Tariffs down, Barriers up? Rethinking the India-EU trade agreement

Image credits : voxeurope

Sri City: The global trading ecosystem in recent years has been notoriously volatile and undergoing a seismic shift thanks to US foreign policy. The new policies regarding trade weaponisation have unsettled supply chains and created chaos and uncertainty in the global market. 

With larger geopolitical storms brewing, transatlantic trade is at its most turbulent state ever. This has resulted in a lot of chaos but also opportunity. One of these pockets of opportunity is what India has used as leverage to deliver a historic trade deal with the European Union.

The Framework

Talks about this trade deal were started all the way back in 2007 but were stalled in 2013 due to issues related to disagreements over tariffs, market access, intellectual property rights and regulatory standards. Now that Europe needs a new partner it has come rushing back to finish signing this so-called mother of all deals in record time.

This trade deal aims to eliminate most tariffs that currently restrict bilateral trade, with India removing approximately 92.1% of tariff lines and the EU removing around 90% of tariff lines. Europe stands to benefit most in the agri-food, chemical, pharmaceutical, machinery, medical devices, avionics and automotive industries,while India seems to gain most in the fisheries, chemicals, textiles, footwear and pharmaceutical industries. Some of the tariff drops especially on the Indian side will be seeing a phased implementation wherein they will be slowly dropped in around 5 to 7 years

Beyond trade in goods the agreement also stands to affect the services trade majorly. It establishes rules for IT, financial services and telecommunication with important protections for digital trade such as IP property protections and source code protections.

The deal also has certain measures to safeguard against the sudden surge in imports and encourage sustainable development. 

European Upside

With a consumer base of over 1.4 Billion people India has one of the fastest growing luxury goods sectors in the world. This presents a huge opportunity for European companies who specialize in high quality luxury products such as German automobiles, Swiss watches and French wine. 

India accounts for roughly 2% of EUs exports which translates to approximately 52 Billion Dollars. A majority of these exports currently face very high tariff barriers on entry. With tariffs being reduced or completely phased out under the new agreement, these European goods could transfer from being niche ultra luxury purchases to becoming competitively priced premium alternatives for India's massive upper middle class market.

The timing of this deal is also of significant strategic importance for Europe because as it stands, the United States is still EUs largest export hub accounting for approximately 20.6% of all exports. This has presented to be an issue for Europe as overreliance on a single unpredictable and protectionist market can lead to disaster. 

In this context, access to India, the fastest growing major economy globally, gives Europe something that is increasingly rare in today's global trading ecosystem: scale, sustained growth and relative stability all within a single market.

Indian Outlook 

The media coverage around this deal has been overwhelmingly positive with many outlets calling it a historical breakthrough. However this over enthusiasm risks overshadowing some of the structural issues with this deal that limit real world benefits for Indian businesses. 

Europe has a market base of approximately 450 million people. While this number is dwarfed by India, these consumers generally possess higher disposable income levels and tend to consume more. Considering India is a price sensitive market, access to a more stable high margin market would prove invaluable in terms of diversification. 

Tariff elimination is expected to boost competitiveness across many key Indian industries. Textiles and apparels, a historically significant industry, previously faced tariffs of around 12% now drop to zero, putting us on par with countries like Bangladesh and Vietnam. Similarly the pharmaceutical and medical industries are set to make big gains as they previously faced tariffs of around 11% which are now eliminated. This allows our exports of generics, APIs and medical devices into a market valued at over 480 Billion dollars for no extra cost

In addition this preferential access to European markets could incentivise Indians first to move up the value chain and adopt higher production standards. It also invites us to integrate with global supply chains and overtime could increase India's competitiveness in high value added manufacturing sectors. 

Although this deal clearly provides an economic boost for India’s growing manufacturing sector there are some structural issues that are yet to be addressed mainly non tariff barriers such as Carbon Border Adjustment Measures(CBAM) and Sanitary and Phytosanitary regulations(SPS).

CBAM Measures 

Europe imposes Carbon Border Adjustment Measures to avoid ‘Carbon Leakage’. This refers to the situation where European goods get replaced by carbon intensive imports which goes against their ambitious climate goals. 

Indian goods especially from the heavy manufacturing sector have faced considerable resistance from the European market because of their carbon footprint. This is a non tariff barrier which will not be addressed by this trade deal. 

This means that entering the European market for Indian goods such as refined petroleum products, steel and iron still seems to be a challenge. This is worrisome considering that India exports 7.67 and 4.25 Billion dollars worth of refined petroleum products and Iron and steel products respectively to the EU.

SPS Standards

Beyond climate related measures Europe also has many health and safety standards such as the Sanitary and Phytosanitary regulations. These present another significant non tariff barrier for Indian exporters. The European Union has some of the most stringent food safety and agricultural standards in the world. While yes these standards exist to protect the interests of its people and public health, they also raise compliance thresholds for exporting countries. 

This is the main concern for Indian sectors such as fisheries and grain exports which also happen to be the areas publicly cited as big beneficiaries of tariff reductions. Even if custom duties fall to zero there is the additional financial burden of certification and risk of shipment rejection. These risks disproportionately affect small and medium sized exporters who often lack the financial and technical capability to navigate such complex regulatory framework. So while tariff liberalization may have opened the door, SPS standards ultimately decide who is allowed to play the game.

Conclusion 

This Indian-EU partnership undoubtedly represents a major geopolitical and economic milestone, especially when we take the current geopolitical environment into consideration. In this era where global supply chains are proving to be unreliable and traditional trade alignments are breaking down, this trade deal offers both sides diversification, safety and scale. For Europe it reduces overdependence on volatile global dynamics while for India it reinforces its status as an economic super power and opens new growth opportunities.

Yet the real test lies in whether exporters can meaningfully integrate with each other's markets without being constrained by structural barriers. Although tariff liberalization does not solve these structural barriers it certainly paves a path for future cooperation and mutual understanding.

In this sense, while the deal opens doors on paper, the practical adaptability of Indian firms, particularly small and medium enterprises, remains uncertain. This deal could go on to further concentrate power into the hands of large enterprises who can afford to navigate this regulatory framework. 

All said this deal is historic however phrased but the real question is, if tariff reductions open the door but regulatory thresholds determine entry how impactful can this agreement truly be?