, his aggressive territorial claims on Greenland have rocked these ties gravely, to the point that the European Parliament has put the negotiated US-EU trade agreement on hold. Whether this is acknowledged or not, the Trump factor has no doubt motivated both the EU and India to accelerate the conclusion of the FTA.
Europe's Collaborative Approach vs Trump's Bullying
This FTA provides for easier mobility with the conclusion of the EU-India Comprehensive Framework of Cooperation on Mobility, which proposes to reduce the many current limitations Indian nationals face on study and work in the EU and move toward a shared talent pool. This contrasts with the restrictions being imposed on H-1B visas by the US. The United States Trade Representative, Jamieson Greer, believes that India stands to benefit the most from the FTA, citing greater market access, labour advantages, and potential mobility opportunities for Indian workers. Greer says, "On net, India's going to have a heyday with this", adding that "it looks like the EU is doubling down on globalisation when we're trying to fix some of the problems of globalisation here in the US".
India and the EU have also signed their first Security and Defence Partnership framework alongside the broader trade agreement, which will cover maritime security, defence industry and technology, cyber threats, space security and counter-terrorism. The issues relating to cooperation in the defence industry and technology are essentially in the sovereign domain of individual European states. We are negotiating with France for more Rafale aircraft and with Germany for submarines with AIP capability. The issues of technology transfer, work share, and indigenisation have to be decided bilaterally with these countries.
The EU also has programmes, schemes and funds such as the European Defence Industry Programme, the European Defence Fund for R&D, Permanent Structured Cooperation (PESCO) for joint capability development and initiatives focusing on AI, drones, and space security, and the Copernicus services that are developing space-based security and defence, including space situational awareness. There could be scope for India to plug into these programmes.
A New Order
The EU countries are increasing their defence expenditure in response to Trump's demands, but have now the incentive to develop their own independent defence capabilities in order to reduce reliance on the US for their security, now that the US security umbrella for Europe provided under NATO has become uncertain. India can participate in new defence manufacturing supply chains in Europe and also explore joint development and manufacturing as part of India's own defence atmanirbharta (self-reliance). In fact, US defence companies had become nervous about losing out in the Indian market to Europe because Trump's trade policies towards India were eroding trust in the defence partnership with America.
Under Modi's impulsion, India has negotiated with confidence and dignity vital trade agreements with its major Western trade partners with maximum possible benefits and without yielding on our red lines.
(Kanwal Sibal was Foreign Secretary and Ambassador to Turkey, Egypt, France and Russia, and Deputy Chief Of Mission in Washington.)
Disclaimer: These are the personal opinions of the author
