Context: Significance of India-EU Free Trade Agreement
India-European Union (EU) trade relation genesis:
- India-European Union relations started way back in the early 1960s, when India pursued diplomatic relations with the European Economic Community.
- The signing of a cooperation agreement in 1994 broadened the scope for bilateral relationship beyond trade and economic cooperation.
- Key bilateral agreements signed include the Science & Technology Agreement (2001), the Joint Vision Statement for promoting Cooperation in the field of Information and Communications Technology (ICT) (2001), the Customs Cooperation Agreement (2004), etc.
- India and the EU first started negotiations in 2007 on a Free Trade Agreement (FTA) to cover trade in goods, services, intellectual property and foreign investment. However, 13 rounds of negotiations have not yielded a treaty to regulate trade and investment between the two sides.
Issues and challenges before India-EU FTA:
- Tariffs: In terms of trade in goods, any FTA tries to bring down the tariff rates from the most favored nation (MFN) rates. One of the major demands of the EU is that India should lower its tariff rates on European automobiles and wines and spirits.
- A lowering of tariffs may well result in greater trade with the EU, but for India this may mean more imports than exports. There will be a greater opening in the Indian market for European goods than in the European market for Indian goods.
- EU tariff rates are already quite low and thus, apart from sectors like textiles and fisheries, India’s exports to the region might not increase significantly if tariffs are cut.
- Sanitary and phyto-sanitary (SPS) measures: The EU has been imposing stringent labeling requirements and trademark norms, for instance, which have dented India’s exports. About two years ago, India’s export of Alphonso mangoes to the EU suffered due to stringent non-tariff barriers (SPS).
- Trade in services: India to benefit from an FTA with the EU, it needs strong binding promises by the EU on liberalizing trade in services especially for the supply of services in what are known as modes 1 (range of outsourcing activities) and 4 (natural persons).
- However, given the high unemployment rates in the EU due to economic slowdown, one is not sure to what extent the EU is willing to make commitments to liberalize trade in services.
- And the EU, however, has been unable to take a unified position on the matter, being subject to the individual immigration policies of member states.
- Intellectual property: The EU is keen that India should adopt stringent IP protection standards even if that means going beyond the WTO specified standards that all countries, including India and the EU, have multilaterally agreed.
- India will not and should not agree to additional protection measures as this could compromise public health and raise other compelling concerns.
- Bilateral investment treaty (BIT): The model BIT does not contain an MFN provision, excludes taxation measures, and makes it mandatory for foreign investors to exhaust domestic judicial and administrative remedies for at least a period of five years before pursuing a claim under international law.
Need for speeding up the negotiations of FTA between India-EU:
- India is the only major power lacking an FTA with any of its top trade partners, including the EU, the U.S., China and Gulf economies. This situation is not tenable as most trade is now driven either by FTAs or global value chains.
- Competition from other countries: Brussels concluded a trade deal with Vietnam and a historic FTA with the Mercorsur countries in South America. India, in the meantime, is hanging on to its Most Favored Nation (MFN) status.
- Its status under the EU’s Generalized Scheme of Preferences (GSP) will face rising competition from Pakistan or Sri Lanka, who enjoy GSP+ benefits.
- Trade war: As the world economy in general and particularly Indian economy begins to suffer from the US-China trade war, it is the better time for India to pursue a FTA with EU.
- Convergence: Areaslike e-commerce have registered significant convergence because India’s position on data privacy is on the same lines of European Union’s.
- Geo-strategic perspective: with Americas hostile spotlight focusing on India, and lingering concerns about the regional comprehensive economic partnership (RCEP), India must realize the long-term strategic benefits of a trade deal with EU
- Willingness: EU negotiators are now more willing to make concessions on labor or environmental regulations, which used to be insurmountable obstacles.
- The collapse of the Transatlantic Trade and Investment Partnership and concerns about excessive economic reliance on China have propelled the EU to become a little more pragmatic, which New Delhi should leverage before it’s too late.
- To agree on the FTA despite the differences between the EU’s and India’s negotiating agendas in a tough economic climate, both partners will need to show determination as others have shown in negotiating mega-regional agreements.
- The challenges and constraints are not insurmountable. Given both sides’ reluctance to agree to the other’s demands, they should begin by negotiating less difficult sectors. This will demonstrate willingness to get back to the negotiating table and send a clear signal that both sides want to talk further.
- It is important for India to overcome its siege mentality, commit to institutional reform, and confront domestic vested interests. Reaching an agreement that will bring mutual benefit to both the EU and India will be a long journey, but, despite several missed deadlines, it is not out of reach.