The EU’s bumpy road to trade diversification

By
Pieter Cleppe
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At the end of January, the EU managed to conclude a major trade deal with India. This was a key priority for the EU, after securing the Mercosur deal and the trade agreement between the EU and Indonesia. A trade agreement with Australia – something which failed a few years ago – may be next. Is the European Union back on the right track when it comes to opening up trade?

The EU-India deal foresees that the EU will eliminate tariffs on over 90% of tariff lines – 91% in terms of value – and that India will eliminate tariffs on 86% of tariff lines – 93% in terms of value. The agreement still needs to be signed and ratified, and major topics were left out — for example most of agriculture.

Still, it represents a great success for EU trade policy. There is a relatively long phase-in of tariff elimination — up to 10 years — but given the size of the Indian market, this is worthwhile. India has agreed to give European automakers a quota more than six times larger than any it has offered before. India currently has high duties on industrial products. On average, these are above 16%, but the deal foresees phasing out tariffs for chemicals, cosmetics, plastics, car parts, textiles and apparel, ceramics machinery and boats. For agriculture, it was still agreed that the EU will enjoy phased out tariffs for exports to India of olive oil, non-alcoholic beer, fruit juice, processed food and sheep meat.

Six days after the EU-India deal was presented, US President Donald Trump announced he had “agreed a trade deal” as well with India, during a phone call with Indian Prime Minister Narendra Modi. This call reportedly lasted about half an hour, which contrasts with the 19 years the EU and India have been negotiating. Then, many of the US-India deal’s key provisions remain unclear.

Trump mentioned that the U.S. would cut tariffs on Indian exports from 50% to 18%. According to Indian-British economist Sony Kapoor, the most likely outcome is that US-India trade relations simply revert to their trajectory before Trump launched his global trade war last April. He stated: “It’s more or less going back to the status quo for now, with prospects for trade deepening longer term.”

Claims by Trump that India would remove all barriers to US goods, purchase more than $500 billion of American energy, agricultural and technology products, and “stop” buying Russian oil have not yet been confirmed by the Indian government. That India would open its heavily protected agricultural sector has even been denied.

Ignoring Russian oil trade

Michael Kugelman, a senior fellow at the Atlantic Council remarked to Euractiv that “I highly doubt Modi ‘agreed to stop buying’ Russian oil.” He thinks India will probably continue purchasing reduced volumes, as it has done since the U.S. sanctioned Rosneft and Lukoil last year.

Effectively, since Western sanctions were imposed on buying oil from Russia, India has been drastically increasing its purchases of Russian oil, in order to sell it. This is only one example of how the sanctions against Russia have really failed to stop Putin’s aggression. There is is very little evidence they have done much good for Ukraine – in contrast to the Western arms support for the suffering country, which has enabled it to bravely resist.

Another example is the recent incredibly rally in the price of gold and silver. While there are many reasons for this – not least the exploding debt of the United States – the beginning of the gold rally can be traced back to early 2022, when the West froze Russian Central Bank assets. This was clearly a factor for non-Western Central Banks to increase their pace of gold purchases, a development that was already going on for a while but has intensified since.

Last December’s attempt by the European Commission and a coalition of EU member states around Germany to de facto seize the Russian Central Bank assets held at Euroclear, a custodian in Belgium, did fail, but only at the very last minute, also due to the resistance of Belgian Prime Minister Bart De Wever. It has not exactly strengthened confidence among non-Western powers that their assets are safe in the West.

In any case, the rise in the gold price is now benefiting the Russian Treasury, so the unintended outcome of sanctions is that they are effectively supporting Russia’s military capability.

The EU-India trade deal shows an alternative way forward. Here, EU policy makers seemed to have had no qualms about the fact that India’s purchasing of Russian oil. The trade deal with India is a first step towards more realism in the EU’s foreign relations 

Still a long way to go

Despite the progress, the EU has a long way to go. The EU’s new controversial “Carbon Border Adjustment Mechanism” (CBAM) went into force at the beginning of January. This EU climate tariff is imposed on trading partners that do not follow the EU’s suicidal climate policy, as well as a lot of bureaucracy, even for European companies.

It served as a major hurdle for the EU – India trade deal. India considers this to be outright protectionism. The U.S. Trump administration managed to extract concessions for US companies last Summer, which led to a demand by South Africa to also be exempted, given the cost to African economies as a result of CBAM.

Also within the EU, there is fierce opposition. France and Italy want fertiliser to be exempted, which causes fears that the CBAM scheme will be further dismantled, after it was already watered down somewhat last year. The more logical thing would be to scrap the original rationale for CBAM. That is the EU’s costly climate policy, and in particular the climate taxation scheme ETS which is keeping EU energy prices artificially high, causing major damage to the competitiveness of European companies.

Tariffs are not the only barriers to trade imposed by the EU onto its trading partners. Increasingly, regulation, disguised as “environmental standards” is being abused to serve the same purpose. The EU’s deforestation rules require exporters of cocoa, coffee, soy, palm oil, beef, and related products to demonstrate that the land used in production has not been subject to deforestation since the end of 2020. This extra layer of bureaucracy angered Brazil and the United States, while it also badly soured the relationship between the EU and South-East Asian palm oil exporters like Malaysia and Indonesia — economic powerhouses that should be a priority for the EU in its quest to diversify its trading partners.

In particular the justification is seen as unfair. Unlike the UK, the EU refuses to simply recognize the standards of those trading partners, even if for example, also due to domestic regulation, Malaysian deforestation has improved significantly, with NGOs acknowledging a reduction of 13% in 2024. Malaysia only lost 0.56% of its remaining primary forest in 2024, according to Global Forest Watch. That is less than Sweden’s 0.87% loss. The fact that also here, the United States was granted a partial exemption for American products, adds to the feeling of discontent.

Also the EU’s new corporate sustainability rules, laid down in its corporate sustainability reporting (CSRD) and corporate sustainability due diligence (CS3D) directives have been challenged by trading partners, first and foremost the United States. As a result of this, as well as European business opposition, the EU has been watering those down somewhat, as it has also reduced its reporting duties and other bureaucratic requirements for companies. Apart from this, many other “non-tariff barriers” remain.

Conclusion

The EU may talk a lot about trade diversification, but concluding trade deals with the likes of India will not be enough for that. Also scrapping EU protectionist rules will be required.

In the EU, sometimes the one wing of the EU machine is not aware of what the other is doing. Earlier in January, Euractiv’s Eddie Wax already pointed out the following: “In the space of a single day, I heard top EU politicians and officials call for sanctions against Russia, China, India, Israel, Iran and the US.” Now, while trade bureaucrats have sealed the EU-India deal, basically ignoring India’s oil trade with Russia, other officials are currently busy pushing for a 20th sanctions package for Russia. This would include prohibiting EU companies from servicing all Russian vessels without exemption. Apart from the fact that this amounts to doing the same thing over and over again and expecting different results, it sharply contrasts with opening up trade with India, which simply continues to do business as usual with Russia.

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