The European Union (EU) is rapidly reshaping its trade strategy in 2025. This shift aims to reduce dependence on the United States amid geopolitical uncertainties. The EU has signed new free trade agreements (FTAs) and resumed talks with key partners in Asia. These changes mark a departure from past policies and open fresh opportunities for India’s trade and investment relations with the EU.
EU’s New Trade Agreements and Strategic Realignment
In late 2024, the EU signed an FTA with Mercosur. This deal includes flexible provisions on environment and sustainable governance (ESG), unlike earlier strict EU FTAs. The EU has accelerated negotiations with ASEAN countries, signing an FTA with Indonesia and restarting talks with the Philippines, Thailand, and Malaysia. The EU also signals interest in joining the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP). These moves show the EU’s intent to diversify trade partners beyond the US and adapt to changing global dynamics.
Changes in EU’s Approach to ESG and Dispute Mechanisms
Earlier EU FTAs had rigid ESG clauses with strong dispute settlement mechanisms (DSM). For example, the EU challenged South Korea’s labour laws under DSM in 2021. The new FTAs, such as with Mercosur, offer more flexibility on ESG issues. This reflects a pragmatic approach to accommodate diverse political systems and economic needs of partner countries, especially in ASEAN.
Implications for India-EU Free Trade Agreement
India should leverage this evolving EU trade policy to finalise its own FTA with the EU soon. The agreement should go beyond market access to boost India’s manufacturing and integration in regional and global value chains (RVCs and GVCs). This requires revising India’s strict rules of origin (RoOs) to simpler, cumulative value addition criteria. Such changes would facilitate sourcing inputs from multiple FTA partners and enhance competitiveness.
Rules of Origin and Value Chain Integration
India currently applies dual criteria RoOs demanding both tariff heading change and high value addition. This approach aims to develop domestic value chains but is outdated due to global production networks. Simplified RoOs would allow Indian industries to participate more effectively in fragmented supply chains. The India-EU FTA could include gradual expansion of value addition cumulation across sectors and partner countries to promote deeper economic integration.
Investment Provisions and Dispute Settlement
Trade and investment chapters should be negotiated together to avoid delays. India’s recent FTAs lack strong investor-state dispute settlement (ISDS) mechanisms, limiting investment inflows. A forward-looking ISDS framework inspired by global best practices including the EU’s model is needed. An India-EU arbitration system independent of EU member ratification could boost investor confidence and support emerging technology sectors.
Carbon Border Adjustment Mechanism and Green Cooperation
India can learn from the EU-Mercosur FTA on managing the Carbon Border Adjustment Mechanism (CBAM). Negotiating balanced trade provisions and technical cooperation on carbon markets is vital. Joint efforts on renewables, green hydrogen, and green finance under a Trade and Technology Council would strengthen sustainable economic ties.
Questions for UPSC:
- Critically discuss the impact of free trade agreements on global value chains and domestic manufacturing competitiveness.
- Analyse the role of investor-state dispute settlement mechanisms in attracting foreign direct investment, with reference to India’s recent FTAs.
- Examine the implications of the European Union’s Carbon Border Adjustment Mechanism on developing countries’ trade policies and environmental commitments.
- Estimate the strategic significance of the European Union’s pivot towards ASEAN and Mercosur in the context of shifting global geopolitics and trade alliances.
