What is unique about the India-European Union (EU) free trade agreement (FTA), ostensibly the “mother of all deals”?
It is not just the scale of the deal, which brings around a quarter of the world economy, and the global population respectively, within the bounds of its framework. It is also not the fact that India is offering generous market access in sectors it zealously has protected, such as automobiles, alcoholic beverages, and government procurement. Nor is it the fact that the EU will offer deep market access to several labour-intensive exports from India such as textiles and garments, handicrafts, gems and jewellery, and leather products.
FTA term mirror past deals
None of the above are good enough to make the FTA the “mother” deal. These concessions have been offered by India and the EU in other FTAs. India has committed to these in its latest FTAs like those with the UK and New Zealand. The EU, on the other hand, as it is, has globally low tariffs on most labour-intensive manufacturing exports. Its other FTAs cover almost all issues that would feature in the India FTA.
The true worth of the FTA is in enabling both India and the EU to enhance their economic securities; individually and collectively. This is clear from the concessions offered and the red lines drawn.
As mentioned, labour-intensive exports from India will receive a big boost from the preferential access they will obtain in the EU market. These exports—textiles, garments, handicrafts, jewellery, and leather—have been hard hit by the 50% US tariffs. Some of these industries, such as textiles, garments, and handicrafts, comprise low-skills wage workers including a substantial number of women. Less exports to the US—the largest market for these exports—mean job and income losses for several workers. Garment and leather exporters include many small and medium enterprises, including household businesses. It is important for India to safeguard the economic securities of these workers and enterprises following the hit from US tariffs. On the other hand, while not being entirely equivalent in its depth as a pressing security imperative, lower Indian import tariffs on vehicles made in the EU mean much for European carmakers and their future economic prospects at a time when the latter are heavily threatened by Chinese electric vehicles.
If greater market access for labour-intensive exports is a fillip for making them more economically secure, similar objectives are served by retaining agriculture and dairy on India’s protected list. At a time when many small enterprises and their workers are hurt by high tariffs, more such injuries are necessary to be avoided. It is not surprising that sensitive agricultural sectors have been excluded from the FTA. Along with India’s concerns, the EU’s sensitivities on domestic rice and beef have also been preserved. By ring-fencing vulnerable sectors with red lines both the EU and India have emphasised economic security in their deal and respected each other’s domestic concerns.
Why the EU won’t budge on CBAM
While details will be known once the legal text becomes available, the EU’s uncompromising stance on the Carbon Border Adjustment Mechanism (CBAM) is not surprising. Minimising carbon emissions is fundamental to the EU’s vision of economic security. It is unfair to expect that it will necessarily accept India’s domestic price of carbon, as levied through fossil fuel taxes, as a nullifier for exempting CBAM-sensitive Indian exports—steel, aluminium, fertilisers, cement—from being taxed at the border. High carbon prices are the EU’s way of disincentivising emissions. Even if this is not agreed with, the economic security concern driving the idea must be respected.
The fine print will also have to be awaited for digital trade rules, especially on whether cross-border free flows of data from India are allowed by the EU. Like the CBAM, this is also an area where the EU red line is noteworthy. As of now, India is yet to be included among data locations considered secure under the EU’s General Data Protection Regulation, notwithstanding its implementation of the Digital Personal Data Protection Act.
As these examples indicate, economic security has not been compromised by either India or the EU in reaching the deal. But what is striking is that while not compromising on individual economic securities, both sides were determined to reach a deal. Such determination stems from the exceptional political will on both sides. The mutual political will, no doubt, has been motivated by the common urge to enhance collective economic security by working with each other.
European Council President Antonio Costa’s description of the FTA as an important geopolitical stabiliser underlines the collective economic security it is to provide to both sides. Globally, both the EU and India are trying hard to turn back from the trade dependencies that make them vulnerable to economic coercion by the US and China. The role of a rules-based framework that has the kind of scale that the India-EU FTA has is critical in this strategy. By diversifying with a purpose, both India and the EU can ignore “red eyes” threatening them with random tariffs and export restrictions. And that is a strong guarantee for collective economic security.
Political leaderships in both sides have understood the criticality of enhancing economic securities through the FTA at one of the most geopolitically turbulent junctures in the modern era. Without such understanding, the FTA might still have been left unfinished, fetching it the dubious distinction of being the world’s longest negotiated and unfinished trade deal. The infamy has been avoided by political will and foresight, setting an example for the rest of the world. Don’t “mothers” set the best examples?
Views are personal.
The author is Senior Research Fellow and Research Lead (trade and economics), Institute of South Asian Studies, National University of Singapore