The prospects for an EU-India bilateral trade agreement

Jim Rollo, Michael Gasiorek, Peter Holmes, 30 November 2007

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Europe’s trade policy is traditionally focused on its neighbours by land and sea – North America and the Mediterranean. This summer, the EU shifted focus with an ambitious plan to sign free trade agreements with Korea, ASEAN and most significantly, with India. This is an important move.1

One of the safest bets in a risky world is that Asia will matter far, far more to Europe’s economy in the next half century than it has in the past half century. India will be a major part of this, with over a billion consumers who have been getting richer at a rapid rate for decades.

The EU is not knocking on a closed door. India has embraced the global economy. Up until 1992, Indian trade policy was extremely protectionist, but since then it has unilaterally lowered tariffs, removed import controls and liberalised some of its service sectors. Over the 1990-2005 period, India cut its tariffs from an average of about 80% to 17%. Its export-to-GDP ration, now near 20%, has tripled since 1990, and its imports have grown even faster. India’s current foreign trade policy plan calls for doubling its share of world trade.

Research that we have undertaken with colleagues at the Centre for the Analysis of Regional Integration at Sussex along with partners at CUTS in Jaipur, suggests that the EU-India talks will be difficult but have the potential to succeed, although not, perhaps, as soon as the protagonists desire.2

Prospects for an EU-India free trade deal

Prospects for an agreement appear good but there are potential obstacles. The optimism comes form the fact that the EU is India’s largest trade partner and is an important provider and buyer of services and FDI. Moreover, as far as goods trade is concerned, there is little overlap in trade structures or comparative advantage between India and the EU, so liberalisation should trigger little of the sort of sectoral readjustment that can be so painful politically. Likewise, neither party is likely to ask for difficult agricultural liberalization – another standard source of conflict. More positively and perhaps decisively both sides are anxious to increase the access that their service provider have to each others’ market.

Potential obstacles stem from India’s domestic politics. There is a general suspicion of trade liberalisation in the ruling Congress party (as opposed to the government), and downright hostility to trade from other parties in the governing coalition such as the communists. The European Commission wishes the free trade agreement to address deeper integration issues such as competition policy, the rights of foreign investors, open government purchasing practices as well as environmental, social and human rights clauses. The latter in particular may cause problems in India, which may suspect that such clauses may create pretexts for future protection. India may also simply consider them patronizing given that Indian democracy is older than that of many EU member states.

The final stumbling block may be an unbridgeable expectation gap. The EU’s trade strategy commits it to ambitious and far-reaching agreements. India’s current idea of a free trade agreement is the India-Singapore deal which, though “comprehensive” in name, contains rather less liberalisation than the EU desires.

Finally, an EU-India agreement will inevitably be complicated given the very different stages of development and the size and intricacy of the two economies. The sheer complexity of the negotiations may mean they are not completed by the time of the next Indian elections. They may get held up and perhaps repudiated by any new government, particularly if dominated by left wing parties.

Conclusion

The EU-India negotiations began well in June 2007. But the hard issues are always left to last in such discussions. The benefits of an agreement for the two nations are especially hard to quantify given the importance that each places on hard-to-measure gains in areas like investment and services.3 Nevertheless, India’s rapidly expanding role in the world economy as a buyer and seller make this an important target for the EU. It would be an agreement well worth having. Of course, such bilateral progress should come in addition to, rather than in place of progress in the WTO’s current multilateral talks (the Doha Round) but such progress depends only partly on the EU’s stance. From the Indian side, the free trade agreement would be a move from its reliance on a unilateral liberalisation policy with extreme reluctance to commit multilaterally. While we would hope that India also opens up multilaterally, a bilateral agreement might not be the worst place to start, particularly on services where it is harder for liberalisation to be seriously discriminatory.

References

Decreux, Yvan and Cristina Mitaritonna. 2007. Economic Impact of a Potential Free Trade Agreement (FTA) between the European Union and India (Study commissioned by the Directorate-General for Trade of the Commission of the European Union).

EU Commission. 2006. Global Europe: Competing in the World.

Evenett, Simon. 2007a. Doha’s Near Death Experience at Potsdam: Why is Reciprocal Tariff Cutting so Hard?

Evenett, Simon. 2007b. "Global Europe”: An Initial Assessment of the European Commission’s New Trade Policy.

Gasiorek, Michael, Peter Holmes, Sherman Robinson, Jim Rollo, Anirudh Shingal. 2007. Qualitative analysis of a potential Free Trade Agreement between the European Union and India. Centre for the Analysis of Regional Integration at Sussex (Study commissioned by the Directorate-General for Trade of the Commission of the European Union).

Rollo, Jim. 2007. 'Spice Route to Europe? Prospects for an India-EU Free Trade Area'. Chatham House Briefing Paper 07/02. October 2007.

Rollo, Jim. 2006. 'Global Europe: Old Mercantilist Wine in New Bottles?' Aussenwirtschaft, 61, IV, December 403-413.

Sally, Razeen. 2007a. 'Looking East: The European Union’s New Trade Negotiations in Asia'. ECIPE - Jan Tumlir Policy Essay No. 03, 2007

Sally, Razeen. 2007b. 'Trade Policy 2006, A tour d’horizon.' World Economics, Volume 7 Number 1, November 2007.

Woolcock, Stephen. 2007. 'European Union Policy Towards Free Trade Agreements'. ECIPE Working Paper No. 03/2007.


Footnotes

1 For a description of the new policy see EU Commission (2006). Discussions of the potential implications of the change in EU trade policy include Evenett (2007b), Rollo (2006); Sally (2007a); and Woolcock (2007).

2 For a 5 page summary see, Rollo (2007), “Spice Route to Europe? Prospects for an India–EU Free Trade Area,” Chatham House, The Royal Institute of International Affairs. The underlying research (77 pages), Gasiorek et al (2007), can be found here.

3 See Decreux and Mitaritonna (2007) for quantitative estimates. The main finding is that the potential GDP gains for India are sensitive to the inclusion of various in particular the services sector. India’s exports gains to the EU could be around 14 percent, chiefly textiles, leather, and clothing. By contrast, EU exports are expected to increase by US$18bn, spurred by market access opening. GDP gains for the EU are quite small but positive (0.4 percent of GDP).

Topics: International trade
Tags: European Union, free trade agreement, India, trade liberalisation

Senior Lecturer in Economics at the University of Sussex and Associate Professor at GREQAM
Jean Monnet Reader in the Economics of European Integration at the University of Sussex
Professor of European Economic Integration at the University of Sussex; Co-Director of the Sussex European Institute

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