EU-India Free Trade Agreement: Deal or No Deal?

Abstract

The European Union (EU) and India are currently negotiating a bilateral free trade agreement (FTA) and investment framework. There is an ongoing debate as to whether the EU-India FTA will act as a building block for the trading partners. This article addresses the broader concerns about compatibility; prospects of and the challenges to the proposed EU-India FTA; identifies the building and stumbling blocks in the ongoing negotiations; and suggests a way forward from a policy perspective. The findings suggest that to maximize the potential benefits of this FTA, trade barriers (tariff and non-tariff) in goods and services sectors should be addressed. This must be complemented by a mutually agreeable time frame to conclude negotiations in areas where interests of the partners vary.

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DOI: 10.1177/139156141001100202
2010 11: 181South Asia Economic Journal
Sangeeta Khorana and Nicholas Perdikis
EU-India Free Trade Agreement: Deal or No Deal?
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EU-India Free
Trade Agreement:
Deal or No Deal?
Sangeeta Khorana
Nicholas Perdikis
Abstract
The European Union (EU) and India are currently negotiating a bilateral free trade
agreement (FTA) and investment framework. There is an ongoing debate as to
whether the EU-India FTA will act as a building block for the trading partners.
This article addresses the broader concerns about compatibility; prospects of
and the challenges to the proposed EU-India FTA; identifies the building and
stumbling blocks in the ongoing negotiations; and suggests a way forward from a
policy perspective. The findings suggest that to maximize the potential benefits
of this FTA, trade barriers (tariff and non-tariff) in goods and services sectors
should be addressed. This must be complemented by a mutually agreeable time
frame to conclude negotiations in areas where interests of the partners vary.
JEL: F14, F15, O19, M38, R28
Keywords
Country and industry studies of trade, economic integration, development, regu-
lation, government policy
Introduction
Regional trade agreements (RTAs) have increased by nearly fivefold over the
period 1990 and 2008, up from 86 in 1990 to 421 in 2008 (WTO 2009a).1 A prin-
cipal reason for the proliferation of free trade agreements (FTAs) is the increas-
ing perception of these arrangements as a means to promote trade liberalization
among the negotiating partner countries (Urata 2008). Among the Asian countries,
Research Article
South Asia Economic Journal
11(2) 181 –206
©2010 Research and Information
System for Developing Countries &
Institute of Policy Studies of Sri Lanka
SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/139156141001100202
http://sae.sagepub.com
Sangeeta Khorana (corresponding author), School of Management and Business,
Aberystwyth University, Aberystwyth SY23 3DD, United Kingdom. Email: sak@aber.
ac.uk
Nicholas Perdikis, School of Management and Business, Aberystwyth University,
Aberystwyth SY23 3DD, United Kingdom. Email: nip@aber.ac.uk

South Asia Economic Journal, 11, 2 (2010): 181–206
182 Sangeeta Khorana and Nicholas Perdikis
India leads with the largest number of FTAs (30), followed by Singapore (26),
China and Korea (22 each), and Japan (19) (Economic Survey 2007–08, Ministry
of Finance, Governmnent of India 2008). As part of the ‘Global Europe’ initiative,
the EU has initiated talks with large and rapidly growing markets around the
world (European Commission 2006a).2 The primary aim of this strategy is to
enhance the competitiveness of EU companies for ‘stronger engagement with
major emerging economies and regions together with a sharper focus on barriers
to trade behind the border’. The EU perceives trading agreements with countries
in Asia such as South Korea, the Association of South East Asian Nations
(ASEAN) and India as well as the Andean Community and Central American
countries in Latin America will be a ‘stepping stone’ to a global market economy
(DG Trade 2007). The ongoing EU-India FTA negotiations are particularly im-
portant for India because the EU is India’s largest trade partner accounting for
more than a quarter of its exports. The FTA with the EU will allow Indian exporters’
preferential access to one of its major markets and this can have potentially far-
reaching implications for world trade. By January 2010, eight rounds of nego-
tiations had taken place between the European Commission and the Indian
government but with no substantial advancement. Given the slow progress of
talks, concerns have been expressed that it might not be possible to conclude FTA
negotiations by the target implementation date of 2010–11 (Khorana et al. 2008).
This article analyzes motivation of the proposed EU-India FTA, its potential
building and stumbling blocks and the various challenges to this proposed FTA
negotiations from the perspective of both the trading partners. The structure of
this article is as follows: The second section draws on the existing literature and
presents the background and debate on RTAs. The third section examines whether
the proposed FTA will maximize trade potential for the trading partners. The
fourth section analyzes the rationale of the proposed EU-India FTA and identifies
the potential building blocks to this agreement. The fifth section sums up the
major stumbling blocks and discusses how diverse negotiating interests may
impede ongoing negotiations. The sixth section concludes with some thoughts on
the way forward.
Contemporary Literature on Regional Trading
Agreements
Contemporary literature suggests that the main thrust for RTAs is both political
and economic (Robson 1998). According to classical and neoclassical trade
theory, economies benefit when they reduce barriers to trade between them (Viner
1950). The more recent ‘domino theory’ suggests when one country joins a
regional bloc it triggers a multiplier effect and gives an impetus to the non-
participating countries to seek membership. This lowers bilateral import barriers
‘like a row of dominoes’ to avoid losses from the trade diversion effect if they

South Asia Economic Journal, 11, 2 (2010): 181–206
EU-India Free Trade Agreement 183
remain outside (Baldwin 1993; Baldwin and Venables 1995).3 Others, however,
are of the view that RTAs are welfare reducing since they are a potential ‘stumbl-
ing block’ that detracts partner countries’ efforts to liberalize at the multilateral
level (Bhagwati and Krueger 1995; Bhagwati and Panagariya 1996; Srinivasan
1998). Overall the literature presents mixed evidence on the effects of integration
for partner countries. On the one hand, the World Bank (2000) finds that a trade
agreement between countries leads to welfare gains (from trade creation) for the
country that is at a lower level of development. On the other hand, United Nations
Conference on Trade and Development (UNCTAD 2007) suggests that market
access gains for developing countries are likely to be limited because most agree-
ments do not cover the reduction or elimination of agricultural subsidies in
developed countries. It also finds that gains are further limited for developing
countries by the restrictive rules of origin, non-tariff measures and supply-side
constraints adopted or implemented by developed countries. Gains, if there are
any, are small because FTAs ‘reduce or fully remove policy options and instruments
available to a developing country to pursue its development objectives’ (UNCTAD
2007).
Analyses of North–South FTAs suggest that an FTA between developing and
developed economies might not extend enormous advantage to developing coun-
tries, in this case India (Polaski et al. 2008; Powell 2008). The literature also cor-
roborates this—according to the neoclassical convergence hypothesis, countries
at a lower level of development will catch-up with higher developed countries
though absolute convergence will occur only when the structural conditions be-
tween partner countries are similar (Krugman and Obstfeld 2003). This, therefore,
leads us to the ongoing debate whether the proposed EU-India FTA will in effect
lead to deep integration and be a building block for the negotiating partners
(CARIS-CUTS 2007; Khorana et al. 2008).
Can the Proposed FTA Maximize India’s Trade Potential?
Recent studies, which analyse trade effects of FTAs, present ample evidence on
the trade creation and diversion effects of the proposed EU-India FTA. The
Government of India report (2007) finds that India will be a net loser in goods
under the FTA scenario, primarily as a result of the loss of revenues from lower or
zero tariffs, though gains are expected to be achieved through services sector lib-
eralization. The study by CARIS-CUTS (2007) shows that liberalization in the
goods sector will lead to an ‘ambiguous’ welfare effect. Powell (2008) estimates
a net welfare loss of about US$ 250 million for India from the potential FTA. The
report by Agence Europe (2007) estimates that the growth in goods trade will be
heavily skewed in favour of the EU and its estimated trade with India will grow
by 56.8 per cent under the FTA, while India’s exports to the EU will grow by
18.7 per cent only. Detailed results show India’s exports could grow mainly in the

