India-EU Trade Deal Faces Hurdles from Carbon Lobby and Barriers

Negotiations for a long-awaited Free Trade Agreement (FTA) between India and the European Union (EU) are advancing, yet significant obstacles remain. A report from Jefferies highlights that non-tariff barriers, particularly the EU’s forthcoming Carbon Border Adjustment Mechanism (CBAM), pose substantial challenges for Indian exporters.

The CBAM seeks to impose a carbon price on imports, ensuring that imported goods face the same carbon costs as those produced within the EU. This mechanism could significantly impact India’s exports, especially from carbon-intensive sectors. Jefferies noted, “Key concern for India is the many non-tariff barriers, such as the upcoming CBAM mechanism for its exports. We see a limited scope of relaxation here.”

India’s main priority in the negotiations is to gain greater access to services trade. This includes advocating for smoother movement of professionals and more lenient visa regulations, particularly for its burgeoning workforce in technology and healthcare. Conversely, the EU is likely to push for increased access to India’s financial, legal, and other services sectors.

Historical Context and Current Developments

The negotiations between India and the EU began in 2007 but faced delays, stalling in 2013 due to complexity and a lack of consensus. Talks resumed in 2022, and a broad agreement to exclude politically sensitive sectors, such as agriculture and dairy, has raised hopes for a deal in the near future.

In terms of trade volume, India’s annual goods trade with the EU is approximately $130 billion, comparable to its trade with the United States and China. Indian exports to the EU are estimated at $75 billion yearly, accounting for about 17% of India’s total exports. Since 2022, India has also maintained an annualised goods trade surplus of $10–15 billion with the EU, largely driven by increased petroleum product exports following the Russia-Ukraine war and a rise in electronics exports, notably mobile phones.

Sectoral Implications and Opportunities

Jefferies pointed out that textiles and apparel could emerge as key beneficiaries of the FTA. The EU imports around $125 billion worth of textiles annually, with India holding a modest 5–6% market share, compared to China’s 30%. An FTA could level the playing field for Indian exporters, especially as higher tariffs imposed by the United States have negatively affected the sector.

As the negotiations progress, the focus will remain on navigating the complex landscape of non-tariff barriers while seeking mutual benefits that could enhance trade relations between India and the EU. The successful conclusion of this deal would not only bolster bilateral trade but also set a precedent for future trade agreements in the region.