Bollywood, Yoga, Call Center – for many westerners, India stands primarily for esotericism and the relocation of services, but less for industrial production and trade in goods. One reason for this is the fact that despite its size, India is a dwarf as far as world trade is concerned. A mere 1.6 percent of global merchandise exports come from India. But currently the Asian country is the EU's ninth largest trading partner. By contrast the EU is India's largest trading partner. Since 2007 Brussels and New Delhi are negotiating a free trade agreement - with only limited success. But our new study shows: In terms of gross domestic product (GDP), both sides could benefit from such an agreement.

In 2016 reciprocal trade volumes for goods between the EU and India stood at around €77 billion. There is definitely more potential here, with trade barriers persisting on both sides. A deep free trade agreement would lead to the reduction of tariffs and so-called non-tariff barriers, which could achieve considerable welfare gains. These would be fully felt between 10 to 12 years after the agreement came into effect.

If an agreement was reached, India could increase its economic performance measured by GDP by 1.3 percent annually. Based on the countries GDP in 2015, this would mean an increase by €25.6 billion.

Annual GDP increases for the EU would amount to 0.14 percent on average. Based on the EU's GDP in 2015, this would mean an increase by €21 billion. Individual member states would benefit to very different extents: with nearly €4.6 billion, Germany, which is India's biggest trade partner in the EU, would be able to achieve the second highest absolute increases after the United Kingdom (€4.8 billion). For Croatia by contrast, the effects would be a mere €0.02 billion. However, no EU member state would suffer overall negative effects, which is by no means a foregone conclusion when calculations of this kind are made.

As far as individual sectors are concerned, in Germany the motor vehicle sector as well as machines and equipment would benefit the most, with their value added increasing by up to €1.5 and €1.4 billion respectively. By contrast, business services, wearing apparel and textiles in Germany would be sectoral losers. Their value added would sink by €511 million, €388 million and €341 million respectively. Therefore, in the exchange of goods between Germany and India, losses on one side at least partially reflect gains on the other. That points to stronger specialization by both countries for particularly competitive products.

At the sectoral level the Indian business services and textiles sectors would, seen in absolute terms, be among the winners from a trade agreement and increase their value added by €6 and €3.3 billion respectively. Correspondingly, on the losing side, there are sectors where Indian firms are barely competitive in relation to their European competitors, such as motor vehicles or minerals (value added –€1.5 billion and –€1.1 billion respectively).

A free trade agreement between the EU and India would not only have a positive economic impact, but could also be an important signal in favor of free trade in general, explains Cora Jungbluth, economic expert at the Bertelsmann Stiftung. Moreover, it would be an important strategic step for the EU to improve access for European businesses to Asia's dynamic markets.

A free trade agreement would mean a greater economic openness of India. But it would also imply risks and opportunities for the newly industrializing country and the EU. On the one hand, the agreement may positively impact innovation, productivity and growth. On the other hand, less competitive and productive sectors will have difficulties to withstand pressure from increased international competition.

In order to resume the negotiations and make further progress, compromises are necessary on both sides. In particular the EU should be aware of its responsibilities towards India as a developing country, says Cora Jungbluth. As a rule, trade agreements entail a structural change in the countries concerned. The EU must therefore allow India enough time and flexibility to cope with these changes.
 

Source: Bloomberg.com