Raising trade, with a strategic bonus

Geopolitical pressures can prove strikingly detrimental to the planned social and economic growth of nations. The United States’ tariff war, which targets India and several other emerging economies, has pushed these countries towards alternatives in the short run, while devising roadmaps for the long term. Free trade agreements and comprehensive partnerships with individual countries and economic blocs are responses that are necessitated by the times. India has been negotiating a trade partnership with the European Union (EU) for nearly two decades.

US President Donald Trump, in his characteristic style, has undermined the EU on three counts. First, he initiated action in Venezuela while keeping the EU in the dark; second, he made repeated claims to take over Greenland and threatened the EU with dire consequences if it intervened; third, he proposed a US-Russia-Ukraine tripartite talk on the Russia-Ukraine conflict, sidelining the EU, which has, so far, been supporting Ukraine with money and material.

Never before has the European bloc been under such pressure to look beyond the US to safeguard its economy and its security and strategic interests. It has furthered these very interests by formalising the Free Trade Agreement (FTA) with India. The “Mother of All Deals” marks a historic pivot in global trade as it promises to create a trade corridor that accounts for roughly 25% of the global GDP and one-third of global trade.

At a time when geopolitical dynamics are defined by conflicts and flashpoints, fractured supply and value chains which have not been fully repaired since COVID, and countries increasingly adopting protectionist positions, the FTA is more than an economic agreement. For the EU, the agreement, when ratified and signed in the coming months, will be an insurance against the Trump administration’s weaponisation of tariffs. It secures a durable foothold in the world’s fastest-growing major economy and advances Brussels’ drive to de-risk critical supply chains.

For India, this lays a new democratic foundation as a counterweight to China’s State-centric trade model. China’s aggressive economic engagements in India’s immediate, extended, and distant neighbourhoods have created a complex situation, greatly impacting the present government’s ‘neighbourhood first’ policy. The FTA is a strategic move that positions India to efficiently deal with Trump’s tariff war and reduce the over-reliance on both the US and China. The agreement was accompanied by a security and defence partnership, a rather unusual step for the EU, signalling a turn towards deeper maritime cooperation in the Indo-Pacific and potential joint defence manufacturing.

However, the agreement is not going to be easy to put into practice, considering the EU’s stringent and complex regulatory framework. Several Indian manufacturers will find compliance with the Carbon Border Adjustment Mechanism (CBAM) extremely difficult; this could adversely impact exports in steel, aluminium, cement, and chemicals. The EU has also been insistent on its partners adhering to the Trade Related Aspects of Intellectual Property Rights (TRIPS) Plus provisions, such as extended periods of data exclusivity. India has emerged as a key global player in generic medicines and has been providing affordable medicines to a large section of its economically backward population. It will need to wait before a comprehensive assessment of the agreement’s fine print in the context of these provisions.

The regulatory asymmetry is even more stark when it comes to the EU’s capital-intensive and technology-oriented manufacturing and exports, as against India’s labour-intensive, tax-heavy private sector, and labour-oriented MSME sectors that are perennially starved of capital and innovation. The FTA seeks to allow greater market access for several products which are easily made in India or can be made with a little extra effort. At such a juncture, reducing tariffs can directly hit a large number of Indian startups and small and medium-scale industries that are already under severe strain due to the surge of cheap and unrestricted Chinese imports.

Also, a low or zero-tariff trade system may open up the market to a flurry of EU goods and services, impacting India’s indigenisation push across sectors.

The Union government will have to urgently initiate measures to facilitate the private and MSME sectors to improve their standing and scope in cost-effective manufacturing, without compromising on the quality. This shift will be possible only with optimum utilisation of industrial automation. The trade deal is the beginning of a landmark partnership that goes beyond commercial stakes for the two camps and formalises important strategic collaborations. However, for the results to show, both the industry and the government need to align on multiple points.

(The writer reads between the lines on big national and international developments from his vantage point in the BJP and the RSS.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.