India: Next in Line for an FTA with EU?

by Michelle Chang, BASC Research Assistant

On Oct. 15th this year, the European Union inked a free trade agreement with South Korea that has been in negotiations since 2007. The FTA caused much controversy among the European auto sector as auto makers expect the deal to asymmetrically benefit Korean auto makers. Nevertheless, trade officials on both sides pushed forward with the FTA that has a potential value of €100 billion to both economies and would speed up recovery from the current economic crisis. Expected to come into effect early next year after approval by the European Parliament, the FTA is considered the EU bloc’s greatest trade success to date.

The successful signing of the S. Korea-EU FTA has given EU renewed hope and momentum to push for new trade agreements. India seems to be its next major target.

EU is currently India’s largest trading partner. According to the European Commission’s 2007 statistics, EU goods exports to India were valued at €26.2 billion while goods imports from India stood at €29.4 billion. With a potential market of over one billion people, India is also one of EU’s most important trading partners. The India-EU FTA talks were launched in 2007 but have not made significant progress. After the Indian general election in May this year, India emerged with a stronger and more stable government than before, setting up a better political framework for bilateral trade talks.

With the India-EU Summit scheduled for November, trade officials on both sides have made significant efforts in the past few weeks to reinvigorate their trade negotiations. Such ambitious goals have been made to boost bilateral trade to $200 billion in the next four years.

However, while much energy is put into speeding up the completion of this FTA, there are many disputes that need to be resolved. Neither EU nor Indian trade officials are expecting the completion of the FTA anytime soon.

First of all, there have been major disputes over the inclusion of issues beyond trade in the trade deal. The EU already has to make a compromise by excluding climate change issues in the talks. However, EU’s intention to include labor issues in the deal is met with India’s definite and uncompromising opposition. The latter insists that it would not agree to anything beyond pure and simple trade issues.

Secondly, India has proposed asymmetrical tariff liberalization that requires the EU to cut more tariffs than India. Not surprisingly, this proposal is not well received among EU member states.

Thirdly, the issue of public procurement has attracted much concern. Due to the federal nature of India, India can only liberalize the public procurement market on the federal level while unable to impose liberalization on state markets. While this issue has caused much dissatisfaction among EU states, it is something for which the Indian government can do little due to the nature of its political system.

Both EU and India are genuinely pushing for the speedy signing of their FTA, but the different political, economic, and social circumstances faced by the two parties have made the road ahead full of obstacles. Many compromises have indeed been made by both sides. Yet it is still uncertain how many more compromises are needed to satisfy both sides and if they are willing to go so far. Nevertheless, the existing disputes can be interpreted as a sign that both sides are very much engaged in the bilateral talks. More importantly, the two parties are not wiling to sacrifice quality for speed. The signing of a comprehensive agreement that is satisfactory to both sides can help avoid potential disputes in the future.