The EU–India FTA is a geopolitically driven boost to bilateral trade amid global turbulence, but its economic impact is overstated and constrained by rules, climate tariffs, and implementation risks.
After decades of negotiations, the European Union and India concluded a Free Trade Agreement in January 2026. The President of the European Commission, Ursula von der Leyen, described the agreement as “the mother of all trade agreements”. At first glance, the agreement is convincing: the EU and India are home to around two billion people, roughly a quarter of the world's population. The two economic areas account for around a quarter of global economic output. The trade agreement between the EU and India is the largest trade agreement ever concluded by both. It will strengthen trade, investment, and political relations between the world's two largest democracies. It aims to remove trade barriers and simplify procedures, open up new export opportunities, and strengthen the economic security of India and the EU by diversifying supply sources.
When many observers had already written off the free trade agreement between the European Union and India, a new dynamic emerged in 2025. Indian media described the agreement as a “shotgun marriage”. The American president had grossly offended both the European and Indian governments. The old European companions were astonished at Trump’s dismissive tone, while his treatment of Prime Minister Modi, who paid an official working visit to Trump on 13 February 2025, shortly after Trump's re-election to the White House, was no better. If Trump and his advisors expected the reviled partner governments to react passively to the US going it alone, they were mistaken. Both the EU and India took unexpectedly radical steps. In the European-Indian free trade agreement, the EU Commission is abandoning its previous policy of enforcing European social and environmental preferences as side agreements. The planned agreement will, therefore, not have to be approved by the parliaments of the EU member states, as it is a trade agreement and Brussels has sole responsibility for this policy area. However, it remains unclear whether the investment protection clauses in the agreement could mean that the parliaments of the member states will have to give their approval after all.
If Trump and his advisors expected the reviled partner governments to react passively to the US going it alone, they were mistaken. Both the EU and India took unexpectedly radical steps.
Modi also took the bull by the horns and further liberalised Indian foreign trade. In addition to the agreement with the EU, negotiators from India and the US have also reached a broad agreement. Furthermore, Modi is pressing ahead, initiating talks with the Gulf Cooperation Council (GCC) in February 2026. The Gulf states are pivotal for Indian foreign trade: they account for 15 percent of India's foreign trade. Annual growth rates in bilateral trade have been around 15 percent per year over the last five years. In the Indian fiscal year 2025, trade with the Gulf states amounted to around US$180 billion, exceeding the volume of Indian trade with the EU, which amounted to around US$136 billion.
The European Commission's euphoric outlook is understandable given Trump’s rebukes. Yet it overstates the pact’s importance: if we look at economic performance rather than population size, the agreement between the EU and Japan, which came into force in 2019 when Japan boasted a gross domestic product of over US$5 trillion in 2019, was more significant.
Furthermore, the EU-India free trade zone should not be misunderstood as a liberal economic area. As in all free trade zones, only those goods that are considered Indian or European products according to the agreed rules of origin may be traded duty-free. Rules of origin are opaque trade barriers, compliance with which entails costs for trading companies. However, the European-Indian agreement does not rely on uniform rules, such as minimum value added, but on product-specific rules of origin. For companies, this means product-specific opacity.
India emphasises that the product-specific rules (PSRs) are balanced and aligned with existing supply chains. These PSRs would ensure that significant processing takes place in India or the EU. The rules of origin are intended to prevent abuse of the trade agreement, for example, by Chinese companies. Nevertheless, it is striking that these supposedly tailor-made rules have a significant disadvantage: they codify the current economic and trade structure and may prevent the dynamic development of European-Indian economic relations.
Another highly controversial area is the EU's carbon border adjustment mechanism (CBAM), which has been in place since the beginning of 2026. Indian exports of steel, aluminium, cement, and fertilisers are affected by this tariff. These exports are important to the Indian economy, and the development and implementation of an Indian emissions trading system will likely take many years. Until then, CBAM will rightly be seen by the Indian government as a protectionist tool. Future conflicts are inevitable.
However, the Indian government has secured a guarantee that exemptions from the climate protection tariff that the EU will grant to other countries in the future will also benefit India. This is, therefore, a kind of most-favoured-nation clause in the area of European climate tariffs. It does not take much imagination to envisage an exemption for products from US manufacturers, which would then also apply to Indian producers. However, this raises the question of whether the EU will be able to maintain its climate protection tariff at all. It seems entirely possible that the Indian government is speculating that the European climate protection policy might collapse like a house of cards.
The liberalisation of trade between the EU and India is an important and useful step forward. The signal is that the international division of labour will continue. Trump can create stumbling blocks, but he cannot stop the trade policies of other countries.
After the European Parliament refused to approve the EU-Mercosur free trade agreement and insisted on having the agreement reviewed by the European Court of Justice, the question inevitably arises as to whether the agreement with India could also fail. The European Council must approve the agreement by a qualified majority, as must the European Parliament. If the agreement is classified as a so-called mixed agreement, which also affects the legislative powers of the member states, all EU parliaments would also have to approve it. This process could be lengthy and arduous. However, the question of the nature of the agreement has not yet been conclusively answered.
India and the EU may, over time, consider the establishment of a new global trade regime or joining and upgrading of an existing club, e.g. the Trans-Pacific Partnership CPTPP.
However, the EU-India-FTA does not solve the problem of multilateral trade regulation. The WTO has slid into oblivion and will not be revived any time soon. India and the EU may, over time, consider the establishment of a new global trade regime or joining and upgrading of an existing club, e.g. the Trans-Pacific Partnership CPTPP. Of course, today, that is pie in the sky. But to rely exclusively on bilateral trade agreements is only the second-best solution due to the limited scope and bureaucratic side effects these agreements inevitably have.
Dr Heribert Dieter is an Adjunct Professor at the University of Potsdam and the National Institute of Advanced Studies, Bengaluru.
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Heribert Dieter is Senior Fellow at the German Institute for International and Security Affairs, Berlin. He also is Associate Professor at Potsdam University. Since 2022, he ...
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