Why trade and trade deals are complicated | Number Theory

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As the 9 July deadline for the 90-day pause on US reciprocal tariffs comes closer, both the US and its trade partners are engaged in hectic parleys to strike out trade deals. The US has already announced a temporary trade truce with China, its largest trading partner. Chances are that even a deal with India will be announced very soon (there are reports of it being announced early on July 3, US time). Without prejudice to what US-India trade deal might or might not contain, there is growing evidence from these trade negotiations – direct as well as indirect – that effective trade deals between two trading partners are becoming increasingly elusive because of how global trade has evolved. Here are three examples which illustrate this point in more detail.

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  Why China is irked about the US-Vietnam trade deal

  On 2 July, US President Donald Trump announced that the US had arrived at a trade deal with Vietnam. The interesting thing about this deal is that the US will charge a 20% tariff on Vietnamese exports but 40% on any transshipped exports coming from Vietnam. The routing of Chinese exports to the US from a third country, both in South East Asia and Latin America is a widely acknowledged trend ; Vietnam’s recent transshipping of Chinese exports to the US was flagged in a 25 June JP Morgan research note by Sajjid Chinoy and others. “Vietnam and Thailand appear to be the primary conduit through which this is happening. The case for Vietnam looks particularly stark. Vietnam has been the recipient of strong Chinese imports in recent months. This has been matched by surging exports to the US. May exports to the US rose an abnormally high 12% m/m, such that the annualized momentum of Vietnam exports to the US is running at 74%”, the note said. A day after the US-Vietnam deal, China came out in protest against it. Financial Times reported that China’s commerce ministry on Thursday said it was “conducting an assessment” of the US-Vietnam trade deal, adding: “We firmly oppose any party striking a deal at the expense of China’s interests.” “If such a situation arises, China will take resolute countermeasures to safeguard its legitimate rights and interests,” the ministry added. There is speculation that the US-Vietnam deal could derail US-China trade talks. See Chart 1: US-China-Vietnam trade
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  How China is trying to sabotage India’s telecom exports

  Bloomberg reported on Wednesday that China has asked hundreds of its engineers and workers employed in Foxconn’s iPhone making factories in India to return which will generate headwinds for Apple’s plans to extend and front load its manufacturing in India. The move came after “Beijing verbally encouraged regulatory agencies and local governments to curb technology transfers and equipment exports to India and Southeast Asia in what is a potential attempt to prevent companies from shifting manufacturing elsewhere”, Bloomberg said. Given China’s leadership in manufacturing of such products, control over skilled manpower for such processes gives it yet another edge; it still controls a lot of supplies for making such equipment, vis-à-vis other countries (including India) trying to expand their footprint. Trade data shows India’s import dependence in telephone manufacturing clearly. While India’s telecom exports have shown a large increase in the past couple of years, imports have increased as well. This undermines the gains India could make from a deal with the US over iPhone exports. See Chart 2:
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  Tariffs are not so much about revenue; they are mostly about protecting domestic markets

  This is another interesting aspect of trade negotiations in today’s world. India is actually a good example to illustrate this point. The share of customs revenue in the central government’s gross tax revenues has been falling almost consistently from the 1980s. It has reached just about 5% now from 35% in 1990. This makes it clear that doing away with tariffs is not going to have any significant revenue impact on the Indian economy. But tariffs matter because they protect the domestic market against imports. While the implications might not be as severe in offering concessions to one country, say zero tariffs on US cars in India (they would still be unaffordable for most Indians) , agreeing to such deals with one country might embolden another to demand similar concessions or face retaliation. For example, the Chinese might demand similar favours in the Indian automobile market if the US were to get such a deal, and offer significantly more competition to domestic output than American vehicles would. See Chart 3:
• To be sure, India is not the only country facing such difficult to reconcile choices in its trade negotiations. With the multilateral trade order in shambles and countries trying to optimize bilateral deals, most important economies, the US included, will soon realise that there are no great trade deals to be made no matter how well they negotiate it.