Losing Leverage

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NINETEEN MONTHS into a spiralling global financial crisis, India and the European Union (EU) are discussing withdrawing impediments to cross-border trade. The negotiations held in New Delhi last week were the sixth round of talks for a Free Trade Agreement (FTA).

Despite the interest to reduce trade barriers, the EU is under economic and political pressure to solve structural imbalance issues and maintain a stable Euro. And amid the corrective actions to restore the strength of European Integration, the matter of free trade and reaching out to foreign markets is not seen to have universal appeal.

The global economic crisis has resulted in weak economic indicators and falling demand for goods and services in the last quarter of 2008 and early 2009 for major European economies. Imports by the EU shrank by 7.8 percent in December 2008 on a year on year basis. Recently, French carmaker Renault moved its production back to France. Some European banks have reserved certain percentages for domestic lending only. Italy’s fiscal deficit is more than 100 percent of its GDP. Wealthy European nations like Germany are facing pressure to take the brunt of reckless spending by other EU economies.

With the EU following the pattern set by the US and UK in trying to euphemise protectionism with tax reform measures and employment reservations, India should read the tea leaves.

India has a fifth of its trade with the EU while its share in EU trade is a mere two percent

Since the inception of the EU-India FTA proposal, the central issues have remained the same — goods, services, and investment. Manab Mazumdar, director at FICCI for WTO issues expected negotiations to be under the rubric of NTB (non-tariff barriers) and TBT (Technical Barriers to Trade). “These talks are expected to achieve expeditious resolutions on greater direct market access by removal of the structural barriers,” he says, adding New Delhi must take a clear stand on the ‘‘pressure points’”

As India holds the WTO recognition of “Special and Differential Treatment”, it wants a preferential case of average goods and services tariff (the average is only about two percent for the EU and 17 percent for India), claiming the incentive for its developing country status. In terms of volumes, India has close to a fifth of its trade with the EU, while the Union has only two percent of its trade with India.

Indian negotiators are already aware of their poorer position in terms of bargaining power. Expectations were built on India’s leverage position with nine percent GDP growth in 2007, and the world economy has drastically changed since.

Although India still remains an attractive location for EU foreign investment, that’s in the long term. The prognosis for this round of negotiations look decidedly grim.

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