The EU’s mammoth trade deals

The EU’s Ursula von der Leyen had three things on her India to-do list this week: 

1. Slay a silk brocade outfit at India’s 77th national day parade (which featured everything from motorcycle balancing acts to woolly camels)
2. Sign a free trade agreement with the world’s most populous country, and
3. Don’t chew gum (hi everyone, this is a joke about how India still hasn’t forgiven Obama for chewing gum during their 2015 national day parade).

Having successfully completed her list, VDL returned to Brussels, leaving the rest of us to ponder the significance of this new “mother of all trade deals”.

And sure, there’s significance in the raw numbers, given it’s a free trade area that…

• a) Covers 2 billion people
• b) Represents nearly 25% of global GDP
• c) Cuts Indian tariffs across ~97% of European goods, and
• d) Cuts European tariffs across 99% of India’s goods.

So in practical terms that means if you’re (say) a European auto executive, your Polo GT could eventually face tariffs as low as 10% (down from 110%!). And if you’re an Indian pharma executive, your generic paracetamol could face tariffs as low as 0% (down from 10%).

But as big as these numbers are (doubling exports by 2032?), this story goes even bigger.

First, why now? Both deals have been in the works for decades, though adjusting for BBT (Brussels Bureaucratic Time), you could argue this is the Commission at warp-speed.

But the reality is two things have changed to push these talks from impossible to done.

One is the White House which, under Trump (and continued via Biden), has upended the world’s economic assumptions: in a low-trust world, Ricardo’s comparative advantage is now out, replaced by (say) America First, industrial policy, supply-chain sovereignty, strategic disentanglement, friend-shoring, rank mercantilism, etc.

The other related change has been in Geneva, where the World Trade Organization (WTO) has been paralysed since Trump 1.0 halted judge nominations to the WTO’s top court, after years of broader US frustration over what we’ll casually summarise as the WTO enabling China’s mercantilist rise while thwarting US responses.

Anyway, describe these two changes how you like, but with the world’s largest economy narrowing its front gate, and the world trading system’s roof caving in, spooked capitals are now taking talks into their own hands and rushing for new markets to buy their stuff.

That’s a big reason why India has suddenly gone from trade hermit to apostle, while the EU is now doing deals everyone long insisted would be impossible, which brings us to…

The second story here: why this trade deal?

One reason an EU-India trade deal always seemed impossible was both capitals struggle with the same powerful constituency: whether occupying the streets of Delhi, or dumping dung in the streets of Brussels, it’s the farmers who don’t like the thought of suddenly being poor because trendy Brazilian picanha is now on special down at Lidl.

So how did the EU and India resolve that tension? They didn’t! Instead, they basically agreed to keep their farmers happy and exclude sensitive agricultural goods from the deal, while the Mercosur pact comes with endless sweeteners to calm farmer fears.

So with trade now facing narrower gates and caving roofs, everyone seems to be saying that a skinny deal now is better than some chunker that dies a committee death in 2049.

Intrigue’s Take

Interestingly, the EU uses similar language when describing both its India and Mercosur deals, framing them as proof “that rules-based cooperation still delivers great outcomes”.

That repeat is partly because Brussels bureaucrats love smashing those ctrl-c and ctrl-v buttons as much as the next functionary. But it’s also because Brussels is openly sending a message (to the US) that it’s still better to build a world on deals rather than barriers.

Yet it’s also directed at everyone, and we just saw an example why: there’s long been a quiet fear of Trump-tariff contagion, and we maybe just saw it in Ecuador’s sudden 30% tariffs on Colombia over an unrelated dispute — though Ecuador might learn that it’s tougher to nail that tactic without the leverage of the world’s largest economy.

But while the EU likes to frame this as a deal vs no-deal binary, you might also frame trade deals around who does and does not pay. Much of the Western world, for example, is grappling with the way maybe globalisation was paid for by rust belt workers.

As for who pays in our world’s emerging new trade regime? Whether it’s the pricier steak to protect our local farmer, or the pricier EV to protect our local automaker, or the pricier tech to protect our supply chain, this new trade regime is paid for by us, the consumer.

We’ve gone from trade’s beneficiary to its sponsor.

Sound even smarter:

• Some of the big winners for Europe will likely include machinery, chemicals, pharmaceuticals, wine and olive oil. India’s winners will likely include textiles, pharmaceuticals, jewellery, leather, and marine products. India’s high-skill expats also seem to benefit from greater EU access.