The European Union and India’s failing free trade agreement

Negotiations on a free trade agreement (FTA) between India and the E.U., which would affect 1.7 billion people, began in June 2007, but have not reached a conclusion.

The Prime Minister, Shri Narendra Modi with the President European Council, Mr. Donald Tusk and the President European Commission, Mr. Jean-Claude Juncker, at EU-INDIA Summit, in Brussels, Belgium on March 30, 2016. Photo © Asokan/ Wikimedia Commons

On paper, the European Union (E.U.) and India would form a lucrative trade partnership. The E.U. is India’s biggest trade and investment partner, while India is the world’s fastest-growing economy and has strong links to Europe, with the second-largest diaspora on the continent. Despite this, E.U. officials agree that the relationship is ‘underperforming’. Negotiations on a free trade agreement (FTA), which would affect 1.7 billion people, began in June 2007, but have not reached a conclusion.

The first E.U.-India political summit took place in 2000, and was replicated every year until 2012, when a diplomatic row erupted between Italy, an E.U. member state, and India over the deaths of Indian fisherman at the hands of Italian marines. The thirteenth summit only took place in March 2016 after a four-year gap, but even this did little to dispel the general feeling that the E.U.-India relationship was stagnating. Apart from differing opinions on tariff reductions, there are a number of non-tariff barriers that remain sticking points.

Non-tariff trade barriers

Sanitary and phytosanitary measures (SPS) continue to pose a major obstacle in the FTA negotiations. In 2014, the E.U. took emergency measures to ban imports of Indian mangoes, aubergines, bitter gourd, snake gourd and taro on the grounds that too many of them carried pests such as non-European fruit flies. The Indian government protested the ‘unilateral action’ at the peak of the mango harvest, pointing out that it had just implemented a new system to improve food certification.

Although the majority of Indian mangoes are consumed domestically, E.U. countries are an important export market for fruit farmers, and the ban led to heavy losses. The E.U.’s executive body, the European Commission, finally agreed to lift the ban on Indian mangoes in June 2015, but extended its ban on the vegetables, irritating India further. World Trade Organization (WTO) rules on SPS allow developing countries a longer timeframe to adopt quality control regulations where there is no danger, but the E.U. has shown very little willingness to compromise on this issue.

The E.U.’s refusal to recognise Indian quality control certificates is a significant non-tariff barrier to Indian exporters, impacting particularly on small farmers who are a critical constituency for India’s political class. At the same time, if an E.U.-India FTA does go through, Indian agriculture would come under pressure from an influx of European farm imports. In this sense, Indian food producers would be doubly affected by the FTA as it currently stands.

An ongoing diplomatic row over two Italian marines has overshadowed relations since 2012

Since around 70 per cent of the Indian population relies on agriculture, the sector is heavily protected against cheaper imports by high tariffs and other trade barriers including quotas. It has been a consistent point of contention in world trade talks, notably leading to the collapse of the Doha round of WTO global trade liberalisation negotiations in 2008. Any Indian government that agreed to lower barriers on European agricultural imports would likely face major discontent at home, particularly as the E.U. continues to heavily subsidise its own farmers, who could flood Indian markets.

Visa liberalisation

More than half of India’s population is under 25, and the country’s skilled labour force is growing rapidly. A key challenge for India in the negotiations is the liberalisation of market access for service suppliers. India is pushing to expand opportunities to outsource, particularly in the lucrative information services (I.T.) industry, but the E.U. has been reluctant to confer ‘data secure country’ status because of India’s vague data protection legislation.

Moreover, the outsourcing of jobs to low-cost destinations such as India is now a sensitive political issue within the E.U., where anti-globalisation sentiment is rife, and leaders deemed to endorse the practice are likely to suffer electoral damage. E.U. companies outsourcing to India must follow strict contract terms, raising operating costs and weighing on the country’s attractiveness as a source of cheap labour.

