EU-India FTA: Need of the hour

Trade ought to dominate Ursula von der Leyen visit to India

The flurry of visits by international leaders to New Delhi seems to be getting even more exciting. British Prime Minister Boris Johnson has been hogging the limelight with his rather unsubtle images during his visit to India and one can expect that to continue as the maverick leader meets Indian Prime Minister Narendra Modi in New Delhi today.

Johnson’s agenda in India has been a mixed basket, with Ukraine somewhere near the top, but by far it is trade and investment that seems to be the key to this visit, going by the utterances by Johnson, his Indian hosts and the two entourages. The details are likely by the end of the day once the official visit comes to an end and Johnson heads back to the United Kingdom.

Hours after Johnson would have landed back in London, another high-profile European visitor would be packing her bags on an equally important visit to New Delhi. Indeed, European Commission President and the de-facto head of the European Union Ursula von der Leyen will be reaching India on Sunday on a two-day trip.

Her agenda would also be dominated by Ukraine and indeed her office has already referred to the importance that she attaches to this issue vis a vis Indian stance which has so far disappointed the Europeans and their American allies.

But, while she is in New Delhi, neither India nor the EU should ignore the economic side of the relationship which faces the threat of stagnation. In the face of fast changing geo-political developments India and European Union cannot afford to ignore their strategic economic interest, and a free trade agreement between them could be important. The FTA will not only bring EU and India businesses closer but also create new dynamics in the world of trade and business in the two continents.

In this, an FTA is the next frontier in the EU-India strategic partnership. It is unthinkable that the two largest democracies and trading partners who are in the negotiation for a Free Trade Agreement for last 15 years have not been able to design a trade architecture to deepen their strategic relations. But this could be changing now.

After seven years of stalled negotiation for a comprehensive trade agreement, European Union and India have come back on the negotiating table. This “de-freezing” of the status-quo appears to have been necessitated because India gaining confidence in negotiating free trade agreements. In the last two months, India has successfully negotiated two trade agreements (with United Arab Emirates and Australia). India hopes that with EU too it can rebuild its trade negotiating strategy in the background of the above two successfully negotiated FTAs.

There is also a political element into India’s aggressive negotiating strategy. The recent state elections in which the ruling party was a major beneficiary, has given Prime Minister Narendra Modi the required strength to take hard decisions. Also, the general election still months away, PM Modi can afford to take risk of economic reforms. The surge in India’s goods and export reaching more than USD 400 billion has added self-confidence in India’s policies.

Brussels comes calling again

The meeting in Brussels in the first week of April with EU trade officials was to exchange their negotiating positions in the wake of the developments of the last seven years and to take stock of the lost decade. It appears that the Indian Commerce Secretary was able to convince the EU side that if EU was serious to have the FTA inked, it must also take into account the economic developments taking place around the world currently and how both EU and India can be reliable, dependable economic and trade partners.

In a way, this was a positive meeting between EU and India with meeting of minds. Both parties have decided to meet again in New Delhi in the middle of June to give their negotiating framework a serious direction. Both agree that FTA would be a game changer for social and economic development in the two continents.

War in Ukraine: Common concern but limited choice

The Russia-Ukraine war, that has come on top of the ongoing effects of the Covid-19 pandemic, is exacerbating international food and fuel price volatility. It has already contributed to spiking food prices, with possible major consequences for global food security. Crude oil is also hovering close to record highs and neither India nor the EU are insulated from these price rises.

There is a general view among the European leadership that by staying away from the conflict India has missed an opportunity to play a decisive role in the global affairs. This has come into greater focus due to India’s close relations with the European Union. Although India has nurtured progressive relations with EU for last several years but the fact that even after 22 years of strategic partnership, Europe has failed to create significant security and economic conditions for India to have a stake in Europe, should be seen as Europe’s failure. Also, had there been a free trade agreement in place, India’s position could have been different. However, it would not be wrong to say that the longer is India’s silence and deeper India shelters under its non-aligned policies, the harder it will be for India to seek support in its global ambitions.

Textile could be big beneficiary

But it is not all grim for both sides. Their differences on Ukraine apart, they have managed to progress in trade talks and one important outcome of the meeting in Brussels was that EU has agreed to include textile and garment in the negotiation agenda. This is a major development because Indian textile export to EU has been falling over the years and competition from other nations as well as the GSP plus trade privilege to Pakistan being some of the factors.

Pakistani exports to the EU are dominated by textiles and clothing, accounting for nearly 80 pc of Pakistan’s total exports to the EU in 2020. The EU absorbs nearly 34 pc of the country’s total exports to the world. Around a quarter of the items imported to the EU from Pakistan are from the textile sector, like bed linen, table linen and toilet and kitchen linen. The textile industry contributes over 60 pc to the country’s exports. In a way, India’s loss is Pakistan’s gain in the textile sector.

India’s apparel exports to EU over the past five years have grown 2.6 pc, while those by Bangladesh & Vietnam galloped at 9.6 pc. The textile industry has been trying to hold its own in the face of challenges like surge in cotton prices, acute labour shortages and competition from nations such as Vietnam and Bangladesh. A free trade deal could have proved extremely significant for textiles going forward to leverage the opportunity presenting itself. Europe is a major market for Indian textile products including apparels, and any incentives will help India to increase its export to Europe.