South Asia Economic Journal, 11, 2 (2010): 181–206
184 Sangeeta Khorana and Nicholas Perdikis
textile and leather sectors and to some extent in manufactured items and food
products. Achterbosch et al. (2008) employ a computable general equilibrium
(CGE) model and show that the impact of tariff reductions under a possible EU-
India FTA will involve potential losses for India. This study suggests that as far as
offensive export-related interests are concerned there will be gains from improv-
ing access for exports to the EU market that will result in reducing input costs for
export industries in parallel with improved access to high quality inputs. The find-
ings of this study also show that India has little to gain from concluding an FTA
with the EU if it merely involves tariff reductions in trade with the EU. On the
contrary, the EU, which is an important source of industrial imports for India, will
expand its position in the Indian market in industrial and extraction goods, par-
ticularly at the expense of lower cost producers in China.
Polaski et al. (2008) employ CGE modelling to assess the impact of the pro-
posed India–EU FTA. The simulation results for a potential FTA with the EU
shows that Indian exports would increase by about 5.5 per cent and its imports by
3.4 per cent.4 The overall impact on India would be slightly negative, with a wel-
fare loss (US$ 250 million) and decline in the overall real income and private
household consumption. Moreover, the effects of liberalization will vary among
sectors and that the strongest effects on all factors would arise from manufactur-
ing liberalization. In terms of employment generation, the proposed FTA would
increase the demand for unskilled labour modestly, by 0.5 per cent or approximately
2.3 million jobs based on current employment levels. In general, there is overall
scepticism about the potential benefits for India from the proposed FTA.
Ecorys’ (2009) estimates with CGE modelling and gravity equation approach
show that India is expected to gain €4.9 billion in the short run and €17.7 billion
in the long run, while the EU is expected to gain €4.4 billion in the short run and
€1.6 billion in the long run. For sectors like motor vehicles and automotives
sector, the effects on output are expected to be positive for both the EU and India,
especially when dynamic FDI effects are included. Investment flows, as a result
of the FTA and possible future barrier reductions could lead to large (potential)
beneficial effects for both the EU and India, expected to be at €17.7 billion. But
the study predicts a decline in production for the Indian manufacturing sector
with negative employment changes in sectors like paper production, publishing,
transport equipment, processed food and beverages, and tobacco products. The
impact of the FTA on real wages (both skilled and unskilled workers) will also be
positive as real wages are estimated to increase by over 1.5 per cent in India.
Regarding the analysis of trade potential between the EU and India, studies
suggest mixed evidence. Decreux and Mitaritonna (2007) also use CGE model
(MIRAGE) to simulate the impact of reducing 95 per cent tariffs and two possible
scenarios for the services sector. In the first scenario, protection in services is cut
by 10 per cent, while in the second scenario a 25 per cent cut is considered. The
results show positive trade impact on India under both scenarios and show that
EU goods exports to India would grow massively with gains in the terms of trade
for EU exporters. This study finds EU exports of automobiles and machinery

South Asia Economic Journal, 11, 2 (2010): 181–206
EU-India Free Trade Agreement 185
parts to India would increase by 700 per cent, which would account for 82.5 per
cent of the Indian import market. Gains are, however, predicted for the services
sector in India. The findings indicate that the overall impact in terms of Indian real
income is sensitive to the inclusion of relevant sectors for India in the negotiation,
and in particular the services sector will be important for India to reap the full
welfare benefits of an FTA with the EU. More specifically, it identifies software
engineers, accountants and lawyers as the service sectors with the highest trade
potential from the Indian perspective. Other sectors in which India has a high
revealed comparative advantage (RCA)5 are textiles and agro-food products
(Decreux and Mitaritonna 2007). The study by CARIS-CUTS (2007) calculates
the RCA for the top 15 exporting sectors for both India and the EU. The correlation
coefficient is estimated at –0.18 between the EU and Indian export sectors. This
suggests that there is little similarity in comparative advantage patterns between
the EU and India which corroborates the finding that goods liberalization will
result in an ‘ambiguous’ welfare effect. De and Raychaudhari (2008) also esti-
mate the RCA for India’s services exports and find that the RCA increased from
1.14 in 1991 to 1.97 in 2005, which confirms India’s strong comparative advant-
age in the services sector.
Theoretically, the elimination of trade barriers (tariff and non-tariff) will in-
crease effective market access and allow exporters to realize potential economies
of scale. However, this does not necessarily mean that a country’s economic
welfare will increase. The increase in bilateral trade could occur as a result of
more efficiently produced imported goods replacing less efficient domestically
produced goods. On the production side, this would lead to trade creation and
result in allocative and productive efficiency gains. This, in turn, would provide
increased incentives for, both Indian and EU, producers to invest in product and
process innovations, thereby improving their dynamic efficiency. In turn it would
result in greater competition amongst firms. As a result of increased competitive
pressures, firms may decide to modify their strategies to restore their profit
margins. They could do this in the following ways: first, by reducing production
costs, which can be achieved by concentrating on core business activities which
could lead to an increase in intra-industry trade where their competitive position
is strongest. There is a long literature on intra-industry trade and bloc formation
dating back to Verdoorn and Schloctern (1964), Balassa (1965) as well as Murshed
and Perdikis (2000) in the Indian context. Second, this will lead to firms regain-
ing market power through product differentiation.6 This confirms the view of
Krugman and Obstfeld (2003) who suggest that profits are generated from a dif-
ferentiated bundle of goods and as a result this leads to specialization which
increases trade between the trading partners, in this case the EU and India.
Trade diversion would lead to more efficient trade partners being replaced by
less efficient partners. The overall economic efficiency impact of the proposed
FTA will depend on whether trade creation or diversion dominates. In practice,
this will be difficult to measure. In theory, there are several indicators of trade
creation and diversion. For instance, India’s average most favoured nation (MFN)

South Asia Economic Journal, 11, 2 (2010): 181–206
186 Sangeeta Khorana and Nicholas Perdikis
tariffs range between 10 and 15 per cent, which implies that as a result of reduction
in tariffs under the FTA, the EU firms will be able to supply goods at lower prices
which will lead to higher demand for EU products, that is, trade creation. The
possibility of trade diversion cannot be ruled out, which makes the net welfare
effect rather ambiguous. This implies that elasticities of supply and the impact of
tariffs on competitiveness are other important issues which need to be considered
within the ambit of the ongoing negotiations. Given the existing comparative ad-
vantage of the trading partners, the extent of trade creation/diversion has to be
interpreted cautiously. The greater the difference in comparative advantages, the
larger will be the gains from trade creation under the proposed EU-India FTA. An
important factor that needs to be considered is the existing pattern of trade between
the FTA members such that increased trade between India-EU should have the
potential to make the FTA welfare enhancing for both the countries. In the goods
sector, this is more likely to be beneficial for India given that it has a growing con-
sumer base and is, therefore, an important market from the perspective of the EU.
Our analysis of India’s trade shows that nearly a quarter of total Indian imports
came from the EU in 2008. This implies possible and limited trade creation effects
on the consumption side, given the existing dissimilar production structures be-
tween the EU and India. There may though be some scope for limited trade cre-
ation on the production side. This, therefore, translates into an ambiguous effect
though with positive welfare implications.
The Potential Building Blocks and Economic Motivation
for the EU-India FTA
The essence of an FTA is the exchange of trade preferences between the partner
countries, which are not extended to non-partner countries. Preferential liberal-
ization creates new incentives for the private sector and governments to achieve
competitive goals through these agreements. The main objectives and economic
motivations for negotiating the FTA are first, to gain preferential and additional
market access to the negotiating partners’ market; and, second, to leverage tariff
concessions into more substantial gains in subsequent trade talks. On the one
hand, India perceives this bilateral agreement as a means to enhance market access
for its goods (mainly textiles and clothing exports) and service providers in the
EU markets as well as a means to address the existing non-tariff barriers (NTBs)
faced by its exporters. The EU, on the other hand, continues to pursue this bilateral
trade agreement as part of ‘Global Europe’ strategy that prioritizes the new gen-
eration of FTA partners based on the two following economic criteria: market
potential (market size multiplied by the growth rate) and protected markets (both
tariff and non-tariff barriers). India meets all these criteria and constitutes a size-
able market with a total population of over 1.1 billion characterized by a strong

