The Hindu Business Line : India-EU trade links: Stronger the better

It is imperative that India continues to strengthen its trade relations with the EU and, at the same, explore the possibility of a free trade agreement with it so as to gain, at least to some extent, preferential and duty-free access to the European market.

Woo the EU: India cannot ignore the fact that the EU is today not only the world's largest exporter of goods but also the second largest importer.

TWO blocs are at the centre stage of world politics and economics — the US and the EU. The US has assumed the mantle of the world policeman and holds strong positions on matters relating to politics and trade.

The EU, on the contrary, has made more of an impact because of its strategic trade-policy initiatives and policies of neo-protectionism. It has largely been held responsible for the failure of the 5th Ministerial of the WTO at Cancun, Mexico.

For long, the US and the EU have subjugated the developing nations of Asia and Africa with their economic and political might. The EU, in particular, was quite adamant at the WTO talks and stuck to its established position in such matters as agriculture and the Singapore issues.

Further, the EU has been aggressively pursuing the path of regionalism alongside multilateralism. From a modest beginning as the European Coal and Steel Community (ECSC) in 1951, the EU has emerged as the largest regional trading bloc in the world with strong eco-political powers and, in fact, poses a serious threat to the US-led uni-polar world.

The EU is now 50 years old and has 15 members with a combined population of 372 billion and a GDP larger than that of the US.

The Maastricht treaty of 1992 laid out plans for a new European currency (the euro), and, in January 2002, replaced independent currencies of the member-countries.

The EU, therefore, is a classic and successful example of a regional grouping. It is considered a seasoned player in blending its multilateral approach to global trade with a strong element of regionalism and bilateralism.

Nearly 60 per cent of world trade now takes place within regional arrangements that have either achieved or are on the path of reaching free trade. But each country has quite a different share of this preferential trade — the EU's, for instance, is close to 70 per cent.

The EU is party to 28 of the 91 regional trade agreements (RTAs) in goods notified under GATT Article XXIV and currently in force — the EC Customs Union (CU) and 27 bilateral RTAs with third countries. It is also party to eight of the 11 RTAs in services notified under GATS article V that are currently in force — the EC itself and seven bilateral RTAs with third countries (WTO secretariat, 2002).

The trade policy review of the WTO for the EU shows that it has relationships in the form of Customs Union, free trade areas and preferential/non-reciprocal arrangements.

In this situation, the enlargement of EU members to 25 (following the accession of 10 more countries) poses a serious threat to the exports of developing countries, including India. There is a general apprehension that the intra-regional trade among the EU countries is likely to increase making the EU more protectionist.

The enlargement of the EU has raised a number of issues that have implications, particularly vis-à-vis market access. With new members acceding to the EU, the tariffs on some products are likely to be raised to the common external level. Experience shows that the new members had tended to increase their levels of tariffs on some products once they became a part of the Customs Union.

In the event of such an increase in the level of tariffs, Article XXIV of GATT 1994 can be invoked. This Article provides that if the tariffs are increased which are not in keeping with the schedule of concessions (Article II), the WTO member concerned shall offer compensation to its trading partners as provided in Article XXVIII of GATT 1994.

The enlargement of the EU has serious implications for India. Bilateral trade has been the bedrock of the India-EU relationship. Over the years, the EU has emerged as India's largest trading partner with nearly a quarter of our exports going to the EU.

It is also a major destination for our products and a source of supplies for critical imports, including important raw materials and investment goods.

The Table shows the share of India's exports to the EU in the past three years. Though the EU is a major trading partner, India's share in the total imports of the EU is a negligible 1.31 per cent. Again, India's trade with each of the 10 acceding countries is also not very large; less than one per cent of our total exports of India. But India is a principal supplier of many items of exports (such as agricultural goods, textiles and chemicals) to each of the acceding countries. It is held that once the acceding countries become a part of the EU, they would require bringing their tariff rates on a par with the common external tariff of the EU resulting in adverse effects on products of export interest to India, particularly agricultural and textiles.

Further, another major issue posing a threat to India's export to the EU is non-tariff barriers which are more trade restricting. Non-tariff barriers faced by Indian exporters in the EU, particularly in the areas of standards, testing, labelling and certification requirements are a major cause of concern. There are a plethora of EC legislation relating to sanitary and phytosanitary and food safety issues which are applied in the most stringent manner on imports from developing countries such as India.

In this backdrop, it is imperative that India formulates its trade policy in such away that it is able to effectively combat the problem of non-tariff barriers. Though Indo-EU trade relations have always been at a high point and the two meet regularly at annual trade summits and pledge to enhance trade and investments, the reality is starkly different. Today, one wonders whether India-EU relations are at the crossroads.

There are several alternatives that India could pursue in this situation. First, the composition and direction of exports have to be changed. India has to find new trading partners and reduce its dependence on the EU. The policy of Focus-Africa and Focus-Latin America initiated by the Commerce Ministry is a novel step in this direction. But India cannot ignore the fact that the EU is today not only the world's largest exporter of goods but also the second largest importer. This bears testimony to the importance of trade to European consumers and producers and to the significance of EU as a market for most WTO members, notably developing countries such as India (Trade policy review of EU, 2002).

Thus, it is imperative that India continues to strengthen its trade relations with the EU and, at the same, explore the possibility of an FTA with the EU so as to gain, at least to some extent, preferential and duty-free access to the European market. When countries such as Mexico, which is a part of NAFTA, formed an FTA with the EU in 1999 itself, there is no reason why India cannot.

The role of the EU and the US in the WTO, especially in making the Doha Development Agenda a reality, can hardly be undermined. The two are critical to the functioning of the multilateral trading system. The sooner developing and developed countries join hands, the better it would be for the world trading system, particularly for developing economies such as India.

India and China are slated to emerge as economic superpowers in the latter half of this century. But to achieve this, it would be inevitable for them to join hands with countries such as the EU, which will have a crucial role to play. India's continued success on the path to development largely depends not only on the kind of trade policies that it pursues in the next few years but also vastly on the strategy and attitude towards the Western world led by the EU and the US.

(The authors are respectively faculty at the Indian Institute of Foreign Trade and the Institute of Economic Growth, New Delhi.)