Indian textile export to EU still attracts nearly 10 pc tariff. As Pakistan is not able to fulfil its textile quota because of continuing financial crisis in the country, India should have taken advantage of this and impressed upon EU with offer of export at reasonable tariff. In my view India has lost both time and opportunity and it would not be easy for the country to compete with some Asian countries who have become major exporter to EU to fill the gap vacated by Pakistan. This also shows the poor policy and planning and of course, lack of seriousness in taking the trade cause with EU with strategic strength.

Is it finally time for FTA?

EU and India are learnt to have exchanged their positions on the issues that had forced them to ‘freeze’ their negotiations eight years ago. Some of the irritant issues that includes key agricultural and dairy products, sanitary and phytosanitary standards or SPS, automobiles, and some issues of digital trade. If an agreement on FTA were to be reached, there would be vast with implications for all sectors and constituencies, including agriculture and dairy, key industrial products, medicines, and the digital economy.

It could also bring in a host of regulatory issues in question in both continents. However, a trade agreement will provide a competitive edge for European and Indian businesses in the face of economic slowdown. By reducing and eliminating certain barriers to international trade and investment, FTA will benefit Indian and EU exporters, importers, producers, and investors. A renewed engagement in the EU-India trade negotiations, which should focus on addressing a number of issues where progress would improve business conditions and support the investment that India needs.

Besides textiles, another key area of concern for India relates to its large pharmaceutical industry. For many years India has played a pivotal role in providing a sustainable supply of quality-assured generic medicines that are vitally important for public health systems around the world. At no time perhaps has this aspect of India and its know-how been more visible to the entire world than it has been over the past two years since the outbreak of the pandemic when almost all parts of the world, including the rich countries, waited anxiously for their share of Covid-19 vaccines manufactured in India.

Thus, the EU must recognise that it is critical for the safety and health of the world that the EU-India FTA agreement remains free of TRIPS-plus measures and heavy-handed enforcement provisions that could jeopardise access to, and production of, affordable generic medicines. Indeed, such a provision would almost certainly come back to bite the Europeans themselves.

With large differences still remaining on other issues like patents, data treatment and the like, it may be preferable that both the sides start working on less controversial issues first and the more difficult ones can be taken up later, as any deal there will take time to materialise.

Multilateral rules for free-trade agreements: WTO factor

Negotiating a free-trade agreement will need both EU and India to satisfy all the rules of the World Trade Organisation of which they are members. In the context of next stage of the negotiations that both EU and India want to move, it is important to know that the internationally agreed rules for the content of free-trade agreements fall mainly under the purview of the WTO. In other words, free-trade agreements have to meet not only the WTO rules and disciplines, but they may also have to satisfy many other international requirements contained in multilateral conventions.

A key rule, and in a way the guiding factor, of the multilateral trade system is that reductions in trade barriers should be applied, on a most-favoured nation basis, to all World Trade Organisation’s members. This means that no WTO member should be discriminated against by another member’s trade regime. However, regional trade agreements (RTAs) are an important exception to this rule. Under RTAs reductions in trade barriers apply only to the parties to the agreement. This exception is allowed under Article XXIV of the General Agreement on Tariffs and Trade (GATT) for trade in goods, in Article V of the General Agreement on Trade in Services (GATS) for Trade in Services and in the Enabling Clause for developing countries.

There are two major types of regional trade agreements under the WTO – customs unions and free trade areas. Some countries may also sign interim agreements, which operate during a transition period, ultimately leading to the creation of a customs union or a free trade area. WTO rules state that the same trading terms must be applied to all WTO members, unless there is a trade agreement between 2 or more countries. For the above reasons both parties have decided to meet in New Delhi after the WTO meeting which takes place in the middle of June in Geneva. This will help both parties to take into account the WTO rules and will satisfy the issues that fall under WTO rules.

UK-India FTA

As UK-India FTA negotiation is progressing on the expected lines and they are slowly coming to the stage of “zeroing” the most difficult and most complex issues, it could also become a factor that would influence EU and help India in the negotiation. The visit of the British Prime Minister Boris Johnson to Delhi to discuss several strategic issues including the FTA, reaffirms that UK and India are on the right course and on same wavelength on the negotiation. It appears that India is far keener to ink an FTA with Britain than with the EU in the present circumstances. The UK-India FTA is predicted to boost Britain’s total trade by up to GBP 28 billion pounds annually by 2035.

Challenges for trade diplomacy

This is also a testing time for trade diplomacy for both EU and India. In any trade agreement, give and take is the secret and this should govern India’s trade policies. India should look at the long-term gain and how through the FTA it could make the EU not only a dependable trading partner but also a strategic partner in true sense. India and EU will need to recognise that if the negotiation has taken more than 15 years and still not complete, there are issues that are politically and economically sensitive. They must avoid a situation where a trade deal becomes the source of social unrest.

The EU and India are like a multi-generational family in which there is a small amount of shifting of the extended family, sometimes with friction, but with continuity of the group. Absence of any significant “give and take” for both EU and India will only hurt their interests in long term. It is therefore time to implement some innovative ideas so that they can ink the trade deal which will become guiding factor for future trade negotiations for both the EU and India.