EU looks east: Why India must seize the moment to clinch its FTA deal

The European Union has shown flexibility in its FTA policy. India must capitalise

In a rapidly evolving geopolitical and trade context, the European Union (EU) has emerged as the most proactive economy in strategically reorienting its trade policy in search of alternative partners beyond the United States (US). In view of the impending risks of President Donald Trump assuming power in 2025, the EU, as a preemptive trade policy action, signed a free trade agreement (FTA) with Mercosur in December 2024. In 2025, the EU has accelerated its FTA negotiations with the dynamic member economies of the Association of Southeast Asian Nations (Asean). While the EU-Indonesia FTA was signed earlier this week, the long-pending FTA negotiations with the Philippines, Thailand, and Malaysia have also been resumed. This is alongside active signalling by the EU of a desire to deepen economic integration with the mega-regional Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP). 

Importantly, the recently signed FTAs deviate significantly from the EU’s past FTA policies. The FTA with Mercosur, for example, includes flexibilities in several provisions, especially in the realm of environment and sustainable governance (ESG). In the earlier EU FTAs, ESG-related provisions were not just strictly specified but also provided for a uniquely defined dispute settlement mechanism (DSM) to determine potential breach of a sustainability commitment. In 2021, the EU went as far as challenging the Korean labour laws under the DSM of their bilateral FTA. Furthermore, the variation in political systems across the Asean economies, which in the past had come in the way of EU-Asean negotiations, no longer seems to be an obstacle. The departure from the strict stance followed in the earlier FTAs and the increasing inclination to look East is perhaps arising from the evident unravelling of EU assumptions about its erstwhile alliances with the US. Clearly, there is a realisation that the EU needs to chart an independent course not just in the defence and strategic context, but also in trade. 

For India’s FTA negotiations with the EU, these are positive developments, and India should seize this moment to finalise the FTA, preferably before the end of the year. It is also important that India view its FTA with the EU not just as a means to gain preferential market access for its exports, but with a longer-term vision to enhance its manufacturing competitiveness. Hence, parts of the FTA that deal with rules of origin (RoOs) and investment-related provisions should be specifically designed to facilitate India’s integration with the EU’s regional and global value chains (RVCs and GVCs). 

India has, for long, followed a policy of strict dual criteria-based RoOs in its FTAs. Both, a change in tariff heading and high value-added content are required to grant origin preference to imports from FTA partner economies. The underlying logic for strict RoOs has invariably been that they help stimulate integrated value chains within the country. However, there is scant evidence to support this justification. In fact, this logic has long been rendered irrelevant by the emergence of globally networked production processes, engendered, in turn, by the revolutionary changes in information, communications, and technology. Complex value chains, invariably characteristic of hi-tech industries, entail multiple border crossings of parts and components, sometimes with minimal value addition in a particular location. Simpler RoOs, therefore, enable a more flexible choice for input sourcing. In order for India to integrate with GVCs and RVCs, RoOs in India’s FTAs must therefore be aligned with this reality of global production fragmentation. 

In the FTA with the EU, it may, therefore, be useful for India to adopt simpler, cumulative value addition (VA)-based RoOs for at least a select set of products/ sectors. The possibility of gradual upgradation of VA cumulation rules to a larger set of sectors/products and, over time, across economies with which India and the EU both have FTAs, may be considered for inclusion as a built-in provision in the FTA. Granting such origin preference to parts and components across common FTA partner countries for which VA cumulation is permitted will promote value chain integration for India. Considering the EU’s serious pursuit of an increasing number of bilateral FTAs with Asean member economies and India’s existing FTAs with Asean and the European Free Trade Association (EFTA), a suitable alignment of RoOs across the FTAs would open a whole new realm of possibilities for India’s GVC integration. A more liberal and creative approach to RoOs negotiations with the EU is therefore very desirable.

 

With regard to investment, the first-best approach would be to simultaneously negotiate the trade and investment chapters as part of the broader FTA negotiations. A separate investment deal to be undertaken at a subsequent time invariably gets infinitely delayed. The lack of an appropriately designed investor-state dispute settlement mechanism has been the underlying cause of investment chapters being limited in scope in India’s recent FTAs, for example with Australia. It should be noted that an FTA limited to tariff preferences remains ineffectual in attracting substantial foreign direct investment inflows. There is, therefore, a need to urgently launch discussions in India on a forward-looking investor-state dispute settlement mechanism, drawing upon ideas emerging from different countries across the world, including the EU. Meanwhile, in addition to commitments on regulatory ease and investment facilitation, inclusion of an India-EU arbitration mechanism (which is not subject to individual member country ratification in the EU), in the investment chapter should be seriously considered. It can impart significant impetus to realising the potential investment opportunities in critical emerging technologies highlighted in EU’s new India strategy released earlier this month.

 

Finally, on the Carbon Border Adjustment Mechanism (CBAM), India could take a leaf out of the EU-Mercosur FTA. A rebalancing of preferential provisions, on similar lines, in situations where the negotiated concessional trade outcomes may be adversely impacted, could be worked out with the EU.  This should be done along with assured cooperation-—technical and operational— in developing India’s carbon credit market and pricing mechanism to ensure interoperability with the EU emission trading system. Potential joint initiatives for cooperation on renewables, developing green hydrogen capabilities and green finance should be additionally negotiated in the joint India-EU Trade and Technology Council.

 

Overall, the timing is propitious for finalising a well-designed and substantive FTA with the EU.

 

The writer is professor, School of International Studies, JNU, and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views are personal