South Asia Economic Journal, 11, 2 (2010): 181–206
EU-India Free Trade Agreement 187
and growing middle class, GDP growth rate between 8 and 10 per cent and sub-
stantial tariff and other non-tariffs barriers (European Commission 2007). Enhanc-
ing market access, therefore, remains the core component of the ongoing FTA
negotiations for both the countries. This argument is further substantiated by first,
the increasing importance of India as a trading partner to the EU; and second, the
growing purchasing power of the burgeoning Indian middle class that makes India
a potentially large market for EU firms. The McKinsey Global Institute (MGI)
predicts that India’s consumer market will be the fifth largest in the world by 2025
(MGI 2007). Neill and Poddar (2008) estimate that the Indian economy could
grow to US$ 28 trillion by 2050 and its per capita income will rise to US$ 17,000
by 2050. Wilson and Purushothaman (2003) find that India has the potential to
be the second largest economy (second to China) and it may possibly overtake the
US in terms of absolute GDP by 2050, even when measured at market exchange
rates. It is clear that these studies support the argument of existing market access
potential in India for foreign firms, in particular EU firms.
Table 1 presents the overall trade patterns between EU-India during 2004–08.
The EU is India’s largest trading partner while India ranks as the EU’s tenth most
important trading partner and that trade in goods more than doubled over 2000–08
(EUROSTAT 2009). In 2008, nearly 22 per cent of India’s total exports went to
the EU and 18 per cent of India’s total imports came from the EU. India’s top
export destinations within the EU were Germany (26 per cent) followed by the
UK (16 per cent) and Belgium (13 per cent). India’s exports of goods to EU have
grown at an average of 14 per cent per year, particularly commodities and manu-
facturing goods.
Trade data on EU-India trade flows suggest that EU exports to India have
increased from US$ 25 billion in 2005–06 to US$ 44 billion in 2008–09. Table 2
presents detailed product group analysis that shows total EU exports to India
increased mainly in machinery and transport equipment and manufactured goods.
These product groups account for over 70 per cent of the total EU exports to India.
Total EU imports increased from US$ 19 billion in 2004–05 to US$ 42 billion in
2008–09, with textiles and clothing and chemicals accounting for most imports
from India. The composition of EU-India trade over 2004–05 to 2008–09 shows
that the EU has a substantial trade deficit with India in agricultural products,
energy, and textiles and clothing which is not the case in machinery and transport
equipment for which the balance is positive. India, however, accounts for just
around 2 per cent of total EU exports in 2008–09.
Table 3 presents detailed tariff profiles for the EU and India. The analysis of
tariffs applied by the EU and India reveals that both industrial and agricultural
products face tariffs under these broad categories. India’s average applied MFN
tariff is 14.4 per cent in 2009 with tariff rates of 34.7 per cent and 10.5 per cent on
agricultural and industrial products, respectively. Though, both the applied and
bound tariffs have declined, they remain high. As a result, the tariff structure
notified by India to the World Trade Organization (WTO) provides protection to

Table 1. Trade Patterns between the EU and India, 2004–09
Year
EU-India Trade Flows India-EU Trade Flows
Imports
(US$ bn)
Share of Total
EU Imports (%)
Exports
(US$ bn)
Share of Total
EU Exports (%)
Imports
(US$ bn)
Share of Total
Imports (%)
Exports
(US$ bn)
Share of Total
Exports (%)
2004–05 23.84 1.59 20.80 1.80 19.30 17.30 18.25 22.17
2005–06 24.55 1.62 26.15 2.03 25.99 17.42 23.23 22.51
2006–07 28.64 1.67 30.65 2.10 29.86 16.07 26.83 21.31
2007–08 39.39 1.84 40.41 2.38 38.45 15.28 34.54 21.17
2008–09 44.21 1.90 46.30 2.40 42.73 14.07 39.35 21.23
Sources: EUROSTAT (2009) and Ministry of Commerce, Government of India (2009).

Table 2. Top 10 Exports and Imports of Goods (Value and Share) for 2008–09
EU Imports from India EU Exports to India
Products
Value
(Millions
of US$)
Share of
Total EU
Imports (%) Products
Value
(Millions
of US$)
Share of
Total EU
Exports (%)
Manufactured goods classified chiefly by
material
10,490 4.73 Machinery and transport equipment 17,335 2.44
Miscellaneous manufactured articles 8,957 3.67 Manufactured goods classified chiefly by
material
12,093 5.41
Machinery and transport equipment 6,268 1.21 Chemicals and related products, n.e.s. 3,641 1.44
Chemicals and related products, n.e.s. 4,109 2.67 Miscellaneous manufactured articles 2,514 1.48
Mineral fuels, lubricants and related
materials
2,857 0.51 Crude materials, inedible, except fuels 1,696 4.64
Food and live animals 2,101 2.32 Commodities and transactions n.c.e. 861 1.88
Crude materials, inedible, except fuels 1,026 1.21 Mineral fuels, lubricants and related
materials
247 0.24
Animal and vegetable oils, fats and waxes 285 2.87 Food and live animals 133 0.23
Commodities and transactions n.c.e. 211 0.47 Beverages and tobacco 83 0.34
Beverages and tobacco 126 1.61 Animal and vegetable oils, fats and waxes 16 0.42
Total 36,431 1.90 Total 38,617 2.41
Source: EUROSTAT (2009).

