A long and winding road: how Indo-European trade negotiations will end

Oil on troubled waters? 

Last month,United States President Donald Trump told the European Union (EU) to impose high tariffs on India in retribution for purchasing Russian oil. Trump himself has levied a 50% duty on Indian imports – half in a futile attempt to eliminate its trade deficit with Delhi, the other half as punishment for India’s swelling of Russia’s war coffers through oil purchases. This is as high as the tariffs on China.  

The EU declined Trump’s mafioso-like ‘offer you can’t refuse’. Rightly so. It is worth unpacking the thinking behind Europe’s refusal – for once – to bend to White House pressure.  

Great expectations 

There were three good reasons. The first is that India and Europe are about to conclude an ambitious Free Trade Agreement (FTA) which, with several stops and starts, has taken 17 years.Prime Minister Modi and European Commission President Von Der Leyen agreed to wrap up by year-end.One of these writers was involved in that negotiation as early as 2011.  

The latest India–EU Strategic Agenda includes around 60 areas of cooperation, but the FTA is front and centre.With an India–EU summit expected early next year, the expectation is to finalise the FTA in advance or use the Summit as a (photo) opportunity to announce it.  

To be WTO-consistent, FTAs must liberalise substantially all trade– typically 90-95% of trade and tariff lines. Imposing a 50% duty on Indian imports the moment the end is in sight would be both counter-productive and breach this requirement. It’s akin to torpedoing a ship below the water line as it enters the port to cheering crowds lining the docks. It would sabotage the Agreement. 

For this reason alone, Europe will not place tariffs on India. Against a deteriorating economic climate, and the need to reduce undue dependencies on the US and China, Europe needs this deal to boost its exports and diversify. 

Westward ho! 

And an India struggling against 50% duties in the US also needs Europe’s market more than it did. Along with its agreements with the United Kingdom and European Free Trade Association, the EU-India deal represents a welcome pivot away from the traditional anti-Westernism still seen in some quarters in Delhi. It is timely. Though a fast–rising economy, now fourth globally, India has long remained import–dependent for raw materials and unable to enhance manufacturing as a share of GDP: far from growing, the share of manufacturing in GDP slid below 13% from 2023 to 2024. 

Countries such as Vietnam, Thailand, Cambodia or Malaysia have successfully attracted multinational corporations diversifying away from China, offering lower labour costs, simplified tax structuresand reduced tariffs. By contrast, India continues to present investors with challenges around complex regulations, bureaucratic delays, inconsistent or unpredictable policy reforms, and comparatively high labour costs. Factorshindering competitiveness.  

At such a time, it is even more important that India unlocks FDI flows from reliable partners.  A successful EU–India FTA could channel foreign direct investment to India, advancing the ‘China+1’ strategy, bolstering investment, industrial growth and India’s regional competitiveness.  India’s recent FTAs with the UK and EFTA were based on the principle of opening its market in exchange for increased investment: confidence-building measures for other partners–most notably the EU. The timing is ideal for both parties to reach a mutually beneficial agreement, given their respective economic needs.

The Russia House 

Second reason: the EU itself imports Russian energy. Hungary, Slovakia and others to some extent depend on Russian oil and gas. Almost 20% of EU gas imports are Russian.  

The EU as a bloc earlier targeted end of 2026 to wean itself from Russian energy, a deadline that not all EU member states accepted, and have now pushed to 2027. It would be hypocritical – and probably illegal under WTO – for the EU to sanction India for refining Russian crude while it itself imports similar volumes of Russian energy.  

The EU is increasingly criticised for its disregard for international rules, and its extraterritorial reach – as seen in its trade agreement with the US, and in various environment-related import restrictions. It can do without another challenge to its frayed multilateral credentials.   

Satyagraha, European style? 

Thirdly, the EU has historically been wary of using trade tools for non-trade purposes. “Render unto Caesar what belongs to Caesar!” has been the traditional cry from the Berlaymont. A major criticism of the Trump administration has been its blunt weaponisation of trade for political or security ends, be it Greenland, the Panama Canal, or tariffs on Brazil for imprisoning former President Bolsonaro.   Naked weaponisation of trade is something the EU largely dislikes. So much so that it introduced five years ago a yet-to-be-used Anti-Coercion Instrument –allowing Europe to retaliate if countries like the US, China or others use trade restrictions to coerce changes in Europe’s political choices or behaviour. Europe will not undermine its own case by using tariffs to force changes in Indian policy.  

Naked weaponisation of trade is something the EU largely dislikes. So much so that it introduced five years ago a yet-to-be-used Anti-Coercion Instrument –allowing Europe to retaliate if countries like the US, China or others use trade restrictions to coerce changes in Europe’s political choices or behaviour. Europe will not undermine its own case by using tariffs to force changes in Indian policy.  

The EU prefers to secure any non-trade goals – sustainability commitments and the like – through cooperation, not coercion. Fortunately so, since India has made clear that it will not sign any FTA with binding commitments on sustainability, human rights, etc. enforced through trade sanctions. That is neo-colonial.  

What the EU has done in its latest sanctions on Russia is ban imports of petroleum products from Nayara, the major Indian refiner of Russian crude, part owned by Russian Rosneft, which was found violating sanctions by using Western services for delivering oil. While unwelcome to the company and to the Government of India, reactions were muted, a cautious response enabled by discreet India–EU discussions on Russian oil trade.

Industry experts do not see this ban as a major stumbling block in EU-India relations provided it is not extended unjustly to refiners supplying the thirsty local market.  In any case India can reduce the Russian mix in its total exports to Europe – which run at around €19bn a year – with petrol refined from Gulf or Iraqi crude.

And since Russian oil is not essential for India’s industrial requirements – it primarily serve to reduce costs on a vital commodity – economic pragmatism and supply security override political pressure. Going by the recent trends in India’s oil imports, we may safely deduce that India will continue diversifying oil imports purely for economic interest, rather than by giving in to unjust demands from any side.

Pride and prejudice 

To paraphrase Jane Austen, it is a truth universally acknowledged that further punitive measures on the European side would be counterproductive, unnecessarily pushing India to a corner where New Delhi reacts, re-affirming its resolve to maintain good trade relations with its long-standing Russian ally.   

The authors suggest that Europe must recognise the views of the Indian electorate, which remains largely pro-Russia and holds a different perspective on Moscow’s role in the Ukraine war. As a democracy, any aggressive push for India to ‘cut ties’ with Russia could trigger domestic backlash, making pragmatic strategic decisions more politically costly for the current government.  

For all the optimistic talk in Europe about the common values uniting Europe and India, India will continue to balance its relations with Russia and the ‘Western powers’ in its national interest.  We urge the collective West, divided within itself, to reconcile itself to India’s multi-alignment approach, and focus on incentivising its partnership with New Delhi rather than undermining this core principle of India’s foreign policy. 

And all manner of things will be well 

Both India and the EU need stable and predictable partnerships. Strategic wisdom lies in maximising areas of convergence, minimising divergencesand certainly not undermining each other’s core principles. The era of the Great Game is long over.  

The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.