Explainer: IPEF’s advance tariff notice proposal

The US has proposed that advance notices of tariff changes and export restrictions be considered by the 14 member-nations of the Indo-Pacific Economic Framework for Prosperity (IPEF). New Delhi is not very comfortable with the idea and has sought industry’s views. Mukesh Jagota looks into the issues concerned.

Background 

The IPEF, which accounts for 40% of world’s economic output and 28% of trade, came together in 2022, following the challenges thrown by the pandemic. It includes India, the US, Australia, Indonesia, Japan and Republic of Korea. The forum seeks to go beyond traditional free trade agreements and work on the issues of supply chains, clean energy, decarbonisation, infrastructure, and tax and anti-corruption. India has kept itself out of the trade part of the framework so far. Under the supply chain tract of the negotiations, the US has proposed that IPEF members should give advance notices before changing their import tariffs or putting restrictions on exports. New Delhi has voiced discomfort with the proposal and has sought the view of domestic industry.

The pros of advance notice 

Advance information eliminates surprises, gives time for adjustment and minimises losses of trading partners. As it is seen with sudden change in tariffs and restrictions, entities with goods in transit or that are holding stock either make huge losses or profit. At the company level, it can upset all calculations and business plans. At the very least, contracts have to be renegotiated at the operational level. Sometimes export restrictions can go as far as disturbing the macro-economic indicators of a country or even the entire world. Few countries have the resilience and economic depth to bear such shocks For example, if a big supplier country of, say, food or fuel curbs or bans exports, it leads to shortages and sudden jump in prices globally. The extent of the harm these shocks can cause have been on full display during the pandemic and later during the war in Ukraine.

And the cons 

Trade agreements at the bilateral, regional or at global level deal with shocks that might come through trade by agreeing to tariff limits or sometimes even volume quotas. Advanced knowledge about tariffs and export controls carries with it the capacity to create problems of a different order. For instance, disruptions and opportunities for extracting undue gains will emerge. 

It might also expose the country putting tariffs and restrictions to pressure from fellow members of the IPEF. This will put limits on the powers of the member-countries to pursue an independent tariff policy to manage local shortage or glut and also their ability to formulate incentives for the different sectors of their economy.

As far India is concerned, given it is not in the trade pillar of the IPEF, advance notices on tariff changes and export curbs shouldn’t have mattered. But these will creep into the supply-chain pillar and affect India’s interests. 

Legal landscape and the current system of tariff notices

Taxation and regulation of trade is a sovereign right. Every country decides independently how its taxation policy is conducted. 

Countries may agree to accept some limits on their taxation and trade regulating powers through negotiations with other countries, but for that, they would want to be fairly compensated. This could be in the form of reciprocal curbs that the countries they are negotiating with may agree to, or through other support. 

In bilateral and multilateral trade agreements, when countries change tariffs within the limits set in the pacts, they inform other members of the grouping.

All World Trade Organisation (WTO) members notify the global trade regulating body of the changes that they have made in their tariffs. However, that is done post facto, after the tariff has been changed. What the US is trying to do at IPEF is entirely new.

Getting all 14 members to agree to cede even slight control over their respective policy space will be an uphill task, looking at the history of trade negotiations. Each country fiercely guards its space for policy formulation while trying to get the maximum while giving out the minimum.