But if the US has been using tariffs to wield its influence on global trade, the EU, for decades, has been projecting its influence on international trade through its ever-expanding regulatory might. From food and chemicals to engineering goods, the EU has implemented a wide net of strict regulations that tend to discourage exporters due to the steep compliance burden.
Trade experts said that the India-EU FTA offers India a legal opportunity to leverage its fast-growing consumer market to find a solution to the EU standards that could reverse the gains made under the trade deal. The lack of resolution of EU regulations under the legal agreement could result in considerable asymmetry in the India-EU trade, experts said.
Sangeeta Godbole, a former revenue service officer and EU trade deal negotiator, told The Indian Express that almost 80 per cent of India’s exports attract less than 1 per cent tariff without the trade deal, and Indian goods will not gain significant market access when the FTA is signed compared with what India would offer by lowering high tariffs on a broad range of goods.
“Indian shipments must be protected from excessive environmental rules, as these rules are already straining Small and Medium-sized Enterprises (SMEs) within the union. The EU has given exemptions to the US. Giving large polluters a carve-out and pushing developing countries to comply with strict regulations risks dampening whatever tariff advantage that India may gain in the FTA,” Godbole said.
Carbon Border Adjustment Mechanism
The European Union, starting January 1 this year, began implementing the world’s first carbon tax. In its current form, CBAM would apply a carbon-related charge to the import of goods from the power sector and energy-intensive industrial sectors, such as cement, steel, aluminium, oil refinery, paper, glass, chemical and fertilisers from countries with lower environmental ambitions and regulations than the European Union.
But CBAM has provisions for the bloc’s lawmakers to expand the list of items that will bear a levy. India largely exports aluminium, iron and steel to the EU, which are expected to be impacted due to the regulation. India’s steel exports have already begun shrinking during the transition period of CBAM between 2023 and 2025.
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From January 1 this year, every shipment of Indian steel and aluminium entering the EU is carrying a carbon cost, and several Indian exporters may have to “cut prices by 15–22 per cent so EU importers can use that margin to pay the CBAM tax”, think tank Global Trade Research Initiative (GTRI) said.
Indian exporters have informed the Commerce and Industry Ministry that CBAM is acting as a non-tariff barrier, as the EU is also restricting its exports of scrap under its new recycling policy.
The European Union is the world’s largest producer of steel scrap, a critical input for low-carbon steel production.
EU Deforestation Regulation
The European Union’s Deforestation Regulation (EUDR), aimed at preventing products sold in the EU from being sourced from deforested land, was scheduled for implementation in December 2024. The European Parliament decided to extend the regulation’s timeline to December 2026.
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According to GTRI, the EUDR is expected to impact India’s agricultural exports to the EU, valued at $1.3 billion, more severely than exports from competing countries due to India’s higher deforestation rate. Unlike quality standards, where only the final product’s quality matters, the EU’s regulations impose complex compliance mechanisms, seemingly designed to increase the cost of imports and protect local producers, GTRI said.
Experts have pointed out that India currently does not have compliance standards in place, and the EUDR could pose challenges in exports of food products as the regulation requires extensive compliance procedures, including supplier details as well as addresses of production. Much of the cultivation in India happens by smallholder farmers, making traceability challenging.
EUDR has angered several other countries. Indonesia has filed a case on EU over the deforestation law and has said that the EU is conducting “regulatory imperialism” with its new deforestation law.
Corporate sustainability due diligence
The EU Directive on Corporate Sustainability Due Diligence (CSDD) entered into force in July 2024 and will begin coming into effect from 2027, and by 2029, will require companies to analyse their value chains and identify potential risks and impacts, such as human rights violations, environmental pollution, and corruption. This process will require businesses to collect and analyse data from a range of sources, including suppliers and other business partners, raising compliance and concerns around data security.
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Indian manufacturers have told the government that CSDD aims to ensure responsible corporate conduct, but the supplier’s data is sensitive and sharing it is a business risk. The industry has suggested that the government may bring in reporting standards that the EU accepts, and that convergence in standards will help Indian producers align with standards.
Industrial Accelerator Act
The Industrial Accelerator Act, expected to be proposed in January this year, is likely to introduce local content norms that mandate minimum domestic value addition, which could put pressure on imports. Indian experts said that the EU, for the longest time, had been pushing other countries not to introduce local content norms, but has itself introduced the regulation.
According to the text, the Industrial Accelerator Act would introduce clean, resilient, circular, and cybersecure criteria to strengthen demand for EU-made clean products and deliver a clean European supply for energy-intensive sectors. The European Commission said that the act should establish a low-carbon label, initially covering steel and then cement, to provide consumers with information on the carbon intensity of products.
