Prime Minister Narendra Modi and the President of the European Commission, Ursula von der Leyen, Tuesday announced the formal completion of negotiations on the long-awaited free trade agreement (FTA) at the India-EU summit on Tuesday.
Although the trade talks first began in 2007, the greatest progress was made in the past six months. From having closed barely seven of the 21 chapters by July last year, both sides managed to wrap up all the chapters last week. The fast-tracking of negotiations coincided with the dramatic use of tariffs by the US, which has triggered anxiety among countries globally, forcing them to scout for newer markets.
While the EU continues to face threats of US tariffs over its tech regulations and Greenland, Washington has imposed steep 50% tariffs on India since August last year.
The US tariff threats may have accelerated the India-EU trade negotiations, but India and the EU managed to narrow differences by reevaluating negotiating positions amid rapid geo-economic shifts that have even left multilateral bodies such as the World Trade Organization (WTO) scrambling for relevance.
Washington’s protectionism
In one of the clearest messages of the US moving away from the liberal trade order, US Secretary of Commerce Howard Lutnick, said at Davos that globalisation has “failed” the West and the US, adding that other countries should also follow policies like ‘America First’ by tightening immigration and putting their workers first.
Uncertainty in US trade policy has affected both India and the EU as Washington remains the largest export market for both New Delhi and Brussels. While the Indian labour-intensive sectors have been facing the 50% tariff, the EU-US relations remain volatile despite a trade deal.
The US agreed to reduce tariffs for the EU to 15% last year under a deal that remains unpopular in Europe due to limited gains for Brussels and was largely seen as a tactical agreement rather than an economic agreement amid the war in Ukraine.
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Earlier this month, US President Donald Trump threatened to dramatically raise tariffs up to 30% on the EU for opposing his plans to take over Greenland. The threats paused only after the EU threatened retaliation, leading to a fresh framework agreement on Greenland. Brussels and Washington are also clashing over tech regulations. The US in December barred five Europeans from entering the country over “censorship” of tech platforms.
Meanwhile, Indian exporters face the worry of the permanent loss of market in the US as American buyers are no longer placing orders. Competitors such as Vietnam and Bangladesh have begun benefiting. The US tariff has also hit investments in India and has resulted in a surge in foreign portfolio investment.
Both New Delhi and Brussels have started entering other agreements. Brussels concluded its trade deal with Mercosur, a South American trade bloc, earlier this month, and New Delhi has signed trade deals with the UK, New Zealand and Oman in an effort to diversify exports.
Chinese overcapacity
One of the prime reasons for India-EU to restart negotiations in 2022 was China’s growing trade surplus. Much like other parts of the world, the EU and India import most of its industrial requirements from China. Beijing’s tightening grip on the manufacturing supply chain reflects China’s record $1.2 trillion annual trade surplus despite friction with the US.
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However, New Delhi as well as Brussels have been trying to restrict Chinese products in the strategic sectors. On automobiles, for instance, Brussels in 2024 imposed tariffs up to 35% on Chinese EVs. Similarly, India is opening its automobile sector for developed countries in free trade agreements and continues to impose over 100% duty on imported automobiles.
India and the EU are also under pressure from the US to reduce its dependence on Chinese products and be used as a transhipment hub. Targeting the EU, Lutnick said: “…why would Europe agree to be net zero in 2030 when they do not make a battery? They are deciding to be subservient to China, which makes the batteries”.
This month, Lutnick, in a podcast, had also targeted India’s dependence on China and its inability to sign a trade deal with the US. “India makes generic pharmaceuticals. That’s good. India is our ally. But the ingredients come from China,” he said.
The think tank Delhi Policy Group, in a report last year, said both India and the EU remain significantly dependent on China. “However, the COVID-19 pandemic in 2020 starkly exposed the vulnerabilities of over-reliance on China-centric supply chains. This has prompted both actors to reassess their dependencies and pursue diversification and de-risking strategies to build more resilient, secure, and sustainable supply chains,” the report said.
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Brexit & India-UK deal
Experts pointed out that India’s trade agreement with the UK also helped make the case for an India-EU trade deal, as New Delhi gave London market access in various product categories that the EU has also been interested in. New Delhi’s opening up of the automobile sector particularly made the case for an India-EU trade deal, as the negotiations between the two countries were abandoned in 2013 over India’s stance on automobiles.
For the UK, the India deal was the largest agreement since Brexit. Particularly of interest to Germany and France, the UK report on the deal said that the UK’s beverages and tobacco sector is estimated to increase exports to India by around £700 million, equivalent to a 180% rise, while UK motor vehicle exports are estimated to increase by £890 million, a 311 per cent increase. Notably, one of the primary reasons for Brexit was that the UK wanted more control over “immigration, trade, and regulations to pursue economic growth”.
