The Hindu Business Line : Trade impact of EU-25

FROM MAY 1, the European Union has 25 members in place of the 15 since 1995. The expansion has important implications for India. As of now the EU is New Delhi's largest trading and investment partner — accounting for nearly a quarter of India's total trade and more than 26 per cent of the total investments that have flowed into the country since 1991. One would expect these figures to increase post-enlargement, but in fact they will not because of the very small space the acceding countries occupy in India's trade picture. According to one estimate, trade with the 10 new member-countries is worth just 800 million euro against the 26-billion-euro trade between India and the EU-15.

Even so, the accession will throw up some challenges for Indian exports to the acceding countries, among which Hungary and Poland are the most important. The main question is whether, post-accession, Indian exports to these countries will remain unscathed in view of the formal integration with the EU-15 leading to greater intra-EU trade facilitation. One view is that, given the small volume of trade transacted between the acceding countries and India, compared to trade between India and the EU-15, the post-May 1 trade diversion impact will not be significant. But there are specific sectors — such as electrical machinery — in which the accession economies import both from India and the EU-15. The post-May 1 internal EU market arrangements will almost certainly make Indian exports relatively uncompetitive vis-à-vis European products. Conversely, countries such as Poland and the Czech Republic compete with India to sell textiles and apparel, footwear and leather, chemical compounds, iron and steel, automotive parts and furniture in the EU-15 market. Here, too, the tables could be turned against India after May 1.

Taking the larger picture into consideration, the big advantage for Indian exporters will be that, in place of 10 different national tariff regimes, they will now have to deal with the EU's common external tariff structure. This should make market access to these countries easier in view of the consequent "general bias toward tariff reduction" and the simplification of export procedures. Exports of industrial products are likely to receive a fillip because the EU-25 most-favoured nation rates are, on an average, lower than the rates applied by the new EU members, particularly the two largest economies — Poland and Hungary. However, as regards farm products, the position may be reversed as the import tariffs in seven of the 10 acceding economies are lower than the average EU tariff. The silver lining for Indian exporters is that there can hardly be any replacement for products such as tea, rice and spices.

The fear has also been expressed that EU-15 investment may be diverted to the acceding countries because they offer cost advantages similar to India. But this is probably an exaggeration because, as EU officials themselves admit, costs in these economies may not remain low for very long after they join the Union. Perhaps the most important problem Indian exporters will face is the imposition of non-trade barriers such as stringent quality checks, which in the past have disrupted the smooth flow of agri-food exports to the EU. The campaign against this specific hurdle will have to be sustained by New Delhi.

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