Navigating India - EU Free Trade Agreement: Problems and Possibilities
On February 5th 2021, India and the EU held the first meeting of High-Level Dialogue on Trade and Investment attended by Minister of Industry and Commerce, Dr. Piyush Goyal from India and Executive Vice-President and Commissioner for trade Valdis Dombrovskis from EU. The High-Level Dialogue was created with an aim “at fostering progress on the trade and investment agreements, addressing trade irritants and improving conditions for traders and investors on both sides as well as discussing supply chain linkages” in the last bilateral summit held in July 2020, after a gap of two years.
The pandemic has exposed the cracks in the global economy with several countries relying heavily on China, the EU being one of them. In the year 2020, the EU imported 22.4% of its total goods from China followed by the US (11.8%). Meanwhile, India’s share in the total imports of the EU remains less than 2%. The EU is the 2nd largest importer and exporter of goods in the world. EU is India’s largest trading partner in the world, ahead of the US and China with trade in goods worth $105 billion in 2019-20 and trade in services of some $ 35 billion (2018). Meanwhile, India is the EU's 10th largest trading partner. Among EU members, Germany remains the largest importer and exporter of goods (by value) to India.
The EU's main exports to India are manufactured goods (86%) including machinery, vehicles and chemicals. India’s main exports to the EU are also manufactured products (86%) followed by primary goods (13%). EU is India’s largest trading partner with bilateral trade touching $105 billion in the year 2019-20, India having a trade surplus of approximately $2.5 billion.
Prime Minister Narendra Modi is scheduled to meet his EU counterparts in Portugal on May 8th. As both sides prepare for the crucial summit in the coming month, we look at some of the outstanding issues that have prevented the materialisation of a Free Trade Agreement between two largest democracies.
Differences Amidst Negotiations
India-EU trade negotiations began in 2007 in the backdrop of the 7th India-EU summit in Helsinki. Talks were suspended after 16 rounds of deliberations and negotiations in 2013 due to gaps in “level of ambition,” according to the EU. India highlighted its concerns over tariff levels on wines and spirits, auto components and data security. The issues can be broken down into three parts: First, the EU has repeatedly demanded cuts in import duties on auto parts and wine while it continues to provide large subsidies to dairy and agricultural products. High duties and state-imposed taxes render European wines to be expensive in Indian market but acts as an important source of income for the government. Second, India’s interests lie in the services portfolio as it seeks to ease the norms for its IT professionals working and residing in parts of Europe, to which the EU is reluctant. Third, with respect to data privacy and patent laws, India’s Intellectual Property Rights (IPR) regime is often flagged as insufficient and discriminatory. The EU considers it as a conservative approach and needs India to strengthen its IPR commitments.
The EU calls the Indian trade regime restrictive and regulatory with apprehensions on “technical barriers to trade (TBT), sanitary and phyto-sanitary (SPS) measures.” After the fallout of negotiations in 2013, there was an immediate strain in the relationship with the EU banning import of mangoes from India and increasing the number of tax dispute cases. Talks lingered on informally until 2017 with no constructive outcome. After the July 2020 virtual summit, European Commission President Ursula Von der Leyen spelled out EU priorities: “Avoiding market access barriers and ensuring fair and transparent competition remains essential. We raised that topic too.” Brussels is also sceptical of India’s ‘Make in India’ and ‘Atma Nirbhar Bharat’ initiatives and colour them under India’s protectionist tendencies. “The reluctance to engage from 2014, this I can testify personally, is not from the Indian side. It is from the EU side, even today,” as Minister of External Affairs S. Jaishankar recently noted.
On the investment front, with a total foreign direct investment stock of $91 billion the EU is one of the largest foreign investors in India. Investment remains a crucial intersection for both parties, but India has denied to negotiate on a separate investment treaty. It wants goods, services and investment under the banner of Bilateral Trade and Investment Agreement (BTIA). Its firm position can be reiterated from the move back in 2016 when India terminated over 50 bilateral investment treaties, many of them with EU member states.
Road to Reconciliation
The India-EU Strategic Partnership: A Roadmap to 2025 launched last year calls to “work towards balanced, ambitious and mutually-beneficial trade and investment agreements.”
On the investment front, it endorses to “optimally use the Investment Facilitation Mechanism (IFM) established in 2017 to promote and facilitate EU investment flows into India.”
In the absence of a trade agreement, several sub-committees and joint working groups exist to negotiate and cooperate on individual matters. The Agriculture and Marine Joint Group, Joint Customs Cooperation Committee, Joint Working Group on pharmaceutical constitute a major portion of the committees.
India and the EU are natural allies for a reason. The stakes for both sides in the race to access greater markets are high. With the recent Brexit and India in talks with the UK over a trade pact, the EU will continue to explore deepening economic relations with India. The Indian side found itself in troubled waters when the EU agreed to an investment deal with China amidst calls of diversifying supply chains away from the Chinese state. Prior to this, Brussels also successfully sealed a Free Trade Agreement with Vietnam, the agreement coming into force on 31st July 2020. The FTA aims to scrap 99% duties on goods traded between both sides. Vietnam is already a place ahead in exporting goods to the EU and with the FTA, will slowly increase the gap between Indian and Vietnamese exports. With India not part of any major trading pact like RCEP and TPP, it is in pressing need to finalise the EU trading pact.
India currently enjoys a Standard GSP status in the European market that is due to expire in 2023. GSP status “removes import duties from products coming into the EU market from vulnerable developing countries.” New avenues of cooperation in the fields of climate change, green technologies, 5G and global value chains.
The Way Forward
India has increasingly shown interest in recalibrating and strengthening partnership with EU members. Since diplomacy has shifted behind the screens, most of the virtual summits conducted were with EU members including Netherlands, Finland, Sweden, Luxembourg, Italy, Denmark and EU itself. Indian Foreign Secretary Harsh Shringla concluded a tour of France, Germany & the United Kingdom last year.
The multi-dimensional nature of India-EU relationship was highlighted by S. Jaishankar in a comment: “[We] are each political and economic poles in an increasingly multi-polar world. Our ability to work together, therefore, can help shape global outcomes.” Amidst internal challenges faced by the EU, a strategic shift in its foreign policy is visible. The Council of European Union in a report titled ‘EU Strategy for cooperation in the Indo-Pacific’ and released on April 19th mentions “the need for the EU to leverage its economic weight through applying high standards in free-trade agreements in the entire Indo-Pacific region.” The roadmap created marks a formal entry of the second largest regional trading bloc in the Indo-Pacific that is at the centre of geopolitical macrocosm.
Several reports suggest that both sides are looking to lock a ‘mini-deal’ or ‘interim deal’ in the upcoming summit. This will be a significant breakthrough. Failure to relaunch the BTIA talks in the coming summit will be an opportunity missed.
References:
[1] https://trade.ec.europa.eu/doclib/docs/2019/may/tradoc_157889.pdf
[2]https://commerce.gov.in/about-us/divisions/foreign-trade-territorial-division/foreign-trade-europe/
[6] https://data.consilium.europa.eu/doc/document/ST-7914-2021-INIT/en/pdf
[7] https://www.reuters.com/article/us-india-europe-trade-idINKCN24G24C
[8] https://thediplomat.com/2014/06/whats-holding-back-the-india-eu-fta/
Pic Courtesy-Pedro Lastra at unsplash.com
(The views expressed are those of the author and do not represent views of CESCUBE.)
