India’s trade talks with Europe are going smoothly, but THIS could derail it

 

Contrary to Trump’s tariff tantrum and the frozen vibes that have suddenly enveloped India-US trade talks, the discussions with the European Union (EU) have been proceeding pretty smoothly.

 

With Trump’s hardening of stance, India now desperately needs to offset the shock of losing out on its biggest trading partner—with major ramifications not just to its exports, but the whole economy itself.

 

That means it needs to recalibrate and find alternate options quickly. And what better than a market that is almost as big as the US, with whom you have been, coincidentally, already talking?

 

In reality, India’s free trade attempts with the EU have a very chequered past, with talks beginning nearly two decades ago but reaching nowhere. There were seven rounds of talks over six years from 2007, but those were different times, and India played hardball and refused to relax many of its trade barriers or open up many of its sectors. The result? Talks stalled after the seventh round in 2013, and it seemed that the dream had died.

 

But cut to the UK leaving the EU after Brexit and India refusing to join the China-led trade alignment called RCEP, both entities suddenly realised their mutual need for an alternative matched. Talks restarted in June 2022 after PM Modi and European Commission President Ursula von der Leyen met, with the steady progress prompting some quarters to get optimistic about a treaty being finalised even before this year is out.

 

“Looking at the rapid progress that we are making, my sense is that we can do it faster than the year-end,” Union Commerce Minister Piyush Goyal had said back in June.

 

The fast progress this time, besides, of course, the fact that the Trump-induced upsetting of the global trading apple cart requires quick-fix solutions, has prompted both sides to be much more accommodating. After the 12th round of negotiation last month, tentative agreements have already been reached on five broad areas, which include IP, customs and trade facilitation.

 

It also helped that both sides had agreed to sort out the easier points first, before moving into more contentious issues.

 

Goyal has said that only a few unresolved issues remain, describing India and the EU as ‘complementary economies.’

 

But that may just be wishful thinking, for there are a total of 23 chapters that need to be thrashed out threadbare by both sides and settled down, and this includes topics ranging from technical barriers to trade, customs facilitation, rules of origin, etc. Duties on automobiles, alcohol and beverages, data security frameworks, etc., are also pending. The question of opening up government procurement (which India has already opened up to British contractors as per the UK FTA recently signed), as well free movement of professionals, to what extent services sector can be opened up are also likely to take time, especially since EU is a bloc of 27 countries, where consensus might take time.

 

The most sensitive, of course, will be the Carbon Border Adjustment Mechanism or CBAM, which the European Parliament adopted back in 2023 and is undergoing a transition period of phasing in—it is slated to be fully implemented from New Year’s Day 2026.

 

For the EU, the ‘carbon tax’ is central to its attempt to be sustainable and become completely carbon emission-free at least by 2055. Still, for India, the new rule adds increased compliance responsibilities on companies importing products into the EU area, with Indian companies having to pay additional penalties if they don’t follow adequate carbon reduction methodologies as per the EU’s stipulations.

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For India, this has always been an issue, and even senior Indian ministers have lashed out against what they termed as an unfair proposal to limit their trade prospects and against the principles of multilateralism. Many Indian big scale exporters to European markets will find the going tough as they would either have to go in for major ramping up of climate control procedures (reduce dependence on energy from coal, which is cheaply abundant in India, for example) or come clean and pay up hefty carbon border tax when their exports enter the common market.

 

Either way, India fears this would jack up costs and bring down profitability, making many of its crucial export sectors to the EU, like iron and steel. In fact, a study by ICRA points out that the profit margin on Indian steel exports could fall by as much as 14,000 rupees per metric tonne once CBAM is fully implemented.

 

India had called out the EU’s proposal at various fora, including the G20. While India’s call for an exemption from CBAM may be impossible—it is, after all, a legislation passed by the European Parliament and pivotal to Europe’s Net Zero goals, what negotiators could offer is reinforced co-operation in its implementation—possibly as part of the trade deal, or maybe separately.

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This could work out into perhaps a phased timeline for implementation of the new rules by developing a framework for co-operation. (India is not alone in its protestations against the new rules, and this timeline could involve multiple other trading partners from the Global South)

 

India, on its part, is quietly updating its rules related to environmental impact, so that it aligns with the EU’s stringent green norms. The new benchmarks, which could come into effect as early as the new year, cover areas like products having to certify that they have not been made by cutting down trees or causing deforestation in any manner, as well as the use of recyclable packaging and waste disposal. There could also be a ban on the use of antibiotics in meat production, a practice said to be rampant in the country, especially with poultry.

 

“In any trading relationship, there are certain sensitive issues which we have to resolve amicably,” Goyal had said recently. The next round of India-EU talks is scheduled next month, by which time there could be better clarity on the fate of India-US trade, too.

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