Table 3. Tariffs and Imports by Product Groups, 2009
EU India
Final Bound Duties
MFN Applied
Duties Imports Final Bound Duties MFN Applied Duties Imports
Product Groups AVG
Duty-
free
(%) Max
Binding
( %) AVG
Duty-
free
(%) Max
Share
(%)
Duty-
free
(%) AVG
Duty-
free
(%) Max
Binding
(%) AVG
Duty-
free
(%) Max Share
Duty-
free
Animal products 28.7 20.6 236 100 27.6 23.8 236 0.2 25.3 105.0 0 150 100 31.6 0 100 0.0 0
Dairy products 67.8 0 225 100 64.1 0 205 0.0 0 65.0 0 150 100 33.8 0 60 0.0 0
Fruit, vegetables, plants 10.8 22.8 233 100 12.4 18.6 233 1.0 17.5 100.8 0 150 100 29.7 0.5 100 1.1 20.5
Coffee, tea 7.2 27.1 99 100 7.2 27.1 99 0.7 83.4 133.1 0 150 100 56.1 0 100 0.0 0
Cereals and preparations 27.0 6.3 124 100 22.3 7.2 123 0.1 6.7 119.4 0 150 100 30.8 11.1 150 0.7 0.1
Oilseeds, fats and oils 6.0 48.2 180 100 6.4 43.4 180 1.2 69.7 168.9 0 300 100 26.2 16.9 100 1.3 0
Sugars, confectionery 31.3 0 143 100 33.3 0 143 0.0 0 124.7 0 150 100 34.4 0 60 0.0 0
Beverages and tobacco 24.3 23.4 239 100 20.7 19.8 203 0.4 23.9 127.0 0 150 100 70.8 0 150 0.1 0
Cotton 0.0 100.0 0 100 0.0 100.0 0 0.0 100.0 110.0 0 150 100 17.0 0 30 0.1 0
Other agri-products 5.2 66.4 133 100 5.8 65.5 133 0.4 70.6 104.1 0 150 100 21.9 11.0 70 0.4 9.1
Fish and fish products 11.2 10.7 26 100 11.8 9.0 26 1.3 5.1 100.7 0 150 13.1 29.6 0 30 0.0 0
Minerals and metals 2.0 49.5 12 100 2.0 49.2 12 18.0 59.4 38.3 0.4 55 59.8 7.4 0.9 10 29.5 0.0
Petroleum 2.0 50.0 5 100 3.1 20.0 5 18.9 83.8 – – – 0 9.0 0 10 29.2 0
Chemicals 4.6 20.0 7 100 4.6 21.4 7 9.2 43.1 39.5 0.1 40 89.0 7.9 0.5 100 8.0 0.5
Wood, paper, etc. 0.9 84.1 10 100 0.9 81.2 10 3.3 85.0 36.5 0 40 62.1 9.1 3.1 10 2.0 3.6
Textiles 6.5 3.4 12 100 6.6 2.1 12 2.4 2.0 29.9 0 142 70.2 14.1 2.4 122 1.3 0.0
Clothing 11.5 0 12 100 11.5 0 12 4.4 0 40.7 0 97 54.9 19.9 0 97 0.0 0
Leather, footwear 4.2 27.8 17 100 4.2 22.7 17 2.4 17.0 35.2 0 40 50.7 10.1 3.1 70 0.8 0.4
Non-electrical machinery 1.7 26.5 10 100 1.9 21.0 10 12.3 54.7 28.2 7.1 40 94.5 7.1 7.2 10 10.1 27.9
Electrical machinery 2.4 31.5 14 100 2.8 20.1 14 11.5 54.8 26.8 27.4 40 93.8 6.9 20.9 10 7.2 64.9
Transport equipment 4.1 15.7 22 100 4.3 12.5 22 5.5 10.8 35.8 0 40 70.5 14.8 4.4 100 5.1 0.1
Manufactures, n.e.s. 2.5 25.7 14 100 2.7 20.6 14 6.7 52.7 31.4 20.2 40 42.5 8.8 4.7 10 2.8 37.0
Source: WTO (2009b).
Note: AVG: average.

South Asia Economic Journal, 11, 2 (2010): 181–206
EU-India Free Trade Agreement 191
agriculture (mainly beverages and tobacco followed by coffee, tea and oilseeds,
fats and oils), automobiles, and textiles and clothing sectors. There are tariff peaks
in excess of 100 per cent in textiles (129 per cent) and beverages and oilseeds
(150 per cent). An analysis of the tariff schedule also suggests tariff overhang.7
The World Bank indicators suggest that tariff overhang has increased from
32.9 per cent in 2005–07 to 35.2 per cent in 2008. Tariff overhang is predominant
in agricultural products, given that India has high bound tariffs than tariffs ap-
plied on these product groups. But generalizing the prevalence of tariff overhang
among all products may not be reasonable given tariffs on a few select commodities,
such as tea, coffee, pepper, cloves, cardamom, poppy seeds, garlic, cut flowers
and honey, have increased over time. As a result these tariff changes have led to
an increase in tariff dispersion, which has more than doubled during this period.
More so, analysis also reveals higher protection for unprocessed than for semi-
processed products and in some cases for semi-processed than for final products
which suggests de-escalation in the MFN rates. Finally, most product groups,
except petroleum and metals and minerals, show tariff peaks equal to or in excess
of 30 per cent. MFN applied tariffs on chemicals, non-electrical and electrical
machinery are low and less than 9 per cent on average (7.9 per cent, 7.1 per cent
and 6.9 per cent, respectively). The explanation for this is India’s reliance on these
imports. Given that these product groups represent over a third of total EU exports
to India (42 per cent) under current trade, the EU may not benefit substantially
from tariff reductions under the FTA.
For the EU, applied tariffs were 5.4 per cent on average (industrial and agri-
cultural goods) in 2009, with 14.9 per cent on agricultural products and 3.8 per
cent on industrial goods. The analysis reveals that tariffs levied by the EU are
lower on industrial goods compared to agricultural products. Tariff peaks are most
prevalent in agricultural products; an example is dairy products with an average
MFN rate of 64.1 per cent (a peak of 231 per cent). Most industrial products, ex-
cept petroleum and chemicals, have tariff peaks in excess of 10 per cent. Given
that EU exports industrial products to India which accounts for nearly three-
fourths of total trade under the current trade, Indian consumers are likely to benefit
financially from tariff reductions under the FTA.
The proposed EU-India FTA aims to eliminate duties on 90 per cent of tariff
lines (at the HS6 digit level) and trade volume within 7 years of the entry into
force of the agreement.8 The remaining 10 per cent of products have been classi-
fied as ‘sensitive products’ and included in the Negative List. India has identified
over 400 products as sensitive, out of which nearly 150 are agricultural products
(Actionaid 2008). Examples of such products are processed food, dairy products,
sugar, fruit and vegetables, meat products including poultry, maize, honey,
mushrooms, egg products, saffron, coriander seeds, vanaspati9 and cocoa powder.
In addition, there are about 250 manufactured items and raw materials that in-
clude some textiles and clothing (that is, woollens), textile machinery, rubber,
cars, commercial vehicles and two wheelers, paper and paper board, furniture,
chemicals, machinery and appliances as well as fish and fish products and wines

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192 Sangeeta Khorana and Nicholas Perdikis
and spirits in the list of non-agricultural sensitive products. Similarly, 226 products
are identified as sensitive by the EU (Actionaid 2008). Examples of these are
chemicals, petrochemicals, plastics, ceramics and glassware.
Stumbling Blocks in the Ongoing Negotiations
Currently, talks have stalled due to diverse negotiating interests of the partner
countries. For instance, on the one hand, India perceives that the FTA could be
employed as a means to enhance market access for its goods (mainly textiles and
clothing exports) and services to the EU markets as well as to eliminate the ex-
isting NTBs faced by its agricultural exports in the EU. On the other, the EU
perceives a bilateral agreement as an opportunity to achieve the objectives of
‘Global Europe’ strategy and allow its firms’ access to the relatively protected
Indian banking, retail and government procurement sectors. The EU perceptions
are based on first, the Indian economy, which has grown at an average rate of over
9 per cent per annum, will continue to grow and trade in goods and services be-
tween the EU and India will increase; second, the purchasing power of the bur-
geoning middle class makes India an attractive and a potentially large market for
European firms.
Proportion of Tariff Lines to be Covered
While the EU wants both the partners to eliminate duties on 90 per cent of tariff
lines and volume over a period of seven years, India has requested that the EU
accepts an asymmetrical deal. This envisages the EU eliminating 95 per cent of its
tariffs but leaving India at 90 per cent which would reflect in the latter’s eyes the
different levels of development between the two parties. The EU has rejected this
proposal and this disagreement has been partly responsible for the talks stalling.
India wants the principle of asymmetry to be retained in the ongoing talks but this
is contrary to the EU strategy which perceives the negotiating partners as equal
players (European Commission 2008). A related issue is that India has to eliminate
tariffs on at least 90 per cent of its total trade which poses an additional question
about identifying and sheltering the appropriate sensitive Indian sectors.10
Extent of Services and Investment Liberalization
Services are an increasingly important sector in the ongoing negotiations. Studies
suggest that India has a strong competitive edge in services trade and that the
share of India’s services trade in overall world trade increased from 0.68 per cent

