MC EXPLAINER Donald Trump's lopsided trade deal with Vietnam may have lessons for India

India and US are currently negotiating a trade deal

India may be on the cusp of signing a mini-trade deal with the United States, possibly this weekend, but if US President Donald Trump's agreement with Vietnam is anything to go by, New Delhi may have to push for more.

On July 2, Trump announced a deal with Vietnam, under which Vietnamese products would face a 20 percent tariff but there would be zero duties on American goods entering the Southeast Asian nation.

While this is lower than the 46 percent tariff announced on the “Liberation Day” that would have been re-imposed from July 9 in the absence of a deal, Vietnam has also been slapped with a 40 percent duty on trans-shipments, raising questions on Rules of Origin.

Trans-shipment is the process of transporting cargo containers from one vessel to another while in transit to its final destination.

The US's deal with Vietnam is also a deviation from commitments made under the bilateral trade agreement (BTA) inked in 2000.

In effect since December 2001, it allowed Vietnamese goods such as textiles, footwear, seafood, furniture, handicrafts and agricultural products to enter the US at concessional tariffs ranging between 2 percent and 10 percent.

According to Global Trade Research Initiative (GTRI) estimates, the tariff deal risks Vietnamese exports worth $135 billion to America.

A trade deal with the US may be imminent for India but Trump's agreement with Vietnam does spark concerns.

India is negotiating a scaled-down version of the first tranche of a BTA with the US. The deadline for a more comprehensive BTA is fall of this year.

What India wants?

India and the US have been holding marathon talks, which enter Day 7 on July 3, with an Indian team led by commerce ministry special secretary Rajesh Agarwal extending its stay in Washington multiple times since June 27.

Apart from an exemption from reciprocal tariffs, including the 10 percent blanket levy, India is also looking for removal of steeper duties on steel and aluminium at 50 percent and a 25-percent levy on certain automobiles and auto parts.

The US has been pushing for greater access for its farm and dairy goods. India is resisting granting sweeping concessions on these items.

New Delhi is also lobbying for tariff cuts on its labour-intensive exports such as textiles and leather.

For India, securing a deal before July 9 is crucial when Trump's reciprocal tariffs will be re-imposed. America's deal with Vietnam has alarmed experts on the possibility of an uneven deal.

New Delhi has made it clear that it wants a win-win deal.

Reciprocal tariffs

Among the major concerns is that the reciprocal tariffs may stay, albeit at a lower rate. India could see limited gains from attempts to seek an exemption from Trump's 26 percent duties.

Vietnam was already paying a baseline tariff of 10 percent on its goods entering America, a tariff slapped on all nations, including India. But now the Southeast Asian nation will pay double of that.

Even the United Kingdom continues to face a 10 percent blanket tariff despite being the first country to agree to a limited trade deal with the US.

India, therefore, may continue to face higher tariffs, though lower than the planned 26 percent.

Rules of Origin

The US's decision to impose a 40-percent tariff on trans-shipped goods — products originating elsewhere, notably China, but routed through Vietnam — may also be inconsistent with the World Trade Organization’s Rules of Origin.

According to WTO, Rules of Origin attributes one country of origin to each product.

"They are the criteria used to define where a product was made and are important for implementing other trade policy measures, including trade preferences (preferential rules of origin), quotas, anti-dumping measures and countervailing duties (non-preferential rules of origin)," the global trade body says.

However, a shipping route does not change the country of origin and hence, does not typically alter the treatment of tariffs.

The US's stance on trans-shipment goods and its interpretation on Rules of Origin may spell trouble for India.

If India is slapped with a similar tax, exporters will not be able to sidestep steep American tariffs by rerouting goods to the US through other nations at lower duties.

The deal between the US and Vietnam also does not clearly state the tariff treatment for goods that are partially manufactured in China but go through assembly or value addition in the Southeast Asian nation.

This could create uncertainty for global supply chains that link India, Vietnam and the US due to issues identifying tariffs for goods based on a vague American definition of Rules of Origin.