Monday Morning Meeting on Evolving Trade and Investment Ties with Europe

Dr. Swasti Rao, Associate Fellow, Europe and Eurasia Centre, Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA), made a presentation on “Evolving Trade and Investment Ties with Europe” at the Monday Morning Meeting held on 15 April 2024. The session was moderated by Ms. Anandita Bhada, Research Analyst, Europe and Eurasia Centre, MP-IDSA. Scholars of the Institute attended the session.

Executive Summary

On 10 March 2024, member states of the European Free Trade Association (EFTA) – Iceland, Liechtenstein, Norway, and Switzerland – and the Republic of India signed a comprehensive Trade and Economic Partnership Agreement (TEPA). It is a USD 100 bn Free Trade Agreement (FTA) with the four non-European Union nations under which India will lift most import tariffs on industrial products from these countries in return for the investment over 15 years. The investments will be done across a range of Indian sectors, including pharmaceuticals, machinery and manufacturing.

Detailed Report

Ms. Anandita Bhada, in her opening remarks provided an overview of India’s recent trade agreement with the European Free Trade Association (EFTA). She noted that the negotiations between EFTA and India started in 2008 and the agreement was signed in March 2024. However, the deal is still to be ratified by the countries. She also mentioned the India-EU FTA, which is still under negotiation. In terms of collaboration on import and export of goods, EU is India’s second largest partner whereas India is EU’s tenth largest partner. Over the years, this partnership has seen several rounds of negotiations, however, there still remain disagreements regarding the technical barriers to trade, imports and pharmaceuticals. With regard to the India-UK FTA, Ms. Bhada noted that some developments could happen before January 2025, as it is said to be in its last stage.

Dr. Swasti Rao commenced her presentation by highlighting a list of 10 commandments for Free Trade Agreements (FTA) to conduct trade negotiations as given by John Clarke, EU’s former trade negotiator. Her presentation was divided into the India-EU FTA which is under negotiation, India-UK FTA, which is also under negotiation, and recently signed Trade and Economic Partnership Agreement (TEPA) which is India’s trade deal with the EFTA, showcasing its strategic importance which is being viewed as a success.

Dr. Rao emphasised that the EU, the United States of America (US), the UK are one of the largest sources of Foreign Direct Investment (FDI) in India. She also pointed out that India has not been able to utilise the full potential of China +1 diversification, as most of the diversified investments from Europe are going to countries like Vietnam and Bangladesh. According to Dr. Rao, one of the reasons for this is India’s reluctance to agree on bilateral investment guarantees that the investor countries insist on. India prefers the multilateral approach towards investment through the World Trade Organisation (WTO) framework, whereas the western countries stress more on bilateral investment guarantees which are more case-specific and country-specific. In case of the UK or the EU, one could see that enhancing trade ties and bilateral investments with India are considered a part of their larger foreign policy objectives like friendshoring.

Dr. Rao noted that when it comes to dispute settlements as well, India prefers the WTO framework whereas the western countries prefer bilateral arrangements. She also noted that traditionally India has had high tariff barriers and a protectionist approach to safeguard its small and medium-sized enterprises (SMEs) from foreign competition. She pointed that the Indian Government prefers to have a sector-by-sector approach for analysing the pros and cons in reduction of tariffs in sensitive areas. She highlighted that the idea of ‘Make in India’ is to first boost the manufacturing in India and then merge it with the global supply chains.

Dr. Rao further stated that when the current government came to power in 2014, it had suspended all FTAs and scrapped the Bilateral Investment Treaties (BITs), as India’s exports had not increased much in the past decade. She illustrated that most FTAs, like the ones with the Southeast Asian partners, were not technically advantageous to India as they did not provide India with significant export surplus. Thus, the government launched an FTA Review in 2019. This review delved into the details of India’s low FTA utilisation, Respective Comparative Advantage, non-tariff barrier issues and the solutions to them. The Review addressed the challenge of India incurring trade deficit despite the FTAs. After 2019, the government’s approach to FTAs has been to rectify the export deficit which has been on a rise. Dr. Rao referred to the gradual increase in trade deficit from 2019 until 2023 where the top two deficits are recorded with China (approximately USD 100 bn) and Russia (USD 35 bn) due to India’s oil purchases.

In 2021-22 India re-launched its FTA negotiations. These have been referred to as the ‘New Age FTAs’ as there is a tangible push towards finalising FTAs with western countries (UK, EU, EFTA), UAE and with the African partners. The post-COVID learning here is to actively build resilience of supply chains and overall economic security instead of merely trade. The government has been trying to link the FDI to production linked incentive schemes. There has been increased focus on natural trading partners (UAE, UK, Australia) with whom not only has the trade been in export surplus but there is also presence of resilient supply chains. The New Age FTAs have also focused on the service sector as compared to the old ones which were more focused on goods. While India’s overall trade in goods and services has increased manifold, the factor of mobility remains a hurdle in the FTAs with UK and EU, as India would like to have more mobility and countries such as the UK, are stringent about it. Further, the New Age FTAs are focused on improving the Logistics Performance Index (LPI) by lowering it from 13-14 per cent of GDP to 10 per cent under the National Logistics Policy.  