South Asia Economic Journal, 11, 2 (2010): 181–206
EU-India Free Trade Agreement 193
in 1981 to 2.52 per cent in 2006 (De and Raychaudhari 2008). In value terms,
India has a positive balance of US$ 14.31 billion in total world services trade
(EUROSTAT 2009). Trade in services has also grown rapidly between the EU and
India with an overall surplus in services trade. This is a priority negotiation issue
for the EU and India in the ongoing FTA talks. The importance of including
services in the FTA is substantiated by trade flows—EU investment flows to India
have registered more than a tenfold increase (from less than US$ 1 billion in 2003
to over US$ 12 billion in 2009), which makes the EU an important trading partner
and a source of foreign inward investment in India. Table 4 presents annual trade
flows between India and the EU for services and FDI flows.
Table 4. Bilateral Trade in Services between India and the EU, 2006–08
Commercial Services, Excl.
Government Services (Billion $) FDI Flows (Billion $)
India’s Exports
to the EU
India’s Imports
from the EU EU to India EU from India
2006 9.53 7.84 14.59 3.44
2007 12.93 9.4 16.93 3.026
2008 12.11 10.04 26.9 5.92
Source: EUROSTAT (2009).
Given that services is the fastest growing part of Indian economy which regis-
tered a trade surplus of nearly US$ 2 billion in 2008, the importance of an agree-
ment that includes services is very significant. But the negotiating partners have
different interests. The EU is interested in ‘an ambitious, far-reaching and com-
prehensive agreement on services and investment’ (European Commission 2008).
India, however, has opposite interests particularly in the General Agreement on
Trade in Services (GATS).11 India’s interests lie mainly in the liberalization of
Mode 1 (for example, call centres) and Mode 4 (such as business visas, free move-
ment of independent professionals like software engineers, accountants and
lawyers in both directions). In Mode 1, the focus sectors are research and develop-
ment, dental and health-related sectors and telephone-based sectors. The main
sectors in Mode 4 relate to the mutual recognition of qualifications as well as
more relaxed requirements for visa and labour market tests for Indian service pro-
viders in the EU.
The EU interests are mainly in banking, finance and insurance, retail, account-
ancy, legal, telecom and maritime services in which the EU is aiming for com-
plete liberalization. The EU also seeks to gain additional market access for banks
(commercial presence, cross-border supply and consumption) and consolidate
access in IT and telecom sectors. Market access in moderately liberalized sectors
like health, insurance, education and construction as well as gaining limited access
into restricted sectors also figures on the EU negotiating agenda. Examples of

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194 Sangeeta Khorana and Nicholas Perdikis
completely sheltered sectors in India, with restrictions on foreign direct invest-
ment (FDI), are legal, accountancy, postal and distribution services. For instance,
India does not allow FDI and international presence in the legal services sector.
Similarly, current regulations allow no FDI with limited partnership in the ac-
countancy service sector (the total number of firms is restricted to 20). Postal and
distribution services is yet another that allows price preference be provided for
state-owned and state-run postal operators in India and does not allow FDI. It is,
therefore, expected that the EU would seek to open up these closed services sec-
tors. Besides there are restrictions on capitalization norms in the insurance sector
and a statutory limit imposed on FDI and portfolio investment in nationalized
banks. Given existing regulations limit foreign equity involvement, the EU has
sought removal of restrictions on bank branches. Other concerns voiced are the
norms on foreign ownership, equity ceilings as well as voting rights and investment
by state-owned companies in foreign banks in India. The EU has also suggested
revamping the current approval procedures by the Foreign Investment and Pro-
motion Board (FIPB).12 It has also asked for the elimination of numerical quotas.
Liberalizing norms for participation in the financial sector are, therefore, an im-
portant priority for the EU, given that the European banks are particularly keen to
expand operations in consumer retail finance, wealth management services and
investment banking, which until now have been relatively sheltered in India.
Within this context there are a range of horizontal barriers like dated laws;
multiple rules and regulations; inconsistent practices across states characterized
by many contact points at different levels of the bureaucracy; regulatory gaps;
public sector bias; and limits on foreign investment and ownership that adversely
impact on the current EU-India trade in services (Gasiorek et al. 2007). One
CEPII/CEMIN study finds that consequent to reduction in barriers to services
trade between EU and India, the overall exports of services will increase between
the trading partners. The estimates of this study show EU exports to India will
increase by an average of 10 per cent, while total Indian exports of services is esti-
mated to increase by 5 per cent approximately. Sectors with the highest export
increases from India are business services, transport, communication, finance and
insurance (Decreux and Mitaritonna 2007). For India, liberalizing the services
sector can have long-term implications because it did not list any exemption to the
MFN in its GATS schedule notified to the WTO. This implies that India could be
obliged to multilateralize its commitments made through regional or bilateral
treaties. This is a major stumbling block in the progress of ongoing negotiations
on services. Despite wide-ranging asymmetries between India and the EU, nego-
tiations on banking services cannot be simply construed as a one-way process.
Apart from European banks seeking greater market access to India, a number of
Indian banks (both state owned and private) are also seeking increased presence
in European countries, particularly in the UK and Germany, as they aim to serve
non-resident Indians (NRIs) in these countries.

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EU-India Free Trade Agreement 195
Coverage of the Retail and Manufacturing Industry
In addition, India imposes restrictions on foreign investments in multi-brand re-
tailing and allows a limited 51 per cent foreign ownership in single-brand retail-
ing. This is made worse by the presence of a large unorganized sector in India
that is characterized by low tax compliance and market distortions. Liberalization
of retail investment and distribution in the FTA is, therefore, a key interest of the
European Commission, EU member states and European retailing companies like
Carrefour, Asda/Walmart, Ikea, TESCO and many others that lobby for liberal-
ization under the FTA. There is also mounting resistance to the proposed national
treatment of the retailing sector from non-governmental organizations (NGOs)
and small and medium farmers’ lobbies. These groups are of the opinion that
small retailers and farmers will not be able to withstand the competition from for-
eign retailers. This resistance is also impeding the progress of ongoing talks.
Another contentious issue is enhancing market access for industrial goods. The
EU wants India to reduce its industrial tariffs, which is already under deliberation
in the Non-Agricultural Market Access (NAMA) negotiations of the WTO.13
Given studies suggest the possibility of large trade diversion effects under the
FTA; an EU-India agreement on merchandize trade is unlikely to embody sub-
stantial preferential treatment with regard to market access. An EU-India FTA
will, therefore, deliver little scope for India to achieve efficiency gains for the
industrial sector via adjustments to the pattern of international specialization. This
agreement may eventually deliver more than efficiency benefits if the EU and
Indian firms engage in developing production networks in the post-FTA scenario.
The dynamic effects of such networks may ultimately be significant in the longer
term, given the possible synergies from production networks that will emerge
under the FTA.
Liberalization of the Agricultural Sector
Agriculture is another key sector for India mainly from the perspective of ensur-
ing equity and growth from the FTA. The EU has a highly protected agricultural
sector and India obviously has strong defensive interests in negotiating an FTA
with the EU. Compared to the average applied MFN tariffs, the EU applies a rela-
tively high average tariff on agricultural goods exported by India.14 Within the
context of ongoing talks, India wants the EU to cut tariff and subsidy support on
its agricultural products. In addition, India is concerned about the inadequate at-
tention to safeguard provisions that allow restoring duties on agricultural prod-
ucts to the MFN levels. Yet another shortcoming is that there is no explicit mention
on the use of price triggers in case the EU exports displace Indian agricultural
products. Given that volume triggers are perceived as insufficient to guard Indian

