Friends in need only? The EU and India are overcoming their differences to counter China

June 06, 2021 | India

Executive Summary

A milestone in intensifying EU-India relations, while roadblocks prevail

  1. Both India and the European Union seek to reinforce their partnership, mainly driven by a joint interest in offering alternatives to China’s assertive policy in the region.
     

  2. While EU member states want to diversify their supply chains, India aims to make up for not joining a China-led trade pact. However, its protectionism poses challenges for successful negotiations.
     

  3. Geopolitically, security concerns over China drive the EU-India cooperation. This aligns with the US approach to balance out China in the Indo-Pacific.

Watch out for

  • A joint Artificial Intelligence Task Force and a high-level Digital Investment Forum pushing cooperation in the digital realm;

  • The UK’s talks with India on enhanced trade leading to an interim deal by year-end;

  • German federal election in September, as Green government participation will focus more on climate and human rights standards with China and India.

Key Facts

  • India accounts for 2% of the EU’s overall trade, the EU for 11% of India’s trade, with Germany being the largest EU trader;
  • A comprehensive trade agreement can boost EU exports to India by almost 50%, offering gains between 8.-8.5 bn EUR p.a.;

  • The EU's share in foreign investment to India doubled from 8% to 18% in the last decade, making the EU the largest foreign investor.

State of Play

United by common interests, less by conviction

The EU and India are revitalizing their strategic partnership. Launched already in 2004, the cooperation previously focused on talk rather than action. In 2013, negotiations on a trade and investment agreement reached a deadlock after six years of consultations. Now, the EU and India are giving it another go for self-interested reasons. India is looking for trade partners after withdrawing from the China-backed Regional Comprehensive Economic Partnership (RCEP) of Southeast Asian states. The EU, in contrast, advanced on its Comprehensive Agreement on Investment (CAI) with China. Nevertheless, Brussel strives to hedge against economic tensions with Beijing by protecting its supply chains and looking for alternative locations. Joint areas of economic interest are transport and infrastructure, clean energy, and technology. Geopolitical drivers such as maritime security in the Indo-Pacific accelerate collaboration too. A significant step to intensify cooperation was taken at a joint summit in Porto on May 8. While the pandemic prevented a historic in-person meeting, the EU27+India agreed to relaunch negotiations for a comprehensive free trade agreement. Both sides concluded a connectivity partnership to rival China’s Belt and Road Initiative, and aim to strike separate deals on investment protection and the geographical origins of product names, from Assam tea to Parma ham. Concluding such talks would significantly enhance the EU’s economic foothold in the region.

Europe entering Asian Geopolitics…

In the past, Delhi and Beijing built pragmatic relations, with China being India’s top trade partner even against the backdrop of decades-long border tensions. Now, as India confronts a rising China, Delhi needs both the United States and Europe to construct a multipolar Asia. Since 2016, the EU-India partnership has grown beyond traditional notions of security. Areas of convergence now encompass climate, health, data and privacy, resources management, and the circular economy. However, security continues to be a driver, as China’s growing global role and its regional assertiveness raise concerns in both Europe and Asia. To this end, bilateral talks between Delhi and different EU member states have increased. However, the divergent positions of some European capitals on key geopolitical challenges, such as on China and Russia, often give pause in Delhi. Still, the EU’s 2019 connectivity strategy with Asia, designed to moderate Beijing’s dominance in the region, can benefit from the agreement concluded with India. Bringing India closer to the West is welcomed in Washington too, which declared strengthening ties with Asian democracies a core tool to counter China.

 

The EU-India “Roadmap to 2025” envisages increased cooperation on maritime security, reflecting a deeper collective European commitment to stability in the Indian Ocean. Here, Delhi sees itself as an equal stakeholder, while the EU is a player only via France’s territories. The first India-EU Maritime Security Dialogue held in January 2021 set a clear definition of the Indo-Pacific that aligned with India’s view. Expect more movement on this, given the military and security components of the 2025 Roadmap, which already provide the backdrop of national naval deployments such as by Germany. An area where intensified cooperation is emerging already is cyber security. While China and Russia continue to exercise digital strikes, the EU and India pledge for more cooperation and joint efforts to promote an open, free, stable and secure cyberspace.

… to enhance Trade and secure Supply Chains

Geopolitical drives motivate the EU and India to intensify their cooperation but considerable disagreements prevail on the economic side. In 2013, India’s protectionism on cars, wines and market access for EU companies derailed trade talks, just like the EU’s reluctance to open up for Indian service providers and facilitate access for visas. Moreover, EU capitals seek to reduce dependency on key pharmaceutical products from India. Besides both sides’ goodwill, no concrete solution is in sight to overcome these obstacles. Delhi left RCEP to protect its Indian firms. This policy of self-reliance leaves the economy less competitive in the mid-term, for example in the automotive sector. Therefore, it will be challenging for India to build trade ties with the EU if much-needed market-oriented reforms do not take place, especially within the infrastructure and technology sectors. To avoid a crisis in strategic pillars of the Indian economy, India is now ready to make small concessions. The EU, in contrast, insists on a comprehensive agreement with significantly more market access and specific purchase pledges.

 

Significant economic opportunities can arise for both sides if diverging positions are brought closer. India offers the market-size for meaningful diversification away from China, providing European companies with alternative supply chains. In Germany, the manufacturing and automotive sector will profit in particular from resilience vis-à-vis sanctions from Beijing. India, on the other hand, can compensate being left behind by various trade agreements, from RCEP to CAI. The new connectivity partnership will offer opportunities for digital, energy, and transport infrastructure providers in India and the broader region, allowing the EU to reinforce its foothold in the emerging economic hub. Concrete opportunities arise for providers of data solutions in Indian smart cities program, FinTech companies can profit from increased digital and cross-border payments, and energy businesses benefit from India’s expansion of hydrogen and transmission lines. European companies with plans to increase their market share in these strategic areas could rapidly get political support. Brexit offers another opportunity to reset trade ties with the EU. The UK used to be India’s gateway to the EU’s single market, and Indian firms are wary of losing this advantage. Pressure from China or the US will accelerate negotiations, pushing both countries to make concessions. However, if differences between India and the EU prevail, the EU can opt for a sectoral deal as a fallback scenario to still strike a deal for geopolitical reasons.