The India-EU free trade agreement tells us something important about globalization

No country, apart from China and Canada, has so far offered meaningful resistance to this tearing down of the global trade order. Countries that don’t have leverage are trying to deepen trade integration, though, by signing bilateral agreements. The idea is to diversify and protect trade, and thus insure against the twin uncertainties of America’s tariff blitz and China’s stranglehold over critical supply chains.

It is also to see if coalitions of like-minded partners can find a way to resurrect the crumbling rules-based trade order in preparation of the 14th Ministerial Conference (MC14) of the World Trade Organization (WTO) this March in Cameroon. Pushing plurilateral agreements through the WTO will help rebuild its relevance.

Within this big picture, India and the EU have thrashed out a trade pact that will now be taken up for ratification by the European Parliament and is being called ‘the mother of all deals.’ It stands out because it will be more or less rooted in the rules that governed the globalization era of trade. The India-EU Free Trade Agreement (FTA) is comprehensive and WTO-compliant, unlike any of America’s trade deals that are presidential ‘executive orders,’ which makes them legally questionable both within and outside the US.

The extensive commitments that India and EU have offered to each other can be a base for future trade negotiations between them, and be used by India’s other trade partners to gain better access to its markets. India, for instance, will most likely offer Australia the tariff cuts it has agreed to provide the EU, as the India-Australia mini deal has a Most Favoured Nation (MFN) clause.

India and the EU have agreed to de-tariff most of their trade—seemingly easy to do, given that the current average EU tariff rate on Indian imports is just 4%. However, on some exports, like of textiles and apparel (11-12%), marine products (4-26%) and leather and footwear (2.5-17%), EU tariffs are higher than the average rate; these falling to zero will give Indian companies a level playing field with competitors from other EU FTA partners such as Vietnam.

Both India and the EU need large markets outside the US and China. Europe’s economy isn’t growing all that much, but it’s still an important market for India because our exporters have had a presence there for decades and know it well. Like with the UK, this deal secures a market with which India has a positive trade balance.

The agreement will not only secure market access for exports, it is also expected to draw investments. Apart from geopolitical tensions and India’s large and growing domestic market, the security of a trade agreement becomes an added reason for European companies to move supply chains here.

The respect shown by each partner to the other’s red lines in order to reach a win-win agreement affirms that for those that try, non-predatory trade deals are possible.

India had earlier regarded the EU’s carbon border adjustment mechanism (CBAM) as protectionism rather than environmentalism. By agreeing to include it in the pact, India has not only recognized its legality but also relinquished the option of taking its concerns to the WTO. The EU, on its part, has shown sensitivity to India’s non-negotiable terms on intellectual property rights and sanitary and phytosanitary (SPS) measures. The EU’s SPS chapters are WTO-plus, but with India, this chapter is limited to transparency and predictability, and doesn’t impose hard commitments. Both sides have retained enough flexibility to implement domestic policies.

The two sides didn’t get sidetracked by geo-strategic differences like India’s relationship with Russia despite the Kremlin’s war on Ukraine. The signing of the India-EU security and defence partnership agreement along with the FTA is an example of how countries can smartly discuss security and trade simultaneously. Defence is generally excluded from trade agreements.

Concluding a deal that was in the works for more than 20 years has vastly improved India’s bargaining position in negotiations with other trade partners. The danger always was that this FTA will complicate negotiations with the US. But the opposite seems to have happened.

The market access India has given European companies may well help them race past American competitors to capture market share. US companies would thus be keen to have Washington quickly formalize a trade deal with New Delhi.

The signal has gone out that while India remains protectionist in a few areas that are politically sensitive (chiefly dairy, cereals, poultry and soya milk), New Delhi will grant market access in sectors which were protected earlier but where it sees benefits now, such as wines and automobiles.

On the whole, it’s not clear what the new world order will look like, but the India-EU agreement reaffirms that countries with little leverage would still like to rely on at least some of the globalization era’s mechanisms and values.

The authors are, respectively, consulting editor, Mint, and senior fellow (consultant), Indian Council for Research on International Economic Relations (Icrier); and professor, Icrier.