1. Discuss the key dimensions of the FTA being discussed
2. What is the necessity for the FTA, both for India and the EU
3. What are the challenges in finalizing the deal and implementation
4. Way ahead
The European Union and India have been negotiating a free trade agreement (FTA) since 2007. Despite growing trade between the EU and India, talks stalled in 2013. The EU is India’s largest trading partner, accounting for around 13% of India’s total trade in goods. India contributes around 2.3% of total EU trade and is the EU’s ninth biggest trade partner.
Following are the reasons to hasten talks on a free trade agreement-
A) Wrt India
1. India risks being left behind amidst a collapsing global trade architecture, rising protectionism and a new emphasis on bilateral FTAs.
2. 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. The EU’s revived focus on FTAs could only exacerbate this risk for India.
3. Stuck in a ‘grey zone’, without preferential FTA tariffs or GSP+ status, India will struggle to keep exports competitive for Europe, its largest trade partner where 20% of its exports land up.
4. 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.
5. The EU also offers India a unique regulatory model that balances growth, privacy and standards. India’s governance framework shares the European norms of democratic transparency and multi-stakeholder participation on a variety of new technological domains, from regulating artificial intelligence to 5G networks.
6. Concerns about the Regional Comprehensive Economic Partnership are not resolved yet.
7. 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 is a problem as most trade is now driven either by FTAs or global value chains.
B) Wrt EU
1. 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.
2. A re-escalation of trade concerns and turbulence surrounding Brexit are clear risks going forward.
3. Post-Brexit, the lack of progress in EU-India trade talks might just be an opportunity for the UK to launch its own negotiations for a trade deal with India.
4. The eurozone economy has experienced a sharp slowdown since the second half of 2018 in a reversal from the mini-boom enjoyed in 2017.
5. The escalation of the US-China trade conflict could cause ripple effects in the eurozone.
6. Escalating trade tensions between the US and China could also weigh on the production decisions of European manufacturers, and the risk of increased US tariffs on European cars and parts (a decision now delayed to November 2019) could further dampen sentiment.
7. Compared to the US and China, the euro area has limited room to further loosen monetary policy in the face of a pronounced economic slowdown.
Challenges in India-EU Trade Relations
Intellectual property rights: There is disagreement over IP protection standards. The EU is keen that India should adopt stringent IP protection standards. For India, such a step could impact public health and seriously affect the Indian pharmaceutical sector. European pharmaceutical companies are wary of India’s patents law which prevents ever-greening, which allows companies to renew patents on old drugs by making incremental
India has reduced duties on parts and components but maintains 60 per cent import duties on fully-assembled cars. It is75 per cent in the case of cars with fob value above $40,000 and engine capacity 3000cc for petrol and 2500cc for diesel. This over-protectionism with respect to fully assembled cars remains the most contentious issue.
Services sector: India has demanded flexible regulations, greater access for Indian services and an easy visa requirement for Indian professionals. Europe is cautious about allowing this fearing an increased unemployment problem.
Agricultural trade is highly distorted in both the EU and India. Even though average MFN (most favoured nation) import duties on agricultural commodities in EU (13 per cent) are much lower than in India (33 per cent), EU’s peak tariff rates on certain products such as dairy (650 per cent), fruits and vegetables (156 per cent), and sugar and confectionery (133 per cent) are more than those in India.
Again, the fishery and dairy sectors in the EU are highly subsidised. There is fear of EU dairy products flooding Indian markets after the FTA. India wants the EU to cut its agricultural subsidies while the EU has interests in India reducing its duties on dairy products, poultry, farm and fisheries.
India also seeks data secure status from the EU as the high cost of compliance with existing data protection laws and procedures renders many of its service providers uncompetitive.
European banks have been eyeing India’s relatively under-tapped banking space. However, the surrender of banking licences by Goldman Sachs, Morgan Stanley and UBS shows that the burden of priority sector lending and financial inclusion has discouraged foreign banks.
Tax reduction on wines and spirits is not acceptable as these are regarded as ‘sin goods’ and the states which derive huge revenue from liquor sales would be reluctant to cut taxes.
Beyond mere economic cost-benefit analysis, India must approach EU FTA from a geostrategic perspective.
EU negotiators are now more willing to make concessions on labour or environmental regulations.
India’s governance framework shares the European norms of democratic transparency and multi-stakeholder participation in a variety of new technological domains.
The EU also proposed to establish a regular ministerial high-level dialogue to strengthen engagement with India at a strategic level and to identify shared interests on economic, trade and investment issues.
A trade pact is about give and take. Failing to conclude the EU-India FTA will be a lost opportunity. It would be especially beneficial in the wake of a new global economic downturn. The time for India and the EU is now.