India-EU Free Trade Agreement

The News

In a joint event held at the Headquarters of the European Union (EU) at Brussels, Union Minister for Commerce and Industry, Consumer Affairs and Food & Public Distribution and Textiles, Shri Piyush Goyal, and Mr. Valdis Dombrovskis, Executive Vice-President of European Commission formally re-launched the India-EU Free Trade Agreement (FTA) negotiations. Besides, negotiations were also launched for a stand-alone Investment Protection Agreement (IPA) and a Geographical Indicators (GIs) Agreement.

Free Trade Agreement

A free trade agreement is an agreement between two or more countries to lower tariffs on imports and exports. Goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or restrictions to obstruct their interchange under a free trade policy.

Trade in goods (such as agricultural or industrial products) or services is frequently covered by FTAs (such as banking, construction, trading).

Other intellectual property rights (IPRs), investment, government procurement, and competition policy can also be covered by FTAs.

Other than FTAs, entities have entered into Preferential Trade Agreements (PTAs), Comprehensive Economic Cooperation Agreements (CECAs), Comprehensive Economic Partnership Agreements (CEPAs), Customs Unions (CUs), Custom Markets (CMs), and Economic Unions to liberalise trade between them (EU).

The concept of free trade is the opposite of trade protectionism or economic isolationism.

India – EU FTA

Last year, during the India-EU Leaders' Meeting in Porto on May 8, 2021, an agreement was made to resume discussions for a balanced, ambitious, comprehensive, and mutually beneficial FTA, as well as to begin new negotiations on the IPA and a separate GIs agreement.

After a nine-year hiatus, both parties are resuming FTA negotiations, which were halted in 2013 due to differences in the scope and expectations from the agreement.

Because the EU is India's second largest economic partner after the United States, this would be one of the most significant FTAs.

With a year-on-year growth of 43.5 percent, the India-EU merchandise trade reached an all-time high of USD 116.36 billion in 2021-22. India's exports to the EU increased by 57 percent to $65 billion in FY 2021-22. India has a trade surplus with the EU.

Given that both partners share similar fundamental values and interests, as well as being two of the world's largest open market economies, the trade agreement will help to diversify and secure supply chains, increase economic opportunities for our businesses, and provide significant benefits to our people.

Both parties want the trade talks to be broad-based, balanced, and thorough, with fairness and reciprocity at their core. There will also be talks about resolving market access issues that are hindering bilateral trade.

While the proposed IPA would offer a legal framework for cross-border investments, the GI accord is planned to create a transparent and predictable regulatory environment, facilitating trade of GI products such as handicrafts and agricultural commodities.

Both sides want to negotiate all three agreements at the same time and finish them all at the same time. The first round of negotiations for all three agreements will take place in New Delhi from June 27 to July 1, 2022.

India signed FTAs with Australia and the United Arab Emirates in remarkable time earlier this year. Talks on a free trade agreement with Canada and the United Kingdom are also underway. The FTA talks are part of India's larger aim of forging balanced trade agreements with major economies and revamping existing trade accords to boost trade and investment.

Pros of Free Trade Agreement

1) Comparative Advantage: The concept that when countries produce and sell freely what they do best, everyone wins. To put it another way, everyone should focus on what they do best, with governments intervening as little as possible.

2) Protectionism is costly: Tariffs and non-tariff barriers (NTBs) essentially raise consumer prices. Consumers pay the price of the barriers, or they are forced to buy more expensive domestically manufactured items.

3) Competition: The concept that competition encourages cheaper pricing, increased production efficiency, and innovation.

4) Functionalism: The idea that collaboration in one area (like trade) leads to cooperation in others. In theory, the drug problem, immigration issues, and other issues are tackled more directly.

5) Interdependence: The premise that free trade creates interconnections that make conflict prohibitively expensive. To put it another way, reliance reduces the risk of war. (Europe is a frequently used example.)

6) Economic Growth: Because free trade encourages economic growth, significant social issues like unemployment, environmental degradation, and illegal immigration can be addressed.

7) Protection from protectionism elsewhere: Regional free trade agreements assist exporters secure markets by reducing the threat of protectionism elsewhere. In other words, they act as a counterweight to other huge economic institutions, such as the European Union.

8) Capital and technology introduction: Free trade can help poorer countries integrate capital and technology into their economies.

9) Democratization: Some people believe that free trade improves democracy by encouraging discipline and transparency.

Cons of Free Trade Agreements

1) Threats to domestic industries/jobs: Most mainstream economists are quick to dismiss these concerns, claiming that free trade promotes job creation and growth. This argument, however, is used by labour unions and domestic industries to push for protectionism. Clearly, free trade agreements can cause economic dislocations and ripple effects, even if they increase the size of the economic pie.

2) Infant Industries: Poorer countries have argued that "infant industries" must be protected in order for them to get off the ground in the first place. Most economists agree that this is a valid argument, but they argue that removing the protections will be difficult.

3) Too much reliance on a few products: Specialization based on comparative advantage may cause an economy (particularly a small economy) to become overly reliant on a few resources or products. If demand in those areas declines, the economy could collapse.

4) Nice free traders can come in last: In the real world, governments regulate exports and imports, heavily subsidise their producers, and erect trade barriers. Nice free traders can come in last in this world. After WWII, the US tolerated discriminatory practises from others, but now that it no longer represents the majority of the global economy, it fights them.

5) Security is jeopardised: Protectionists argue that a country should not become so reliant on others that it loses its ability to defend itself. The United States, for example, should not allow its shipbuilding industry to die simply because ships can be built cheaper elsewhere. Another example is steel.

6) Cultural Imperialism: Similarly, Latin American and other countries (most notably France) are concerned about cultural imperialism (Hollywood; rock and roll bands) and the loss of historic industries (French wines).

7) Trade is a powerful policy tool: Trade leverage should not be given up because of a belief in economic rationalism when dealing with other countries. Similarly, we should not cede control of trade matters to regional or international organisations. They shouldn't be able to claim that our laws are unjust trade barriers.

8) Downward Harmonization: In order to compete, free trade may force countries to lower their environmental, labour, or other standards. Furthermore, regional or international bodies may declare such standards to be unfair trade practises.


In terms of increased trade capacity between India and the EU, the FTA will be a game changer.

The India-EU FTA will help lower import tariffs and level the playing field for European businesses.

Standardization of norms is the most significant aspect of the FTA. It will be easy for both parties to conduct business as a result.

Source: PIB and Investopedia

Posted by on 20th Jun 2022