International Trade - Analysing India’s potential free trade agreements with the UK and the EU – Part 2

In the first part of this series (read here), we analysed the prospects and challenges of a potential free trade agreement (FTA) between India and the UK, as a precursor to which, the governments of India and the UK agreed on an Enhanced Trade Partnership last month. Around the same time, the EU also agreed to restart negotiations on a potential FTA with India. In this second part, let’s discuss the prospects and challenges of a potential FTA between India and the EU.

An FTA with the EU, one of the largest trading blocs and the second largest economy in the world, can not only provide India with a large complementary market, but also fulfil its need for advanced / clean technology (from leaders such as Germany and France) to build more advanced and sophisticated capacities, thereby facilitating its integration into the dominant global value chain of trade. On the other hand, an FTA with India would provide the EU member countries an enhanced access to one of the largest and fastest growing markets as well as manufacturing hubs in the world, ensuring supply chain resilience. It will also enhance EU’s economic and political influence in the Indo-Pacific region.

The backdrop 

In addition to what was discussed in the first part, EU’s renewed interest in a trade deal with India is being seen in the backdrop of its decision to not ratify its Comprehensive Agreement on Investment with China for various political, economic and human rights concerns. The EU increasingly considers China to be a “selective partner,” “competitor” and a “systemic rival” and sees India as its “preferred partner. Over the last few years, the EU heavily relied on China for investment in the domestic market and on its supply chain. However, lately (even before the COVID-19 pandemic), several fault-lines have become prominent with respect to China’s disruptive investment strategy and its supply chain dominance. The EU (especially its key members such as Germany and France) is looking at India as an effective alternative to counter balance its over-reliance on China for its global supply chain.

EU’s renewed interest in a trade deal with India is also being seen in the backdrop of the Brexit. Even though India may not be one of the largest trading partners for the EU (it is currently at number 12), yet, the EU cannot afford to overlook UK’s aggressive FTA diplomacy, which has become its competitors post Brexit. After UK’s exit from the bloc, the EU wishes to play a bigger role in the Indo-Pacific region and an FTA could potentially make India an important ally on both economic as well as political fronts.

Potential FTA between India and the EU 

On May 8, 2021, in their first-ever meeting in the EU-27 format, India and the EU decided to resume negotiations for a comprehensive FTA along with parallel negotiations on standalone agreements for investment protection (more on this later) and geographical indications[1]. India and the EU also launched a comprehensive ‘connectivity partnership’ (similar to the one agreed between the EU and Japan in 2019) aimed at enhancing digital, energy, transport and people-to-people connectivity between Europe and Asia by providing private and public financing for connectivity projects in India as well as in other countries in the Indo-Pacific region. It is being said that the connectivity partnership is aimed at providing a sustainable, rules-based and comprehensive source of funding and support to financially vulnerable countries as an alternative to China’s supposedly burdensome Belt and Road Initiative (BRI).

Key issues for negotiations

The negotiations for a comprehensive FTA between India and the EU (including the UK) were first launched in 2007, but were suspended in 2013 due to substantial differences on certain crucial issues. Similar to the UK, there are many issues between India and the EU that would need to be addressed in order to agree on an FTA such as investment protection, enhanced and reciprocal market access, access to public procurement contracts, barriers to trade including tariff, non-tariff and technical barriers, enhanced protection for IP and data, alignment on WTO related issues and the EU’s focus area for all its engagements, commitments on sustainability, environment, labour and human rights.

Investment protection

The foremost issue for the EU is negotiating a standalone bilateral agreement / treaty on investment protection to ensure greater policy predictability for European companies doing business in India. The EU has not been happy about India unilaterally terminating its existing bilateral investment treaties (BIT) with 58 countries, including 22 EU countries (such as the UK pre-Brexit, Germany, the Netherlands, and France) in order to negotiate fresh BITs. India terminated these BITs after a number of foreign companies invoked international arbitrations against the Indian government (such as disputes by Crain, Vodafone, White Industries) for violating certain investment protection commitments under the BITs, including commitments to fair and equitable treatment, non-discrimination and MFN treatment. India’s new model of BIT, which was introduced in 2015, is intended to reduce the exposure of the Indian government to international arbitrations (inter alia, by removing or qualifying the interpretation of fair and equitable treatment, MFN, excluding taxation measures from its ambit and instituting Investor-State Dispute Settlement as the first option for dispute resolution). So, protecting the investment of European companies by way of a standalone bilateral agreement is an important agenda of the EU. India understands the importance that EU is likely to put on executing an investment protection treaty and is therefore insisting on having parallel negotiations and agreement (not one after the other) for both the treaty and the FTA.

