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India and the European Union (EU) are set to encounter a new trade landscape that could pose a significant challenge for negotiators as they resume talks after eight years for a long-pending free-trade agreement.

Negotiations on the India-EU Bilateral Trade and Investment Agreement (BTIA) started in 2007. Talks were suspended in 2013 after 16 rounds of negotiations made little progress. Both sides have explored restarting negotiations after the Bharatiya Janata Party (BJP)-led government assumed power in May 2014, but uncertainties over Brexit and inflexibility of positions prevented a formal resumption.

On Saturday, Prime Minister Narendra Modi will join all 27 EU leaders at a virtual summit hosted by Portugal, paving the path for the resumption of trade negotiations. While the EU will have to deal with an India that is more inwardly focused, with schemes such as Atmanirbhar Bharat and production-linked incentives (PLI), India may find it difficult to meet the sustainable standards in labour and environment on which the EU now lays greater emphasis.

There are also opportunities and some common ground. India seeks to signal that it means business and is not averse to signing trade agreements after it opted out of the Regional Comprehensive Economic Partnership at the last moment. The EU, in turn, wants to diversify its value chain away from China to India and, hence, there is interest on its part also to have a trade agreement with India.

Negotiators from both sides, however, could be staring at several practical problems. “While the EU will say negotiations should continue from the tariff levels as they stood when negotiations started, India may insist on negotiating on the basis of the latest tariffs, which may be higher than in 2017. What position do we take on automobiles as we have started this ambitious PLI programme for the sector? Earlier, we were planning to give a quota to the EU at a much lower duty. On the data front, too, we have been seeking data security status from the EU, but unless we have a comprehensive policy on data domestically, that may not be easy to get. Until we resolve the fundamental issues, progress is difficult to make," a former commerce secretary said on condition of anonymity.

Brexit will also significantly alter the terms of negotiations between the two sides. While India’s demand for allowing greater labour mobility was aimed at Britain, the EU will now no longer insist on tariff liberalization in Scotch whisky and will focus only on getting market access for wine and beer.

The EU would like India to eliminate tariffs in 92-95% of traded goods, said Arpita Mukherjee, professor at the Indian Council for Research on International Economic Relations. “Their argument will be that India should carry out these levels of tariff liberalizations because members of Mercosur, a South American trade bloc, and Vietnam, which are also developing countries, have also signed similar deals. There could also be an e-commerce chapter unlike last time," she said.

The EU may seek greater policy predictability in India through the trade deal, Mukherjee said. “Nowadays, trade partners are increasingly securing predictable and transparent regulatory systems through trade agreements because countries are turning increasingly protectionist, and this is not just about India," she said.

The EU had raised strong objection to India’s unilateral decision to terminate bilateral investment treaties (BIT) with 57 countries, including with EU member countries, to negotiate fresh deals based on a new model.

India brought out a new model of BIT in December 2015, intending to replace its existing BITs and future investment treaties, after being dragged into international arbitration by foreign investors who sued for discrimination, citing commitments made by India to other countries in bilateral treaties.

“The EU is worried and wants to sign a strong investment chapter in the BTIA as now they route their investments through Singapore because there is no bilateral investment protection agreement," Mukherjee said.

There is also a real opportunity for both sides to sign a trade deal. India seeks to signal that it means business and is not averse to signing trade agreements after it opted out of the Regional Comprehensive Economic Partnership at the last moment.

The EU wants to diversify its value chain away from China to India and hence there is interest on its part also to have a trade deal with India.

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