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196 Sangeeta Khorana and Nicholas Perdikis
agriculture, safeguard provisions are an important potentially stumbling block in
the ongoing FTA talks. An added dimension of the safeguard provisions are its
implications at the multilateral level, given that India’s agricultural sector will be
exposed to price and volume risks when tariffs will be reduced multilaterally
under the WTO. The disadvantage is exacerbated by the non-recognition of special
and differential clause.15 India currently enjoys preferential (zero) access to the
EU under the Generalised Scheme of Preferences (GSP) system.16 Some Indian
agricultural exports already enjoy preferential access into the EU markets, so the
possibility of India gaining from tariff reductions under the FTA is reduced.
In addition to tariff reductions under the FTA, the EU wants export restrictions on
raw agricultural products be removed. This then undermines recent government
intervention to avert a food crisis in India. There are other potential road blocks to
the FTA in the form of the Rapid Alert System for Food and Feed (RASFF) and
Rapid Exchange of Information (REI) in the EU.17 Both these fall under health-
related trade restrictions like Sanitary and Phytosanitary measures (SPS)18 and
Technical Barriers to Trade (TBT).19 Any rapid alert in one EU member state leads
to extensive checks of the subsequent consignments in others which pose a major
threat to Indian exports. Other significant barriers include lack of harmonization
of EU microbiological standards and tough norms for horticultural products
(for example, aflatoxin limits in groundnuts) exported by India.
Inclusion of Issues Relating to Competition Policy
The EU is also insisting on a competition policy clause in the FTA. The under-
lying aim is to enhance economic efficiency by promoting or safeguarding com-
petition between firms by ensuring that anti-competitive business practices do not
hinder market access under the FTA. The proposed EU-India FTA includes ‘pro-
visions for rules on agreements between undertakings’ as well as incorporates
provisions on how to prevent the abuse of dominant position by firms in the event
of a merger (European Commission 2007). The EU is reportedly asking India to
provide effective competition in the local market, which implies that this may
impact on India’s flexibility to design a competition policy suitable for its eco-
nomic development. India perceives that this is a means to secure greater access
for EU companies in the Indian market. Within the ongoing negotiations the EU
has also raised questions regarding India channelizing trade through designated
government agencies and state trading enterprises (STEs) as well as voiced con-
cerns that agricultural and petroleum products are traded in a discriminatory man-
ner (EU Market Access Database 2007).20 On the other hand, India has suggested
that the EU agricultural subsidies should be included under state aid in com-
petition policy.

South Asia Economic Journal, 11, 2 (2010): 181–206
EU-India Free Trade Agreement 197
Reluctance to Negotiate Government Procurement
This is another priority issue for the EU and a bone of contention between the
partners. The economic rationale for negotiating government procurement follows
from first, the obligations of non-discrimination and transparency, and second, the
perceived benefits of improved market access through exports, lower procure-
ment costs, efficient resource allocation and overall efficiency gains. The EU has
complained that the ‘Indian government procurement practices are often not trans-
parent, discriminate against foreigners and often give preferences to the locals’
(EU Market Access Database 2006).21 Given government procurement accounts
for nearly 13 per cent of India’s GDP, the Indian government insists it will not
include public procurement in the EU-India FTA agenda. The Indian government
perceives that negotiating government procurement will undermine its policy to
support the medium and small sector. Besides, India also sees this as a restriction
on its ability to procure from local firms in remote areas as part of its policy for
balanced regional development. An indirect risk associated with the foregoing
socio-economic dimension is the possibility that social objectives could be trans-
lated into economic costs. This is objected because first, it may result in possible
reductions of domestic procurement supplies. Second, this will have a knock-on
impact in terms of employment generation in India when it opens up government
procurement to more competitive foreign suppliers (Khorana 2002). India’s re-
luctance to negotiating government procurement is also partly due to huge ad-
ministrative costs involved to enact the necessary legislation as well as to set up
institutions to implement obligations in a transparent manner. For the EU, ‘the
inclusion of procurement is essential for the balance of the agreement and the FTA
without procurement is not on the negotiating table’ (European Commission
2008). This again is a major stumbling block in the ongoing FTA negotiations.
Prevailing Non-tariff Barriers
Non-tariff barriers in the current EU-India trade have the potential to impede the
benefits of this proposed FTA in both the EU and India. These obstacles have been
established by legislation and often derive from practical implementation and
relate to the overall macro environment in the EU and India. The High Level
Trade Group report (2006) highlights the concerns of the trading partners over the
potential of NTBs to impede the benefits of deep integration from the FTA. The
report states ‘…both parties are convinced that substantial benefits could be
achieved through the elimination of non-justified non-tariff obstacles to trade. In
this context, both partners support a flexible mediation mechanism to tackle
non-tariff barriers. Such a mechanism could also be explored at the bilateral
level…’22

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198 Sangeeta Khorana and Nicholas Perdikis
From an Indian perspective, the existing NTBs are attributed to divergences in
the regulatory framework between the EU member states. These are due to lack of
uniform conformity assessment criteria; different national product standards on
health and safety, labelling, marking and packaging requirements; and environ-
mental regulations. The barriers relate to restrictions and minimum limits on the
use of chemicals mainly in footwear and clothing. Instances of such requirements
in footwear are azo dyes (these are prohibited beyond the limit of 30 ppm by EC
Directive 2004/21/EC); chrome IV (prohibited beyond the 3 ppm limit by EC
Directive 2004/96/EC 4); cadmium (permitted up to 100 ppm by Directive 91/338/
EEC); as well as polychlorinated biphenyls (PCBs) and polychlorinated terphenyls
(Directive 85/467/EEC). In the clothing sector, there are specific regulations on
safety for children’s clothing (Directive 2001/95/EC).23 Compliance with add-
itional standards is also required. Examples of these are ISO 9001:2000,24 Social
Accountability 800025 (SA) and Worldwide Responsible Accredited Production26
(WRAP). Given that the EU guidelines lay down only the minimum standards
for imports, the member states’ legislation often require compliance with more
than the minimum requirements which increases the total costs for Indian ex-
porters. Presently the ecological criteria of the EU are implemented through the
Registration, Evaluation, Authorisation and restriction of Chemicals (REACH)
directive.27 Often the buyers ask for more than the minimum environmental
regulations which adds to the exporters’ costs. The regulation on residues in raw
hides and wet-blue leather (EU Directive 76/769/EEC of July 1976) is another
example commonly associated with leather tanning industries that manifests as a
recurring barrier for footwear exporters. Multiplicity of labels in the different
EU member states is another potential problem.28 Yet another is the requirement
for exporters to self-certify for azo-colorants29 in dyed leathers (tests are done
according to CEN ISO/TS 17234:2003) and textiles (tested under EN 14362-
1:2003). The recent study by Khorana et al. (2008) finds that as a result of the im-
porters enforcing these in excess of the minimum requirements, most small firms
are unable to export to the EU market.
This problem of NTBs is not confined to the Indian exporters. The EU exporters
also face market access barriers when exporting to India. Examples of these bar-
riers are sanitary and technical standards, marking and labelling requirements,
shelf-life requirements and mandatory certification of products as well as import
restrictions on products like marble, granite and glazed newsprint. For instance,
India’s Textiles Regulation 1998 (on consumers’ protection) imposes regulations
on yarns and fabrics.30 Border red tape like customs valuation and documentation
formalities, inter-state barriers and local entry tax are other important barriers that
impede effective market access for the EU exporters. The World Bank (2007)
highlights that it requires 20 procedures and takes 224 days for companies to set
up a warehouse to gain access to the Indian market. Another example is the system
of existing additional import duties that roughly doubles the duty at entry.31 In
addition to customs duties, there are other charges that apply to textiles products.

