The India-EU trade deal is worth watching, but without exaggeration

WASHINGTON-References The reference to the “mother of all deals” is a clear case of political hyperbole, but there is no doubt that the Free Trade Agreement (FTA) between India and the European Union (EU) is worth paying attention to. As two of the world’s largest economies agree to eliminate a significant proportion of their trade barriers, especially at a time when almost every trade deal grabs headlines, governments and stakeholders around the world should take note.

The EU and India have been participating in these negotiations for around two decades, albeit with several long pauses. This length of negotiations is the clearest indicator of the complexity and difficulty of reaching this agreement. The US and EU have their own failed experiment in the form of the Transatlantic Trade and Investment Partnership (TTIP), which collapsed after several years of negotiations under the Obama administration.

But observers should also not jump to conclusions about whether the deal would reorient global trade, accelerate economic integration or revive economic growth. Ultimately, the India-EU FTA may have only a modest impact when all these criteria are considered.

More to follow

First of all: the results are incomplete and will require follow-up action. Most early news articles gloss over this reality. As forecast According to both sides, in the final months of negotiations, there will be unfinished business to settle shortly after the ink on the signing is dry. It is always the most sensitive issues that take the longest, and India and the EU have conveniently sidelined some of them in the rush to reach a deal in time for the bilateral summit and the visit of European Commission President Ursula von der Leyen on India’s Republic Day.

For example, there will likely be follow-up negotiations on agriculture, intellectual property rights and the EU’s carbon border adjustment mechanism, among other issues. That said, the fact that there is still work to be done should not diminish the success of reaching agreement on preferential tariff lists and on a large number of detailed rule chapters, such as technical barriers to trade.

Additionally, each trading partner must clear the hurdles to national approval. In the case of the EU, this involves obtaining a “qualified majority” (essentially a double majority of member states and the population represented) through the Council of the European Union and separate approval from the European Parliament.

Recognize limits

The India-EU FTA will not significantly alter existing supply chains, although it may make those between India and the EU more resilient. It is also unlikely to result in trade diversion away from other major trading partners. Although the FTA will include a number of new disciplines for persistent and difficult non-tariff barriers, the headline numbers in the announcement will be tariff reductions on both sides. In fact, EU tariffs are already low in general, and benefits to India in sectors where EU tariffs are high could be offset by EU policy. action earlier this month to eliminate preferential treatment given to India under its Generalized System of Preferences (GSP) program. For example, the GSP program has enabled India to remain competitive with countries like Bangladesh in the European textile and clothing market. Now the FTA could simply replace a low GSP tariff with a new bilateral FTA tariff.

For the EU, the benefits of tariff reductions will likely manifest slowly, and transition periods for tariff reductions suggest there will be no immediate substantial increase in exports. That said, an FTA provides a degree of certainty, stability and predictability in market access that is absent in the absence of a trade agreement. Existing supply chains between the EU and India can be strengthened in the short term and even expanded in the long term.

The view from Washington

While the deal can be interpreted as a response to the Trump administration’s tariffs and tariff threats, there is no reason for it to damage U.S. trade relations with the EU or India. Indian and European trade negotiators have been pushed to their limits by the agendas of political leaders and have responded impressively, even orchestrating workarounds in areas such as geographical indications and sustainability commitments, which have long been part of the immutable model of EU FTAs ​​with other countries.

There is no doubt that journalists and many other commentators will draw the cause-and-effect relationship between the Trump administration’s tariffs and the India-EU FTA, but the history of negotiations suggests otherwise. The current push toward the finish line actually began under the Biden administration. Although the Trump administration’s predictable unpredictability on tariffs played a significant role in accelerating the timetable, the EU and India have long understood the economic and strategic value of striking a substantial trade deal between the two.

The EU-India deal could even light a fire in efforts to secure a US-India trade deal and help advance negotiations on a comprehensive bilateral trade deal, as US President Donald Trump and Indian Prime Minister Narendra Modi have said. discussed last year.

Time will tell what the consequences of this FTA will be. It seems unlikely to be as transformative as the United States-Mexico-Canada Agreement and its predecessor, the North American Free Trade Agreement. However, this does not mean that it will not be a game changer, as the rules-based order, in the form of the World Trade Organization, continues to lose relevance and new structures emerge to fill the void.