India also wants to liberalise the temporary movement of workers, allowing Indian professionals to work in E.U. countries. This would not only increase Indian access to the E.U. services market, but also boost remittances. However, it would require E.U. member states to recognise Indian qualifications; given the stagnation of many E.U. economies, it is unlikely that member states will be keen to open their labour markets further. Indeed, immigration was one of the key concerns for many people in the U.K. who voted to leave the E.U., and the subject is contentious across the bloc. Work permits and professional standards are decided at the national level rather than at the E.U. level, preventing the bloc from presenting a unified front in negotiations.

The E.U. is calling for India to liberalise its professional services too, to open the market to European accounting and law firms, but this would be highly unpopular with Indian professionals.

The view from Rome

An ongoing diplomatic row over two Italian marines accused of killing two Indian fishermen while on an anti-piracy mission approximately 20.5 nautical miles off Kerala has overshadowed relations since 2012, and remains at the Permanent Court of Arbitration.

Italy argues that India is violating the human rights of the marines, while India sees the E.U.’s stance on the case as an infringement of its sovereignty and an undue focus on a single, bilateral issue. The dispute has had wide-ranging implications, outside of the FTA negotiations: in October 2015, the Italian government vetoed India’s application to the Missile Technology Control Regime, a multilateral partnership to control nuclear missile exports. Several media sources also reported that Federica Mogherini, a European Commission vice president and former Italian foreign minister, blocked the Commission president Jean-Claude Juncker from meeting with Prime Minister Narendra Modi during the latter’s European trip in 2015.

The E.U. has also expressed a desire to bring the 14 Estonian and six British guards of the floating armoury ship MV Seaman Guard Ohio back home after they were sentenced to five years in prison for bringing illegal quantities of arms into Indian waters. These sensitive issues have repeatedly hindered any progress on the FTA.

Rendering India-Italy relations even more complex is the fact that the leader of India’s main opposition Congress party, Sonia Gandhi, is Italian by birth. She is the widow of Rajiv Gandhi, an Indian prime minister whose career was blighted by a corrupt arms deal with the Swedish company Bofors that was mediated by Italian fixers who were close to the couple. India’s Hindu nationalist government is currently promoting her links to alleged corruption in a 2013 order for AgustaWestland helicopters from Italy’s Finmeccanica, not only to accuse Sonia of corruption, which she denies, but also to highlight her Italian origins. In a speech in May, Modi asked a crowd in southern India whether those present knew anyone from Italy, or had ever visited the country, or had relatives there – comments unlikely to endear him to the government in Rome.

Other international priorities?

India has strong relations with individual member states, particularly France, Germany, and the U.K., and the E.U. has consistently failed to demonstrate what added value it could bring to India’s existing bilateral ties. For example, in September 2016, India signed a deal with France to purchase 36 Rafale fighter jets worth EUR7.89 billion; France will invest 30 per cent of the total order into Indian aeronautics research programmes and 20 per cent into the Indian production of Rafale components. In Germany, India has found a partner for its Smart Cities programme, energy and transport infrastructure projects, and initiative to clean the heavily polluted Ganges River.

India has also been one of the first countries the U.K. has engaged with as its exit from the E.U. draws closer. Indeed, without Britain in the E.U., the FTA looks much less attractive to India, given that the U.K. is the major draw for Indian investment inside the bloc and has easily its largest Indian diaspora population. On the other hand, India is now in a position of power, being courted by both the U.K. and the E.U., and it could try to use this as leverage to get concessions from both parties in FTA negotiations.

For its part, the E.U. often seems more interested in ensuring a strong relationship with China, which is a more economically powerful partner than India. For example, the E.U. and China have eight annual ministerial dialogues and 51 sectoral dialogues, whilst the E.U. and India have only one ministerial dialogue and 27 sectoral meetings. Although the number of meetings the E.U. conducts with its partners is not concrete evidence of the depth and density of relations, it does indicate a closer co-operation with China.

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