Dr. Rao highlighted that the India-UK FTA, which is still under negotiation, has 26 chapters. So far, there has been progress made on 24 chapters. Despite the bilateral trade in goods and services reaching USD 38 bn in 2023, tariff barriers remain one of the main concerns apart from mobility. The average tariff on exports from India is 4.2 per cent but on imports from the UK is 14.6 per cent. An example mentioned was the UK wanting India to reduce taxes on the electric vehicles (EV). One of the important takeaways according to Dr. Rao is that, the likely change in the UK to a labour government might lead to more flexible rules on mobility and visas.

Coming to India’s FTA negotiations with the EU and the EFTA countries in Europe, Dr. Rao emphasised that the EU is a customs union and has a single market whereas the EFTA countries are not a customs union. When it comes to FTAs with EFTA countries, India has a separate arrangement for all the four nations. It is different in the case of the EU, which operates as a single economic bloc. The agreements between India and the EU were suspended in 2013 and then re-launched in 2021. Upon the re-launch, the FTA was broken down into three separate negotiations – free trade agreement in goods and services, Bilateral Investment Treaty (BIT) and a treaty on geographical indicators.  Dr. Rao stated that one of the problems with the EU is the Carbon Border Adjustment Mechanism (CBAM) and the bloc’s stringent sustainability agenda, which is creating issues in their domestic markets as well. As an example, she mentioned the import of Ukrainian grains that are causing problems in Poland and Czech Republic due to the EU’s stringent rules for its own member states as compared to its liberal rules for Ukraine. The CBAM provisions are mentioned in the European Green Deal, and the EU wants all its FTAs to have this provision. This would create further problems for international trade agreements as CBAM would make it very expensive to export products with a high carbon footprint like steel or aluminium.

Regarding dispute settlement, Dr. Rao pointed out that the EU has proposed setting up an independent investment court system as a part of the dispute settlement mechanism under the investment protection act, which is not confined to the WTO. India on the other hand, prefers the WTO framework. The India-EU FTA is at the second stage of negotiations and has a long way to go. However, according to her, until the issues surrounding CBAM, the BITs and domestic hurdles are not addressed, the FTA might not reach an agreement.

Reflecting on the EFTA FTA, Dr. Rao stated that it is an exceptional agreement. The USD 100 bn investment commitment mentioned in the agreement is not legally binding but is an explicit obligation on the EFTA countries to encourage their private players to invest in India over the next 15 years. Under this FTA, India has opened its markets but not its sensitive sectors. Dr. Rao also pointed out that since economic relations among these countries and blocs are excellent, TEPA could act as a catalyst for the UK, the EU and other FTAs and pave the way forward. TEPA is a win-win situation, simply because India has given the EFTA member states access to its markets in lieu of the USD 100 bn investment promise. Additionally, what makes it more exceptional is that if the investment promises are not adhered to, both parties can review the situation and withdraw trade concessions.

Lastly, Dr. Rao emphasised that all the FTAs are different and there cannot be one standard rule for all. Thus, countries need to negotiate keeping in mind the differences in situations.

Q & A Session

Gp Capt (Dr.) RK Narang (Retd.), enquired about the lost opportunities in FDIs for technology-oriented collaboration and trade imbalance with European countries like France. He also enquired about the service sector focused versus manufacturing sector focused approaches of Europe.Dr. Gulbin Sultana, inquired about specific Indian sectors which could benefit from the EFTA FTA and the impact of India’s exports to the EFTA nations.

Dr. Deepika Saraswat, questioned about Europe’s approach to negotiating FTAs considering the current global geopolitical developments.

Dr. Ashok Behuria, stressed on the protectionist approach of developing countries, the removal of tariff barriers on imports and its impact on domestic industries. He also inquired about the EU and the UK FTA negotiations with China as compared to those with India.

Dr. Anand Kumar, commented on increased imports from ASEAN as compared to India’s exports to the bloc. He also inquired about the type of investments that countries like Vietnam and Bangladesh are receiving.

Dr. Rajiv Nayan, observed that in a globalized world all countries (even the West) are protectionist in nature and try to safeguard their interests.

Dr. Swasti Rao responded to all the comments, questions and observations. She highlighted how FTAs help in facilitating trade between countries by increasing imports and exports. She concluded by stating that the EU FTA would not go forward in its current form as the CBAM provision seems completely against Indian economic interests. Thus, the EU needs to become more flexible in their sustainability agenda and the Green Deal.

Report has been prepared by Ms. Anusua Ganguly, Intern, Europe and Eurasia Centre, MP-IDSA.