South Asia Economic Journal, 11, 2 (2010): 181–206
EU-India Free Trade Agreement 199
These are supplementary taxes on additional duty, calculated as a percentage of
the base rate of the additional duty. For example, if the base rate of additional duty
is 12 per cent and supplementary tax is 8 per cent, then the effective rate of the
additional duty is 12.95 per cent (12%∗[1 + 0.08]). Then an additional excise duty
for goods is applicable between 5 and 8 per cent of the landed value. And finally
a ‘cess’ duty of 0.05 per cent is levied on imported products. This cumulative cal-
culation increases total import duties significantly. In addition to these, individual
state governments levy a ‘cess’ tax of 15 per cent on textiles products and this
varies between the different states—West Bengal and Maharashtra impose a tax
that ranges from 4 to 5 per cent.
Conclusions and the Way Forward
The underlying rationale for EU-India FTA is that, both on a global and bilateral
level, India is growing in economic importance. The proposed EU-India FTA will
have potentially far-reaching implications, given the rapidly increasing value of
trade between the EU and India. The progress of negotiations has been jeopardized
by the various stumbling blocks that can be attributed to the diverse interests of
the EU and India. Two main findings emerge: first, both the EU and India have not
been able to arrive at a consensus on the level of trade to be covered under the
proposed FTA on which tariffs will be eventually eliminated. Second, there are
differences in the main issues that need to be focused on in the ongoing negotiations.
On the one hand, the EU aims to address deeper integration issues like competition
policy, the rights of foreign investors, government procurement and environ-
mental clauses.32 On the other, India is facing increasing pressure from its domestic
lobbies not to negotiate these issues on grounds of livelihood concerns. Besides
there is also resistance from small-scale producers that the FTA may adversely
affect these businesses. What emerges clearly is that there are fundamental dif-
ferences between the negotiating countries—for the EU, the guiding force is the
‘Global Europe’ strategy, whereas for India it is a general broader framework of
trade liberalization. Another related obstacle is the difference in their negotiating
perspectives. For instance, India perceives that the EU and India are not equal
partners; as a result India is demanding an ‘asymmetrical’ approach. The EU does
not recognize this and treats India as an equal partner. This poses the problem of
‘imbalance between the two parties and the extent of proposed coverage of sectors’
(Powell 2008). Tariff reduction may then not be a potentially explosive issue but
the negotiating partners’ thrust (which is guided by diametrically opposite inter-
ests) to gain additional market access in critical areas like services, government
procurement and competition policy, together with the growing opposition of
domestic interest groups may impede the progress of the talks. If no clear agree-
ment emerges in these areas it is apparent that the FTA can at best result in shallow
integration which is likely to generate losses through trade diversion.

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200 Sangeeta Khorana and Nicholas Perdikis
The only solution to address the stumbling blocks is a phased liberalization of
the goods and services sectors with a definite time frame to conclude the nego-
tiations in other areas. It is imperative that the incidence of existing NTBs in the
goods and services sectors be addressed, as their elimination is a necessary con-
dition for deeper integration. Steps suggested to enhance effective market access
include consultations and a joint collaborative review between the Indian and EU
agencies. These should identify specific areas of regulatory divergence that have
to be tackled between partner countries in the goods and services sector. This will
also help develop an understanding of the regulatory compliance requirements.
In addition, this will provide the much needed transparency in regulations and
facilitate information dissemination to the exporters. Simplification and trans-
parency in information and procedures is a must. The starting point can be the
identification of best practices on transparency mechanisms in the EU member
states. It is important to mention here that trade facilitation and capacity-building
measures are integral to the success of the ongoing FTA talks. From the Indian
perspective, technical assistance and capacity building are vital to address the
regulatory divergence that manifest as NTBs for Indian exporters. Capacity build-
ing through technical assistance in India will allow Indian exporters to respond to
the challenges of EU trade regulations, standards and environment requirements.
Besides, trade facilitation measures in export, import and transit procedures are
equally essential. An important issue that needs to be addressed is the promotion
of standardized and simplified documentation for exports and imports. Transparent
procedures for legal recourse and appeals, complaints or mediation services in the
case of disputes with the customs authorities will also facilitate business. Setting
up a time frame for the establishment and functioning of a single window sys-
tem for the clearance of products at all the major Indian ports should be a priority.
The ongoing reforms in Indian customs need to be continued with support from
the EU. Capacity-building measures can also help sustain India’s international
trade potential by stepping up trade-related financial support to address the ex-
isting infrastructure shortages. Public private partnerships (PPPs) are the recom-
mended options as these promote investment in infrastructure at low costs, help
build a competitive business environment and also develop investment oppor-
tunities between the EU and India. This will in turn lead to integration between
the EU and India in the long run and foster an overall enabling business environ-
ment within the present pattern of trade.
Acknowledgements
This article includes material researched for the project ‘Convergence towards Regional
Integration between the EU and India: Trade Implications for the UK and India’. The authors
acknowledge the funding support from the British High Commission, India. We also thank
the researchers at Indian Council for International Economic Research (ICRIER) for their
research support and contribution to the fi nal report. Authors are grateful to anonymous
referee of the journal for useful comments. The views presented in this article refl ect our
own views. The authors remain solely responsible for any remaining errors or omissions.

South Asia Economic Journal, 11, 2 (2010): 181–206
EU-India Free Trade Agreement 201
Notes
1. The figure includes those FTAs which became inactive as well as those which are
active. The figures are taken from WTO’s website (World Trade Organization 2009a).
2. This strategy outlines the road map for comprehensive trade liberalization within the
framework of bilateral relations (European Commission 2006a).
3. Trade diversion occurs when sources of supply switch away from the non-FTA partner
suppliers to the new FTA partner.
4. The largest increases are in exports of apparel and textiles, which would increase by
US$ 1.9 billion, followed by increases in the category ‘other manufacturing’, notably
leather and footwear (an increase of US$ 520 million), chemicals (US$ 220 million)
and services (US$ 230 million). India’s imports would increase by US$ 2.6 billion
(3.4 per cent), and the main increase would be in manufactured goods, particularly
capital goods (US$ 2.1 billion).
5. The RCA measures a country’s exports of a commodity relative to its total exports and
compares this to the world exports of a commodity relative to total world exports.
6. Product differentiation enables a firm to neutralize threats and exploit opportunities.
The threat of new entry can be neutralized by forcing new firms to absorb the additional
costs associated with overcoming incumbent firms’ differentiation bases. The threat of
rivalry is reduced when firms develop a unique niche. Substitutes can be neutralized
when firms’ products appear more attractive than substitute products. The threat of
power from suppliers is neutralized when the product-differentiated firm has loyal cus-
tomers who are willing to pay higher prices when the suppliers raise prices. Threats
from buyers may be neutralized when a firm sells a highly differentiated product that
buyers cannot obtain from other sources.
7. Francois and Martin (2003) show that there is ‘binding overhang’ when the applied
tariffs are lower than the bound rate. The difference between these is called ‘water’ or
the ‘binding overhang’.
8. India is, however, insisting that the EU should eliminate tariffs on 95 per cent of the
goods under the FTA instead of the 90 per cent being targeted by the EU-India High
Level Trade Group.
9. This is purified hydrogenated vegetable oil similar to margarine and fortified with
vitamins A and D.
10. Products identified as sensitive by India are mainly agricultural exports like vegetables,
fruits, wines and spirits, as these are particularly relevant from the perspective of both
the negotiating partners.
11. Refer, for example, Services Gateway, WTO. The GATS distinguishes between four
modes of supplying services: cross-border trade (Mode 1), consumption abroad
(Mode 2), commercial presence (Mode 3) and presence of natural persons (Mode 4).
Cross-border supply is defined to cover services flows from the territory of one member
into the territory of another member (for example, banking or architectural services
transmitted via telecommunications or mail; outsourcing); consumption abroad refers
to situations where a service consumer (for example, tourist or patient) moves into
another member’s territory to obtain a service; commercial presence implies that a
service supplier of one member establishes a territorial presence, including through
ownership or lease of premises, in another member’s territory to provide a service (for
example, domestic subsidiaries of foreign insurance companies or hotel chains); and
presence of natural persons consists of persons of one member entering the territory

