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2019-08-27

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International Relations
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Illustration of a long shadow waving European Union flag with a rupee coin icon  

As the economy begins to suffer from the U.S.-China trade war, it is imperative for India to pursue a free trade agreement (FTA) with the European Union (EU). Last month, negotiators from both sides met in Brussels, for more talks about talks, but time is now running out for New Delhi.

Moving beyond the U.S. and China, this is the right time for India to engage the EU as an indispensable democratic partner to craft a favourable geo-economic order. A series of economic and geo-strategic factors make the need for an economic deal with the EU more urgent.

First, India risks being left behind amidst a collapsing global trade architecture, rising protectionism and a new emphasis on bilateral FTAs. India is the only major power lacking an FTA with any of its top trade partners, including the EU, the U.S., China and Gulf economies. This situation is not tenable as most trade is now driven either by FTAs or global value chains.

The EU’s revived focus on FTAs could only exacerbate this risk for India. In June, Brussels concluded a trade deal with Vietnam and a historic FTA with the Mercorsur countries in South America. India, in the meantime, is hanging on to its Most Favoured Nation (MFN) status. Its status under the EU’s Generalised Scheme of Preferences (GSP) will face rising competition from Pakistan or Sri Lanka, who enjoy GSP+ benefits.

Stuck in a ‘grey zone’, without preferential FTA tariffs or GSP+ status, India will struggle to keep exports competitive for Europe, its largest trade partner where 20% of its exports land up.

The good news here is that India’s talks with the EU have been advancing slowly but steadily. From agriculture to intellectual property, the EU and India have quietly been exchanging and aligning views. New areas like e-commerce have registered significant convergence because India’s position on data privacy is not that different from the EU’s. As with the EU-Japan deal, India may wish to proceed at two speeds: it could delay discussions about free flow of data for a few years and freeze differences on the tax moratorium issue or data localisation, even while committing to liberalise in other areas.

Second, beyond mere economic cost-benefit analysis, India must also approach an EU FTA from a geo-strategic perspective. With Mr. Trump’s hostile spotlight focussing on India, and lingering concerns about the Regional Comprehensive Economic Partnership, New Delhi must realise the long-term strategic benefits of a trade deal with Europe.

EU negotiators are now more willing to make concessions on labour or environmental regulations, which used to be insurmountable obstacles. The collapse of the Transatlantic Trade and Investment Partnership and concerns about excessive economic reliance on China have propelled the EU to become a little more pragmatic, which New Delhi should leverage before it’s too late.

The EU also offers India a unique regulatory model that balances growth, privacy and standards. India’s governance framework shares the European norms of democratic transparency and multi-stakeholder participation on a variety of new technological domains, from regulating artificial intelligence to 5G networks. New Delhi must see this as a strategic premium that is not accounted for in a strict cost-benefit economic analysis.

When New Delhi speaks of Europe as a strategic partner to uphold a multipolar order, it must go beyond security and begin with the business of trade and technology.

Mohan Kumar, is chairman of Research and Information System for Developing Countries; Constantino Xavier is a Fellow, Foreign Policy Studies, Brookings India

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