EU-India FTA and implications for Sri Lanka

After nearly two decades of painstaking negotiations, India and the European Union (EU) successfully concluded negotiations on a landmark Free Trade Agreement (FTA) last month. The trade pact intends to liberalise trade and investment between the two economies through planned commitments covering goods, services, and regulatory cooperation. Both India and the EU together account for 23% of the global GDP (close to $ 25 trillion) and 25% of the world’s population (2 billion). Currently, cross border goods and services trade between the two regions is close to $ 220 billion.   

The deal is widely seen as a strategic hedge against the′ volatile trade policies and tariff threats of the Trump Administration. The White House imposed a 15% tariff on EU imports last year despite agreeing on a trade deal with the bloc, while goods from India were slapped with a more punitive 50% because of its ongoing oil purchases from Russia. Many analysts opine that Trump’s unpredictable trade policies hastened the finalisation of the landmark deal.

As per the agreement, both parties are expected to remove or reduce tariffs on more than 90% of the goods traded between the two regions. The powerful European block expects the trade deal will help the region to double its exports to India by 2032. India will reduce tariffs on over 90% of European exports to India such as autos, machinery, agri-food products, chemicals, and aircrafts. Similarly, the deal would provide New Delhi with preferential access to the European markets for more than 90% of its traded goods. Key export items from India to the EU like textiles, apparel, marine, leather, footwear, chemicals, plastics, sports goods, toys, gems, and jewellery will become eligible for zero duty once the FTA comes into force. Before the deal, the EU tariffed the aforementioned labour-intensive sectors of the economy at rates of between 4% to 26%.

While India exports labour-intensive and downstream products, Europe supplies high-tech products like machinery, aircraft, electronic components, medical devices and industrial inputs. Hence, the two economies are complementary, not competitive. The empirical evidence suggests that a trade agreement signed between a developed economy and a developing economy often creates a win-win situation for both parties concerned.

The trade deal could create six or seven million jobs in the textile sector – the second biggest employer in India after agriculture, according to India’s Minister of Industry and Commerce Piyush Goyal. The two trading partners have also agreed to enable temporary entry and stay for professionals and independent professionals, which would benefit India’s strong IT industry.

Between 2000 and 2025, India signed 15 new trade agreements covering 33 countries, and three PTAs covering seven countries. The deal with the EU is India’s 9th FTA in just four years. In stark contrast to its giant neighbour, Sri Lanka has entered into just four bilateral trade agreements over the last 25 years. Unfortunately, two of them are not even operational – agreements with Singapore and Thailand. New Delhi adopts a highly professional and systematic approach towards reaching FTA with its trading partners and does not rush through like its southern neighbour. Whereas Colombo does not have a proper mechanism towards negotiating FTAs and sometimes the Department of Commerce is sidelined from trade negotiations.

The deal would undeniably challenge Sri Lanka’s exports to the EU, as India is a competitor of Sri Lanka’s main export commodity to the EU – garments. Last year, Sri Lanka earned $ 1.58 billion from apparel exports to the EU. The latest development makes the continuity of the EU GSP+ trade concession extremely vital to safeguard the island’s largest export industry. Currently, Sri Lankan garments qualify for EU cumulation rules for fabrics purchased from India. It is unclear whether the same arrangement would continue when the landmark deal comes into effect.  

Importantly, Sri Lanka needs to closely study India’s foreign trade policy and its professional approach towards forging FTAs with its trading partners to turnaround its dismal track record in terms of trade liberalisation.