India-EU FTA: A turning point in global trade

So, the ‘Mother of all Deals’ has finally been completed. Undoubtedly the urgency shown in finalising the agreement towards the later part of last year had to do with joint efforts to hedge against the unpredictability of US, of ‘Trump -proofing’ as The Economist has termed it. Even granting that, the rhetoric in this case is not misplaced. This FTA is truly historic bringing together India, the 4th largest economy and EU the 2nd largest comprising 25% of the global GDP and accounting for one third of global trade.

The total bilateral trade in goods with the EU in 2024-25 was US$137 Billion. India has a trade surplus of US$15.9 Billion with the EU. In FY25 the EU accounted for 17.3% of India’s total exports, next only to the US which had a 19.8% share. And it is good that it happened as late as it did after prolonged confabulations — it gave us time to learn from our experience with our earlier FTA’s. 

This is an FTA which both sides have hailed. India has secured market access for more than 99% of Indian exports by trade value-or to put it differently covering more than 70% of tariff lines. Nearly 21% of the tariff lines will be granted zero-duty access over 3-5 years. Additionally, more than 6% of tariff lines will enjoy preferential market access through tariff reductions or through TRQ’s. Engineering exports with an export share of nearly 22% will be a major gainer with preferential market access — currently they face tariffs as high as 22%. Labour intensive exports, like jewelry and leather will also gain. 

Also Read: India–EU FTA: Who wins, who loses

Another major gainer will be textiles and readymade garments (RMG), a critical Indian export. India holds a 5% share of EU’s RMG market. Unlike India, key competitors like Bangladesh, Turkey, Vietnam, Pakistan enjoy duty-free access. General Scheme of Preference (GSP) benefits have been suspended from January 1, 2026 — increasing the tariff gap between India and its competitors. The FTA will now create a level playing field for the RMG segment and it is expected that India’s share in EU’s RMG share will increase to 8-9%. 

The FTA covers the whole gamut of sectors— services, IT and IT enabled services, professional services, education, tourism and construction. Predictable access to EU’s subsectors will also provide a boost. Financial services are set to get as boost too including cross-border electronic payments. IP protections provided under TRIPS will get reinforced. On mobility the FTA provides a facilitative framework covering short term, temporary and business travel. Indian traditional medicine practitioners have also secured access. 

Thus, there are chapters on, the vital Rules of Origin, Customs and Trade, reduction of red tape. There are chapters on sanitary & phytosanitary measures seeking to provide transparency and predictability, on technical barriers to trade incorporating commitments made by both India and EU to the WTO, on Trade remedies recognising the possibility of use of trade defense mechanisms (anti-dumping, safeguards) to counter unfair trade, digital trade, and on IP. 

There is a chapter on Small & Medium Enterprises (SME) seeking to incentivise them — setting up of contact points, providing information to help them increase efficiencies. Given India’s vibrant SME sector, this is of special interest to us. Separate chapters highlight commitments to transparency, good regulatory practices, sustainable food systems, trade & sustainable development, environment and climate, trade & worker’s rights, gender equality, dialogue & cooperation, enforceable commitments and dispute settlements, institutional provisions whereby committees are to be set up to oversee the implementation of the FTA.  

The EU too benefits immensely getting access to a market which is 3 times larger than all the 27 countries which constitute EU put together. India is set to eliminate 86% of tariff lines and 93% in terms of value. Agri-food ( olive oil, fruit juices, confectionary, breads, pasta) chemicals, pharmaceuticals, machinery, medical devices, avionics and high-end automobiles are set to gain. Industrial products, cosmetics, plastics, ceramics, boats, will all get cheaper in India. Alcoholic beverages will be reduced over time to 30% for most wines, 40% for all spirits and 50% for beer. Agricultural sensitivities are being protected on both sides. 

There are some areas of concern though.  The India-EU FTA has not been able to resolve the CBAM provisions, a non-tariff barrier which the EU has created. These are apparently to continue. The only concession which India has been able to wrest being that flexibilities if any granted to third countries will also be granted to India and a promise of enhanced technical cooperation on recognition of carbon pricing.

Another area of concern is that the current trade surplus which India enjoys could become a thing of the past and imports from EU are likely to surge with the tariff relaxations. Undoubtedly EU standards-be they health, phyto-sanitary, IP , are high and Indian exporters will need to cope up with them-but then these standards are  in place even now. Automobiles / auto components could be another area of concern given our auto industry’s strength.

This will happen in a phased, quota-based manner-and give the Indian industry sufficient time to get prepared to face competition. India will have to put in place all the safeguards’/mechanisms/ regulations where required to ensure the FTA’s mandate is fulfilled.  However it is important that we do not view the India-EU FTA through the prism of our experience with the ASEAN FTA. The overwhelming shadow of China looms large over ASEAN countries not all of whom have the same robust regulatory framework which EU has. 

What this mammoth FTA has once again demonstrated is that globalisation, the long-held trade mantra is facing a crisis. Or to put it differently the ‘law of comparative advantage’ which was the driving force behind globalisation, is now getting segmented. So, while there is increased interconnectedness, it is now restricted to partners. With WTO enfeebled, the concept of the Most-Favoured Nation (MFN) requiring equal treatment of all trading partners is fast losing flavour. This undoubtedly creates its own set of challenges, (as per WTO there are 380 FTA’s currently in force with another 200 plus that have not been officially notified) with different rules of origin, different specifications and conditions. However, the fact is that things have come to such a pass only as a reaction to the new geo-economic-political realities. And this is not a bad thing. Countries cannot be held to ransom to the whims of another country. 

The Indian government has opened a market which generates over 17% of the global gross domestic product. It is for the Indian exporter to capitalise on it. The FTA is likely to come into force by late 2026/early 2027. They have sufficient time to prepare to penetrate what is a mature, demanding market. 

  —The author, Najib Shah is former Chairman, Central Board of Indirect Taxes & Customs.