Tariff barriers

The EU continues to have a major issue with India’s export subsidies and have even dragged India before the WTO on a number of occasions recently. Whilst the EU would expect India to reduce its high tariffs on wines, a mutually beneficial tariff regime for dairy products (especially cheese) is going to be a complex issue as both the EU and India are large producers of dairy products. For automobiles, India will need to carefully balance the interests of EU on the one hand and South Korea and Japan on the other hand, which are already large suppliers in this segment and may seek a level playing field if any favourable terms are offered to the EU. For pharmaceuticals / medical devices, the EU would expect India to extend the similar terms that are being offered to the UK. As for India, tariff barriers are not that big an issue for its exports to the EU.

Non-tariff / technical barriers

More than tariff barriers, Indian exporters face several challenges in the form of non-tariff and technical barriers. The non-tariff barriers ranging from stringent sanitary and phytosanitary standards for fruits, food and agriculture products, special measures for pharmaceutical products, a special Meursing table tariff code[2], quality schemes for agricultural products, barriers restricting services, including digital trade and electronic commerce,  government procurement policies and the new screening mechanisms to regulate foreign investments and foreign state-subsidised players. India is likely to ask the EU to bring down its unusually high standards to the generally accepted global standards. Despite the barrier-easing talks, India’s exporters will eventually need to adapt to the demands of the sophisticated EU market.

The EU too has problems with non-tariff (such as stringent sanitary and phytosanitary standards) and technical barriers imposed by India. In addition, the EU have had a major concern with the protection of IP and data in India / with Indian companies. The EU in the past wanted India to meet the ‘TRIPS-plus’ standards for the protection of IP and allow, inter alia, exploitation of patents beyond 20 years in certain situations, prohibit the use of clinical trial data and / or bio-equivalent data and include IPRs, know-how, goodwill within the definition of ‘investment’ for the purpose of investment protection framework, all in order to prohibit IP expropriation. India does not allow patent protection beyond 20 years (or ‘evergreening’ of patents) and would find it difficult to agree on the other points as it needs to protect its generic drugs industry and healthcare needs. In addition to patents, geographical indications (GIs) are also going to be a key area from the EU’s perspective.

As regards to data protection, India aims to be recognised as a data secure country by the EU to increase its services trade (more on this later) and reduce compliance cost. It is already in the process of passing a standalone data protection legislation, broadly inspired by the EU’s GDPR.

Key issues in respect of trade in services

Trade in services is growing faster than trade in goods between the EU and India, and this is especially true for India. It would seek a relaxed, harmonised and preferential Mode 1 and Mode 4 access from the EU for its IT/ITes businesses, professionals and students. But, similar to the UK, the EU would also expect a reciprocal access (Mode 4) in the professional services sector such as legal and accountancy. On Mode 3 access, the EU would expect India to provide reciprocal access (commercial presence) and further liberalise the FDI rules in segments like banking and retail trade. India has already allowed a 74%FDI in insurance companies and 100% in insurance intermediaries without any requirement for approval. It is a sector of interest for several EU companies.

