What makes an India-EU trade agreement both urgent and difficult?

The wary (and weary) pugilists of the EU-India FTA

Namaste Global Jigsaw,

Trade can be a powerful force for economic and social good if the terms on which it is conducted are negotiated fairly. Theoretically, at least, genuine free trade would eliminate borders and boundaries, inviting us to imagine a world where goods, peoples, and ideas flow unimpeded in beneficial symbiosis.

This would be a world where visa queues have lost their power to terrorise. Where Indian architects could, should they so desire, work on projects in Florence, and Spanish lawyers argue cases in Mumbai. Where a Belgian postman might wolf down an Alphonso mango out at the Grand Place, even as a techie in Bengaluru sips on a can of Belgian lambic beer.

During my Brussels-based stint as Europe correspondent for an Indian business newspaper between 2009 and 2012, one of my main assignments was to cover the negotiations for a free trade agreement (FTA) between India and the European Union (EU), the aim of which was to realise some semblance of this ideal. These talks had begun in 2007 and eventually broke down six years later in 2013. During this period, the two sides had circled each other like wary pugilists but ended up breaking off talks as weary ones.

After an almost decade-long hiatus, negotiations finally restarted last year. And in an attempt to light a fire under their notoriously snail-like pace, the EU and India also held a supplementary Trade and Technology Council meeting in Brussels last week. The summit featured political and bureaucratic heavyweights on both sides. Indian Minister of External Affairs S Jaishankar and Minister of Commerce and Industry Piyush Goyal headlined Team New Delhi, while European Commission Executive Vice Presidents Margrethe Vestager and Valdis Dombrovskis, among others, batted for Team Brussels.

In the time that has passed since I last wrote on the issue, the topography of the global geostrategic landscape has substantially altered to bring Europe and India into closer alignment. Both sides are questing for strategic autonomy in waters roiled by the ongoing rivalry between the US and its challenger, China. Both are aware of the need to de-risk their economic and technological dependence on China, on whom they remain heavily reliant in trade terms, despite prickly political relations.

Moreover, neither India nor the EU is a member of either the Regional Comprehensive Economic Partnership (RCEP) free trade area, or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Consequently, both are somewhat sidelined in the Indo-Pacific in terms of foreign trade, as they seek to secure and diversify suppliers and attract new capital and technology. An agreement between the two, the world’s third and fifth largest economies, would be a mutual fillip.

For Europe, India’s economic importance has grown significantly over the last decade. Even in the absence of an FTA, the EU is India’s third-largest trading partner. Were a trade agreement signed, Europe would benefit enormously from India’s ongoing rapid economic growth. Moreover, as evidenced by events in Russia and China, the Indo-Pacific has emerged as the central theatre of contemporary global politics, and India with its democratic credentials is a natural choice for the EU to partner with.

For India, the EU is the second most important export market after the US, an important provider of investment capital, technology, and infrastructure, as well as a gateway to global sales markets. A trade deal with Europe could help the country develop at the fast pace that is necessary given its growing population. India’s trade in goods with most parts of the world is characterised by trade deficits. However, this is not the case with the EU, a region with which India has a fairly balanced trade dynamic. India has in fact enjoyed a trade surplus of $13 billion with the EU in 2022-23.

But this theoretical fit between the economy of scale, India, and the economy of skill, Europe, is complicated by non-trade factors like the Russia-Ukraine war and the EU’s climate policies. Last week’s Trade and Technology Council meeting, for example, was supposed to focus on win-win areas like digital connectivity, artificial intelligence regulation, and the devising of ways to make supply chains more resilient.

But the intended upbeat nature of the summit was overshadowed by the comments of the EU’s foreign policy chief, Josep Borrell, who unexpectedly told the Financial Times that Brussels should crack down on third countries, like India, that refine Russian oil and sell the products on to Europe.

In February, the EU imposed a ban on Russian refined oil products, which followed an embargo placed on crude last year. According to Politico, India was a major beneficiary. European imports of diesel from India saw an almost tenfold increase in April, compared to the same time last year. EU member states bought over 5 million barrels and the flow of jet fuel from India to the region soared by more than 250 per cent.

At a press conference following the summit, Jaishankar retaliated by pointing out that EU rules themselves mandate that once Russian crude is substantially transformed, it is no longer considered Russian. And fuel from Russian oil produced by refineries in third countries is exempt from the European embargo.

The other bone of contention that points to how difficult it is for India and the EU to be on the same page, despite good intentions, is Brussels’ proposal to impose a tariff of up to 35 per cent on carbon-intensive imports, including cement and steel, which are among New Delhi’s main trade offerings. But India views the move as an unfair drag on its growth and is planning to take the dispute to the World Trade Organization, accusing the EU of protectionism in the guise of environmentalism.

The chasm between India and the EU can be summed up as the former being at its core a normative power—attempting to shape others in its own image. While India is a nationalistic power, with a focus on sovereignty and what Prime Minister Narendra Modi has called atmanirbharta, or self-reliance.

In the days that I covered the trade talks, I recall both sides sighing to me about how “difficult” the other was. For the Europeans, the Indians lacked “ambition”, their code word for the slashing of tariffs to close to zero. The Indians, on the other hand, complained that the 27-member bloc was unable to speak with one voice, even on trade. Moreover, the European Commission and the European Parliament were often at odds. The former was more focused on the nitty-gritty of trade while the latter was keener to insert its concerns about non-trade issues like sustainability and human rights into any agreement.

In an attempt to rescue the trade pact talks 2.0, it has been decided that negotiations in the areas of trade, investment protection, and geographical indications be conducted separately, rather than as chapters of a single, comprehensive agreement. Movement on any one aspect (geographical indications should be the easiest) can therefore be trumpeted as a victory, even as trickier areas like investment protection are unlikely to yield quick results.

Given today’s global context, trade policy is part of the weft of core strategic interests. In realpolitik terms, Europe’s political interest in India should make it amenable to finding a compromise in trade matters. But the EU, despite its stated desire to be a strategic player, tends to find it difficult to operate within a realpolitik framework. The fate of the India-EU trade relationship will ultimately depend on whether Europe can resolve this conundrum.

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Until next time,

Pallavi

PS: This piece was first published here.