India and EU set for ‘mother of all deals’ as Trump’s tariff uncertainty looms

European Council President Antonio Luis Santos da Costa and European Commission President Ursula von der Leyen will be chief guests at India’s Republic Day festivities next Monday.

Besides state banquets and the ceremonial pomp of the event,India the two leaders will have a more pressing item on their agenda – advancing free trade talks with Asia’s third largest economy. This comes at a particularly trying geopolitical moment for Europe, with President Donald Trump first threatening to escalate his trade war with European allies for opposing a US takeover of Greenland and then backing off.

The choice of guests also carries an important diplomatic message from India – Delhi is accelerating strategic and trade ties with the rest of the world as the impasse over Washington’s 50% tariffs on India spills over into the new year.

“[It] sends a signal that India maintains a diversified foreign policy… and that it is not beholden to the whims of the Trump administration,” Chietigj Bajpaee of the London-based Chatham House think-tank told the BBC.

Some reports say the deal could be announced as early as 27 January when leaders from both sides meet for a high-level summit. Both von der Leyen and India’s Trade Minister Piyush Goyal have called it the “mother of all deals” – highlighting the importance they’ve placed on concluding negotiations that are nearing the finish line after almost two decades of hard bargaining on both sides.

The pact will be India’s ninth free trade agreement (FSA) in four years India coming off the back of a string of deals with the UK, Oman, New Zealand and other countries. For Brussels, it follows the recently concluded trade deal with the Mercosur trading bloc as well as with Japan, South Korea and Vietnam.

“Both sides now seek reliable trade partners, as threats arising out of the geopolitics have created a tumultuous environment for commerce. The urge is equally strong – for India to offset US tariff issues, and the EU to offset trade dependence on China which it considers unreliable,” says Sumedha Dasgupta, senior analyst at the Economist Intelligence Unit.

The deal will also mark a “continuing and significant effort to shed India’s notoriously protectionist carapace”, adds Dasgupta.

As EU-India ties enter a watershed moment on the back of a free trade agreement (FTA) that’s still being negotiated, European Commission President Ursula von der Leyen told TOI’s Sachin Parashar in an exclusive interview that while the last mile is always the toughest, it will be more than worth it. The conclusion of the trade talks and a new defense and security partnership, which the EU chief said can help both parties diversify military supply chains and improve access to new capabilities, are expected to be the 2 major outcomes from the EU-India summit on January 27.

“Both sides are working intensively to address the remaining challenges and bring the agreement (FTA) over the line,” said von der Leyen, adding that the EU is committed to finding a workable solution to sticking points like CBAM. She also said the FTA would knock off 4 billion Euros in tariffs for exporters.

Without directly referring to the transatlantic strife, von der Leyen, who arrives Saturday for the summit, said the importance of EU–India cooperation when values like multilateralism, international law and democracy are being challenged is greater than before. She said India and the EU can help preserve the rules-based order and shape a safe and resilient world.

Besides the diplomatic signalling, what’s in it for the two sides?

Closer trade ties with India are important to the European Union (EU) because of its rising economic stature. India is the world’s fourth largest and fastest growing major economy and on track to cross $4tn (£2.97tn) in GDP, overtaking Japan this year.

As von der Leyen said in her speech at the World Economic Forum in Davos, the EU blocks joining forces with India would create a free market of two billion people, accounting for a quarter of global GDP.

For Delhi, the EU is already its largest trading bloc, and the deal will mark the restoration of what is called the Generalized System of Preferences (GSP) – which removes import duties from products coming into the EU market from developing countries.

India exported about $76bn of goods to the EU while importing $61bn, earning a trade surplus, but the withdrawal of EU GSP benefits in 2023 eroded competitiveness for many Indian products,” according to Ajay Srivastava of the Delhi-based Global Trade Research Initiative (GTRI).

“An FTA would restore lost market access, lower tariffs on key exports such as garments, pharmaceuticals, steel, petroleum products and machinery and help Indian firms better absorb shocks from higher US tariffs,” says Srivastava.

But India is expected to safeguard politically sensitive areas like agriculture and dairy from the agreement, while sectors like cars, wine and spirits will possibly see tariffs come down in a phased manner, which is in line with the approach it adopted in previous deals – like with the UK.

“India’s proclivity has been to adopt a phased approach towards negotiating trade deals by moving more politically-sensitive issues into subsequent rounds of negotiation. In doing so, the geopolitical symbolism of the deal is as important as the economic substance,” says Bajpaee.

Despite the progress, some deep divides remain.

For Europe, intellectual property protection is a major area of concern. It is seeking better data protection and tighter patent norms.

For India, a new carbon tax known as CBAM (Carbon Border Adjustment Mechanism) imposed by Europe starting this year is a major fault line in the discussions.

The CBAM “effectively acts as a new border charge on Indian exports, even if import duties are eliminated under the FTA”, says Srivastava of GTRI.India “This is particularly damaging for MSMEs [micro, small and medium-size industries], which face high compliance costs, complex reporting requirements and the risk of being penalised using inflated default emissions values.”

Whether the agreement ultimately becomes a “growth-enabling partnership or a strategically asymmetric deal” will depend on how these final issues are resolved, says Srivastava.

But in the longer run it will be a win-win, say analysts.

“Ultimately it could expedite trade decoupling from the US and other unreliable partners. It will mean reducing dependencies on Trump’s America – or China for that matter – reducing vulnerabilities to on-again, off-again tariffs, India export controls and the general weaponisation of supply chains,” says Alex Capri of the National University of Singapore.

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