In June 2022, the EU and India relaunched their negotiations for a Free Trade Agreement (FTA). This was the result of the outcome of the EU-Indian Leaders meeting in May 2021, where it was agreed that time was ripe to put new efforts into reaching a deal.
But why do we need an FTA? And why do we need to engage more with each other overall? The answer is simple. The EU India relationship has an enormous untapped potential. There are shared values but also threats and opportunities that should be addressed together. A forthcoming report, commissioned by the confederation, will make the economic case for closer relations
Given the size of the two economies, it is obvious that we trade less than we could and we invest less than we could. The size of the EU economy is more than four times the size of the Indian economy, with less than a third of the population. The EU is an affluent and sophisticated market, which Indian businesses needs to connect to, to expand their business and learn from a highly competitive environment. On the other hand, growth prospects for India are manyfold higher than the lackluster prospects for the EU, which creates a need for EU firms to connect more to India. In short, the EU and India complement each other.
We can see that the EU is much more dependent on China than India. This is not strange, as the Chinese economy, production capacity and consumption levels are much larger. However, even after having taken this into account, the EU India trade relationship is, on the whole, very limited in relation to EU-China trade.
The EU exports 30 times as many cars to China as it does to India and almost nine times as much electrical machinery, as well as 15 times as much pharmaceuticals and 30 times as many beverages. As for services, we can see that EU firms receive 9 times as much revenue from IPR in China than they do in India and that Chinese tourists generated 7 times more income than Indian tourists for the EU economy.
As for imports the figures are even more pronounced, as China is a major supplier of many goods to the EU in a way India is not. 22 % of imports of goods into the EU originated in China in 2021, whereas imports from India constituted a mere 2 %. Hence China is ten times more important for EU supplies of manufactured goods than India.
Products where India might develop a competitive advantage but where there are now noteworthy gaps in supplies to the EU, compared to China, include toys (77 % from China, 0.6 % from India), furniture (66 % from China, 3 % from India) and clothing (33 % from China, 4 % from India). When it comes to more advanced products, such as electrical machinery, Chinas share of EU imports is 50 times larger than India’s share.
When it comes to imports of services India is doing much better, and in particular ICT-services where India’s share is 3 times larger than the share of China. Here India has clear comparative advantages and exports have grown and are expected to continue to grow. However, in other all other services sectors China exports more to the EU than India does.
As for attracting EU FDI a comparison with Brazil is interesting. In 2020 EU FDI stocks in Brazil were 3 times larger than in India, despite the Indian economy being twice as big as the Brazilian.
Tapping the potential
The reliance on China, both as a source of supplies and a destination for exports, is creating increasing discomfort in Europe where many would rather see a diversification in trade patterns. Such a diversification must include a much closer economic relationship with India.
With a gradually enhanced productive capacity in India, it will be increasingly possible to choose India as a source of supplies and a site of manufacturing for EU firms. And with a rising standard of living and a growing middle class, Indians can be expected to demand more EU products, at the same time as Indian investment in infrastructure, digitization and the green transition opens up opportunities for European businesses.
However, even if current trends point in the direction of increased EU-India trade the trajectory is not sufficient. There is even a real risk that we might go backwards. There are various signs of new protectionism in India that could hamper EU firms, for example the Self-reliant India campaign and aspects of the Make in India scheme. But there is also a wave of new unilateral EU trade instruments that are not traditional protectionism but could make trade more complicated and costly and serve to shut non-EU, including Indian, firms out of the EU market. That includes the Carbon Border Adjustment Mechanism (CBAM), which will affect trade in some energy intensive sectors, the International Procurement Instrument (IPI), which can close procurement markets for Indian firms and the due diligence-legislation, which will put new sustainability related compliance costs on Indian firms supplying the EU market. There are also a range of initiatives in Europe on the digital economy, like the Data Act and the AI-Act, which will fill major global regulatory gaps and may greatly affect opportunities for trade in ICT-services. It is a virtual avalanche of new regulation in Brussels that will affect trade opportunities for firms across the globe.
How can we avoid a backlash in EU Indian trade relations and instead move forward and lay the foundation for a stronger relationship? There are two main venues. With the launch of the EU-India Trade and Technology Council (TTC) a new forum has been created for cooperation in the fields of the green transition, new technologies and resilient supply chains. It can be, if it is used proactively by the partners, a forum for exchange on ongoing regulatory processes in the two jurisdictions which could preempt unnecessary trade barriers. It should not be wasted to political symbolism.
More importantly, the EU and India should aim for an ambitious FTA. Such an agreement should reduce existing trade barriers, and prevent new ones, in mutually beneficial manner. For India, it would mean being granted permanent tariff free access to the EU market, in a way competitors like Vietnam and Bangladesh already have. It could also ensure permanent market access for services exports. Having an FTA with the EU would also send a strong signal to the global business community that India is “open for business” and a reliable partner. Research has shown that this signal in itself spurs trade and investments.
For the EU, there are vast opportunities to access the Indian market if tariffs are lowered, customs formalities simplified, services restrictions liberalized and FDI protected in a legally binding investment agreement. Also for India, this would be beneficial as the such an ambitious agreement will contribute to an enhanced level of legal and political predictability in the Indian market. Predictability is key to attract FDI, which is a core Indian interest.
To summarise, to fulfil the potential of EU-Indian relations, action is needed. We need a FTA, as a basis for future economic relations, to the benefit of both the EU and India.TradeFree trade