India-EU FTA: Confronting the Regulatory Challenge in Trade Relations
India and the European Union have successfully concluded negotiations for a comprehensive Free Trade Agreement, marking a significant milestone in bilateral economic relations. This agreement aims to establish regulatory certainty in an increasingly volatile global trade landscape that has compelled nations worldwide to reassess their strategic trade partnerships and alliances.
The EU's Regulatory Dominance in Global Trade
While the United States has historically utilized tariffs as its primary instrument of trade influence, the European Union has cultivated a different approach to global economic leadership. For decades, Brussels has projected its influence through an ever-expanding framework of stringent regulations that span multiple sectors including food safety, chemical management, and engineering standards. This regulatory network creates substantial compliance burdens that often discourage exporters from non-EU nations.
Trade analysts emphasize that the India-EU FTA presents India with a crucial legal opportunity to leverage its rapidly expanding consumer market as bargaining power. This strategic positioning could help address the challenging EU standards that might otherwise undermine the potential benefits of the trade agreement. Experts warn that failure to resolve regulatory disparities within the legal framework of the agreement could result in significant trade asymmetry between the two economic partners.
Expert Insights on Tariff Realities
Sangeeta Godbole, a former revenue service officer and experienced EU trade deal negotiator, provides critical perspective on the agreement's implications. She notes that approximately 80 percent of India's current exports to the EU already face minimal tariffs of less than 1 percent even without the FTA. Consequently, Indian goods may not achieve substantially improved market access once the agreement is formally signed, especially when compared to the significant tariff reductions India would offer across a broad spectrum of imported goods.
"Indian shipments require protection from excessive environmental regulations that are already creating compliance difficulties for Small and Medium-sized Enterprises within the European Union itself," Godbole emphasizes. "The EU has previously granted exemptions to the United States, creating a concerning precedent where large polluters receive special treatment while developing nations face pressure to comply with rigorous standards. This dynamic risks diminishing whatever tariff advantages India might gain through the FTA."
Carbon Border Adjustment Mechanism: A New Trade Barrier
The European Union implemented the world's pioneering carbon taxation system, known as the Carbon Border Adjustment Mechanism (CBAM), effective January 1 of this year. This innovative policy imposes carbon-related charges on imports from sectors including power generation and energy-intensive industries such as cement, steel, aluminium, oil refining, paper production, glass manufacturing, chemicals, and fertilizers originating from countries with less ambitious environmental regulations than the EU.
CBAM contains provisions allowing EU lawmakers to expand the list of products subject to these levies over time. India's export portfolio to the EU, which prominently features aluminium, iron, and steel products, stands particularly vulnerable to these regulatory measures. Indian steel exports have already demonstrated contraction during CBAM's transitional implementation phase between 2023 and 2025.
Since January 1 this year, every shipment of Indian steel and aluminium entering European markets carries an embedded carbon cost. According to analysis from the Global Trade Research Initiative (GTRI), numerous Indian exporters may need to reduce prices by 15 to 22 percent to enable EU importers to utilize those margins for CBAM tax payments.
Indian exporters have formally communicated to the Commerce and Industry Ministry that CBAM functions as a non-tariff barrier, particularly when combined with EU restrictions on scrap exports under new recycling policies. This development is especially significant given that the European Union represents the world's largest producer of steel scrap, a crucial input for low-carbon steel manufacturing.
EU Deforestation Regulation: Agricultural Export Challenges
The European Union's Deforestation Regulation (EUDR), designed to prevent products sold within EU markets from originating from deforested lands, was initially scheduled for implementation in December 2024. The European Parliament subsequently extended this timeline to December 2026 to allow for more comprehensive preparation.
GTRI analysis indicates that EUDR could disproportionately impact India's agricultural exports to the EU, valued at approximately $1.3 billion, compared to exports from competing nations. This heightened vulnerability stems from India's relatively higher deforestation rates. Unlike conventional quality standards that focus primarily on final product characteristics, EU regulations impose complex compliance mechanisms that appear designed to increase import costs while protecting domestic producers.
Experts highlight that India currently lacks established compliance frameworks for such regulations, creating potential obstacles for food product exports. EUDR mandates extensive compliance procedures including detailed supplier information and precise production location addresses. The predominantly smallholder-based agricultural system in India presents particular traceability challenges that complicate compliance efforts.
The regulation has generated international controversy, with Indonesia filing a formal case against the EU regarding the deforestation law. Indonesian officials have characterized the EU's approach as "regulatory imperialism" through its new legislative framework.
Corporate Sustainability Due Diligence Directive
The EU Directive on Corporate Sustainability Due Diligence (CSDD) entered into force in July 2024, with phased implementation beginning in 2027. By 2029, this directive will require companies to conduct comprehensive analyses of their value chains to identify potential risks and impacts related to human rights violations, environmental pollution, and corruption.
This regulatory framework necessitates that businesses collect and analyze data from diverse sources including suppliers and business partners, raising significant compliance concerns and data security considerations. Indian manufacturers have informed government authorities that while CSDD aims to promote responsible corporate conduct, the required data sharing involves sensitive business information that creates commercial risks.
The industry has proposed that the Indian government develop reporting standards acceptable to EU authorities, suggesting that convergence in regulatory standards would facilitate alignment for Indian producers seeking European market access.
Industrial Accelerator Act: Local Content Requirements
The proposed Industrial Accelerator Act, expected to be introduced in January this year, is anticipated to establish local content norms mandating minimum domestic value addition. Such requirements could potentially create pressure on imports entering EU markets.
Indian trade experts note the apparent contradiction in the EU's position, observing that Brussels has historically discouraged other nations from implementing local content requirements while now introducing similar regulations domestically. According to available text, the Industrial Accelerator Act would incorporate clean, resilient, circular, and cybersecure criteria designed to strengthen demand for EU-manufactured clean products while establishing a secure European supply chain for energy-intensive sectors.
The European Commission has indicated that the act should establish a low-carbon labeling system, initially covering steel products before expanding to cement, providing consumers with transparent information regarding product carbon intensity.
As India and the European Union move toward formalizing their trade agreement, navigating this complex regulatory landscape represents one of the most significant challenges for Indian exporters seeking to maximize benefits from enhanced market access while managing compliance burdens imposed by evolving EU standards.