Issues with India’s protectionist approach in general

Developed countries always face the issue of protectionism when dealing with developing countries like India as their protectionist policies distort the level playing field of trading. The EU (as well as other countries / blocs) has trouble fathoming the protectionist measures adopted by India. However, protectionism is no longer a strong argument against India at a time when a number of developed countries / blocs are adopting some sort of protectionist measures to overcome recent economic challenges. The recent trade defence and regulatory measures adopted by the EU / its member countries, such as the new screening mechanism to monitor unfavourable foreign investments and foreign subsidies, could be called out for being protectionist instruments. Though these measures are at variance to the WTO rules, they are being justified by EU countries on the ground that the domestic companies / national champions need protection from being acquired / controlled by state-funded or backed foreign companies. India too has maintained that the plans like ‘Atmanirbhar Bharat’ (self-reliant India), production linked incentive (PLI) scheme and certain countervailing measures are not a smokescreen for protecting domestic industry from external competition, rather measures to increase competitiveness of domestic industries, ensure a robust supply chain in key sectors, reduce dependency on imported input material for key sectors and to protect strategically important domestic companies from being acquired / controlled by its competing Asian peers. Indian government has acknowledged the problem with export subsidies and incentives. India’s current Foreign Trade Policy recognises that its traditional export-led growth policy orientation needs to move beyond the safe and protectionist strategy, and incorporate value addition, supply chain efficiency, innovation, and competitiveness. Alongside, the policy must adopt a fundamental and systematic export promotion measure to move up in the global value chain.

Concluding thoughts

Both India and the EU understand the significance of a potentially higher level of trade between them. India has undertaken  noteworthy structural reforms since the last rounds of negotiations and is in a better position to satisfy the EU on a number of areas, including opening certain important sectors, lower corporate tax, streamlined exit route, data protection, sustainability and social security. Sustainability and climate change have been the central focus of all recent engagements of the EU. India has led the way in meeting carbon emission targets (it is leading the International Solar Alliance to promote clean energy) and is the only country on track, among the G20 nations, to meet its climate change mitigation commitments set by the Paris Agreement. In addition, there is a growing convergence between the EU and India on a number of global and regional issues including digital transparency (especially on open and transparent standards for 5G), cybersecurity, counterterrorism, territorial integrity, maritime cooperation. After UK’s exit from the bloc, the EU wishes to play a bigger role in the Indo-Pacific region and an FTA could potentially make India an important ally on both economic as well as political fronts. All these factors are likely to give a lot of comfort to the EU in the fresh rounds of negotiations.

In terms of next steps, both sides will now undertake respective scoping, consultations and domestic processes with stakeholders. The relevant government departments should consider studying the EU’s recent investments agreement with China and its FTA with Vietnam to frame its negotiation strategy and understand what is achievable. Consultation with industry bodies, exporters / their associations, think tanks has already started. European companies operating in India directly or through subsidiaries may also consider making representations and raise their concerns in the EU or in India.

International trading and geo-political scenario have been witnessing a major realignment over the last few years. This all started with the Trump administration’s unconventional foreign and economic policy manoeuvers and China’s ambition to create a new world order with it being the pivot. The COVID-19 pandemic has further accelerated this trend. The US’ decision to stay away from Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), where the UK wants to enter now, the EU’s decision against ratifying its negotiated investment agreement with China and India’s decision to stay out of the Regional Comprehensive Economic Partnership (RCEP)  are going to have a significant impact on global trading equations. The resurgence of the QUAD alliance (of the US, India, Japan and Australia) and emerging agenda of the G7-plus group, both of which were originally conceptualised as a geo-political alliance, now have significant economic / trade angle. For example, the QUAD has recently decided to consider a connectivity partnership for investing in the Indo-Pacific region and set up task forces on supply chain resilient infrastructure, climate change, emerging technologies (common standard for 5G technology being an important topic). It may well transform into a robust trade and investment partnership between the QUAD countries (involving close to USD 500 billion of trade just amongst themselves!) to counterbalance China’s BRI. So besides economic gains, an FTA with India would further EU’s geo-political agenda in the Indo-pacific region and, at the same time, ensure that both sides do not lose out on preferential access to some of the most important markets / trading blocs.

As for India, at a time when a trade deal with its largest trading partner, the US, seems elusive as the Biden administration is currently busy focusing on internal economic growth and its other Asian peers (such as Vietnam and Thailand) are upping their game, it cannot afford to miss the momentum of having FTAs with other countries / blocs. With Indian government’s new ‘whole of government’ approach this time around, the outcome of these trade talks looks promising!

[1] The joint statement on India-EU leaders’ meet can be accessed here

[2] The EU uses the “Meursing Table” to determine the customs tariffs for processed agricultural products based on what they are made of.  These products include confectionary, cakes, and biscuits. Their tariffs are defined according to the level of milk fats and proteins, sugar, and starch they contain. The table results in thousands of possible combinations of tariffs.