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The Policy Implication of India: European Union Trade Relations

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Pooja Paswan
July 31, 2021

“Maintaining confidence in international trade will be critical to the broader economic recovery in the post-COVID world.”

—Liz Truss (Minister for Women and Equalities of the United Kingdom)

Blurb: The European Union and India have been strategic partners since 2004. Level playing field provisions in free trade agreements can cause significant positive changes in crucial areas like labor and environmental rights in India.

The European Union and India have been strategic partners since 2004. Negotiations for a bilateral trade and investment agreement (BTIA) began in 2007, but reached deadlock over a number of unresolved issues in 2013. Prospects for a BTIA dimmed further in March 2017, when India terminated bilateral investment treaties (BIT) with dozens of countries, including most of the European Union Member States.

A key European Union objective in its trade relations with India is to work towards a sound, transparent, open, non-discriminatory and predictable regulatory and business environment for European companies trading with or investing in India, including the protection of their investments and intellectual property. The aim is to contribute to unlocking the untapped potential of two-way trade between the European Union and India. Currently, India’s trade regime and regulatory environment remains relatively restrictive. The European Union uses all available channels and fora to work with India to ensure fair market access and predictable investment conditions, as well as to promote the full respect by both sides of their multilateral obligations under the World Trade Organization (WTO). The key instruments in this respect are the European Union-India Trade Sub-Commission established under the 1994 Cooperation and Partnership Agreement between the European Union and India, as well as its specialized technical working groups.

What is the Current Scenario?

The European Union is India’s largest trading partner: trade in goods amounted to €79.6 billion in 2019, a slight decrease compared to the previous year, and making up 11.1 % of total Indian trade (slightly ahead of the United States of America and China. India, in turn, is the European Union’s 10th largest trading partner, accounting for 1.9 % of European Union total trade in goods in 2019. After several years of a positive European Union balance of trade in goods with India, the balance became negative in 2019 (-€1.3 billion). The European Union balance of trade in services was also negative in 2018, at -€1.2 billion, with a value of total trade in services reaching €29.6 billion. European Union foreign direct investment (FDI) stocks in India amounted to €67.7 billion in 2018 (India invested €2.6 billion in the European Union). Some 6,000 European companies are present in India, providing 1.7 million jobs directly, and a further 5 million indirectly, in a broad range of sectors. Considering the size of the two economies, these figures are evidence of an untapped potential. Both imports and exports of goods with India are stagnating, at a mere 2 % of all the European Union partners. However, as negotiations progress between India and the European Union on this front, a second, oft-ignored dimension to a trade agreement worth considering is changes to India’s legislative and regulatory framework that the European Union will likely insist on as a pre-condition to entering into an agreement.

Level Playing Field in FTA

Level playing field provisions in free trade agreements (FTAs) require that the regulatory conditions in which goods and services are freely traded between partner countries be virtually identical. Once tariffs and other barriers to trade between two countries or territories have been significantly reduced or eliminated by a free trade agreement, a lax or less stringent regulatory structure in one partner country compared to the other would give producers of the same goods operating under the lax regulatory structure an unfair advantage. These mandatory regulatory changes can cause significant positive changes in crucial areas like labor and environmental rights in India.

What are the Policy Implications?

In the example of a potential India-European Union agreement, for instance, if the costs imposed on producers to comply with mandatory labor and environmental regulations in India are lower (owing to a more lax structure that is implemented poorly) than those of their competitors in the European Union, Indian producers might be able to produce comparable goods at a significantly cheaper price than their European Union competitors, allowing them to capture the European market and crowd their competitors out.

In addition to regulatory compliance costs in areas like labor rights and the environment, level playing field provisions typically also govern rules surrounding the granting of subsidies by states to producers, ensuring that such state subsidies do not artificially allow producers in one partner country to reduce prices and capture the market in the other partner country.

The inclusion of level playing field provisions will make such drastic measures, which view labor and environmental protections as a costor a nuisancethat can be waived to provide a stimulus for economic growth, significantly rarer. Given the importance placed on these protections by the European Union, India will have to similarly view them as untouchable and sacrosanct, as long as it wishes to preserve the economic benefits of low tariffs and reduced barriers to trade with Europe that its producers enjoy under a potential India-European Union agreement.

Author: Pooja Paswan is currently enrolled at the John.F. Kennedy School of Government, Harvard University. She is an Assistant Professor in the Department of Political Science at Jamia Millia Islamia University, New Delhi, India. She has Ph. D in Public Administration and specializes in Public Policy. She was recipient of the ASPA 2019 Founders Fellow. She has worked extensively in the area of development administration and policy. She can be reached at https://jmi.academia.edu/PoojaPaswan and [email protected]. Twitter @poojapaswan

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