Given the rising uncertainty about the relations with the USA the EU is seeking to orientate itself more towards Asia. With 1.2 billion inhabitants, India is considered a dynamically growing market, however, it is still relatively closed in regard to global trade. This means a reciprocal free trade agreement could provide new stimulus for the new stimulus for the trade relationship between the EU and India.
Bollywood, Yoga, Call Center – for many westerners, India stands primarily for esotericism and the relocation of services, but less for industrial production and trade in goods. One reason for this is the fact that despite its size, India is a dwarf as far as world trade is concerned. A mere 1.6 percent of global merchandise exports come from India. With a comprehensive free trade agreement between the EU and India, this situation could change. In terms of gross domestic product (GDP), both sides could benefit from such an agreement, as shown by a
recent study of the ifo Institute Munich on behalf of Bertelsmann Stiftung.
A free trade agreement would not only have a positive economic impact, but could also be an important signal in favor of free trade in general, explains Cora Jungbluth, economic expert at the Bertelsmann Stiftung. Moreover, it would be an important strategic step for the EU to improve access for European businesses to Asia’s dynamic markets.
The EU and India could benefit from a free trade agreement – at the sectoral level however there would also be losers
India is currently the EU’s ninth largest trading partner. By contrast the EU is India’s largest trading partner. In 2016 reciprocal trade volumes for goods stood at around €77 billion. There is definitely more potential here, with trade barriers persisting on both sides. A deep free trade agreement would lead to the reduction of tariffs and so-called non-tariff barriers, which could achieve considerable welfare gains. These would be fully felt between 10-12 years after the agreement came into effect.
If an agreement was reached, India could increase its economic performance measured by GDP by 1.3 percent annually. Based on India’s GDP in 2015, this would mean an increase by €25,6 billion. Annual GDP increases for the EU would amount to 0.14 percent on average. Based on the EU’s GDP in 2015, this would mean an increase by €21 billion. Individual member states would benefit to very different extents: with nearly €4,6 billion, Germany, which is India’s biggest trade partner in the EU, would be able to achieve the second highest absolute increases after the United Kingdom (€4.8 billion). For Croatia by contrast, the effects would be a mere €0.02 billion. However, no EU member state would suffer overall negative effects, which is by no means a foregone conclusion when calculations of this kind are made.
As far as individual sectors are concerned, in Germany the motor vehicle sector as well as machines and equipment would benefit the most, with their value added increasing by up to €1.5 billion and €1.4 billion respectively. Here German firms have a competitive edge in India. By contrast, business services, wearing apparel and textiles in Germany would be sectoral losers. Their value added would sink by €511 million, €388 million and €341 million respectively. Therefore, in the exchange of goods between Germany and India, losses on one side at least partially reflect gains on the other. That points to stronger specialization by both countries for particularly competitive products.
At the sectoral level the Indian business services and textiles sectors would, seen in absolute terms, be among the winners from a trade agreement and increase their value added by €6 and €3.3 billion respectively. In these sectors India has a clear comparative advantage. Correspondingly, on the losing side, there are sectors where Indian firms are barely competitive in relation to their European competitors, such as motor vehicles or minerals (value added –€1.5 billion and –€1.1 billion respectively).
For the EU, a free trade agreement with India would be a strategic step towards Asia
Despite its membership in the World Trade Organization (WTO), India is comparatively closed. Although the government under Prime Minister Narendra Modi is open in principle when it comes to economic liberalization, in India, there also are doubts about the real advantages of free trade agreements for the country.
This probably is one of the reasons why the EU has already been negotiating since 2007 for such an agreement with India, but with only limited success. In 2013, the negotiations were actually broken off because of considerable differences in important areas such as investment protection and market access. At a meeting in March 2016 between Narendra Modi, Donald Tusk, President of the European Council, and Jean-Claude Juncker, President of the European Commission, the desire to reach a trade agreement was expressed, but formal negotiations have not yet been resumed.
The greater economic openness achieved by a free trade agreement implies risks and opportunities for both sides, but in particular for India as an emerging economy. On the one hand, the agreement may positively impact innovation, productivity and growth. On the other hand, less competitive and productive sectors will have difficulties to withstand pressure from increased international competition.
In order to resume the negotiations and make further progress, compromises are necessary on both sides. In particular the EU should be aware of its responsibilities towards India as an emerging economy, says Cora Jungbluth. As a rule, trade agreements entail a structural change in the countries concerned. The EU must therefore allow India enough time and flexibility to cope with these changes.