South Asia Economic Journal, 11, 2 (2010): 181–206
202 Sangeeta Khorana and Nicholas Perdikis
of another member to supply a service (for example, accountants, doctors or teachers).
The Annex on Movement of Natural Persons specifies, however, that members remain
free to operate measures regarding citizenship, residence or access to the employment
market on a permanent basis.
12. FIPB is the only governmental agency that deals with FDIs and investments into India.
Its main objective is to promote FDI into India by undertaking investment promotion
activities in India and abroad by facilitating investment through international companies,
non-resident Indians and other foreign investors. All the proposals submitted are
cleared after discussions with the potential investors.
13. NAMA refers to all products not covered by the Agreement on Agriculture. In other
words, in practice, it includes manufacturing products, fuels and mining products, fish
and fish products and forestry products.
14. Main agricultural export products from India are tropical products, fruit and vegetables,
oilseeds and oils and cereals. Most agricultural products are imported by the EU under
preferences from developing and less developed countries in Africa and Asia.
15. Special and differential treatment incorporates specific provisions on non-reciprocity
between developed and developing countries. There are specific provisions in the
multilateral agreements to treat developing countries more favourably than the other
WTO member countries with a higher level of development.
16. Under the existing GSP scheme, developed countries allow non-reciprocal trade pre-
ferences to developing countries and the least developed countries in the form of
exemption from and/or a lower duty on notified agricultural and industrial products.
The existing EU GSP scheme (Council Regulation No: 980/2005 of 27 June 2005)
provides that most eligible products will continue to attract a reduction of 3.5 per cent
points in the full ad valorem rate of customs duty payable.
17. These rapid alert systems restrict the marketing and use of any such product that is
found to be posing serious and immediate danger to consumers’ safety and health by
swiftly exchanging information.
18. The SPS Agreement concerns the application of food safety and animal and plant health
regulations. It allows countries to set their own standards. It also requires regulations
must be based on science such that these should be applied only to the extent necessary
to protect human, animal or plant life or health. And they should not arbitrarily or
unjustifiably discriminate between countries where identical or similar conditions
prevail. For details see World Trade Organization (1995).
19. The Technical Barriers to Trade Agreement tries to ensure that regulations, standards,
testing and certification procedures do not create unnecessary obstacles. However,
the agreement also recognizes countries’ rights to adopt the standards they consider
appropriate; for example, for human, animal or plant life or health, for the protection
of the environment or to meet other consumer interests. For details see World Trade
Organization (1995).
20. For details see EU Market Access database (2007).
21. For details see EU Market Access database (2006).
22. For details see European Commission (2006b).
23. The use of cords in the head and neck areas for children and young persons aged 7 to
14 is restricted. Restrictions apply mainly to the length of the cords, use of elastic cords
and the characteristics of toggles.

South Asia Economic Journal, 11, 2 (2010): 181–206
EU-India Free Trade Agreement 203
24. ISO 9001:2000 is based on eight quality management principles which are customer
focus; leadership; involvement of people; process approach; systems approach; con-
tinual improvement; fact-based decision making; and mutually beneficial supplier
relationships.
25. SA8000 is an internationally accepted instrument for implementing social accountability
for a social management system. It is based on the internationally accepted ILO labour
standards, but includes tools to implement social standards through the entire system of
a company. SA8000 is gaining ground in many industries worldwide because it is the
only internationally accepted management system for implementing and monitoring
social standards for labour conditions.
26. WRAP monitors factories for compliance with detailed practices and procedures im-
plied by adherence to the following standards: compliance with laws and workplace
regulations; prohibition of forced labour; prohibition of child labour; prohibition of
harassment or abuse; compensation and benefits; prohibition of discrimination; hours
of work; prohibition of discrimination; health and safety; freedom of association and
collective bargaining; environment; customs compliance; and security.
27. The REACH directive is an EU measure that attempts to improve the EU environment
by regulating chemicals used in the production of products. REACH is one aspect of
the EU’s New Chemicals Policy (NCP), which replaces 40 pieces of EU legislation
regarding chemicals and the environment with one directive that covers all aspects of
EU chemicals policy. For details, see UK Reach Competent Authority (2009).
28. In the EU there are government and private labelling schemes. Some examples of
government-sponsored schemes include Blue Angel (Germany), Ecomark (Japan),
Environmental Choice (Canada), White Swan (Nordic countries), Eco-Mark (India)
and Green Label (Singapore). Similarly, private labelling schemes have Öko-Tex
(Germany), Green Seal (USA), Bra Miljöval (Sweden), Britta Steilmann Collection
(Germany). There are, in addition, private environmental labels which the importers
want the suppliers to meet. An example of the use of voluntary environmental labels by
the EU member states is the introduction of Markenzeichen Schastoffgeprufth Textilien
(MST). Another label is Markenzeichen Unweltschonende Textilien (MUT) which set
norms for production processes and lays down standards on the degree of air, water
and soil pollution. Apart from this, a private label like Ökotex has been developed by
Ostereichisches Textil-Forschungsinstitut, which sets norms for both, the raw material
and final products.
29. Azo-colorants are the most important class of synthetic dyes and pigments, representing
60–80 per cent of all organic colorants. They are used widely in substrates such as textile
fibres, leather, plastics, papers, hair, mineral oils, waxes, foodstuffs and cosmetics.
30. This requires marking of words and letters to be in Hindi and English (in capital letters).
The numerals marked have to conform to the international numerals, with instructions
on the height of characters (0.5 cm for yarn and cloth and 0.25 cm for packed yarn
and 3 cm on the bale/case) as well as the colour of ink for marking (all allowed except
red).
31. The method for the calculation of import duties and the administration of tariffs through
numerous notifications makes the tariff structure complicated and non-transparent.
Some of the basic features of the EXIM policy 2008–09 show that the level of customs
duty is prohibitive.

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204 Sangeeta Khorana and Nicholas Perdikis
32. For instance, the EU is demanding the inclusion of social and environmental standards
in the bilateral framework agreement. The main reason for this is that the EU wants to
use the FTA negotiations as a means to ensure implementation of the internationally
agreed social and environment standards by its partner countries, in this case India
(European Parliament 2009). For more details, see European Parliament (2009).
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