NEW DELHI, Jan 25: Trade agreements are designed not merely to lower tariffs but to provide credible, long-term commitments that reduce policy uncertainty. Under standard international trade models, governments face a time inconsistency problem: while they prefer low tariffs ex ante to attract investment, domestic political pressures can push them toward protection ex post. Trade deals function to constrain such shifts, ensuring stability and predictability.
The Trump administration’s approach threatening tariffs on European allies over non-trade issues such as territorial sovereignty has exposed the fragility of this commitment. Tariffs are being used as instruments of coercion rather than remedies for economic harm, eroding the contractual function of agreements and introducing unbounded discretion.
The asymmetry is illustrated by the EU-US trade deal, where US tariffs were capped at 15% while EU commitments remained largely unrestricted. The recent threats of additional duties, suspension of ratification, and frozen implementation have nullified the agreement’s value not by violating terms, but by removing policy constraints.
Contract theory underscores the structural inevitability of this outcome under discretionary tariff authority. Incomplete trade agreements rely on institutional checks, reputational concerns, and reciprocal retaliation. Executive discretion under Trump removes these safeguards, transforming agreements into one sided options and generating extreme uncertainty for both firms and governments. Legal ambiguities, including ongoing Supreme Court reviews, exacerbate the problem, leaving partners unable to rely on treaties as credible commitments.
The strategic implications are profound. Trade is shifting from cooperative governance to deterrence based policy, where market access is treated as leverage rather than a right. Retaliation, risk management, and investment decisions are increasingly framed in geopolitical terms rather than economic logic.
For India, this context suggests caution. With US tariffs largely manageable and alternative markets available, rushing into a trade deal offers little predictability. Pursuing more stable agreements, including with the EU, and monitoring US domestic legal outcomes may yield better long-term results.
In short, trade deals derive value only when they constrain future policy. When discretionary tariffs replace enforceable commitments, agreements lose their stabilizing function, turning market access into a variable subject to political coercion rather than economic reciprocity.