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The Alarmingly Uneven Deal of the India-EU FTA

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By Javier Delgado Rivera

For over four years now, India has been negotiating a Free Trade Agreement (FTA) with the European Union (EU) – the largest trade and investment deal the country has ever embarked on. As much as New Delhi expects to lure the European market and investments closer to India, the actual consequences for the country’s economy could be dire: the open up of public procurement, the deregulation of the banking, automobile, retail and mining industries plus the adverse impact the deal will have in small-scale farmers make of this FTA a counter-productive undertaking.

Europe is India’s major trading partner and biggest –real- source of foreign direct investment (FDI), what gives a flavour of the weight that Brussels carries in the Indian economy. In addition, the EU’s gross domestic product is about ten times larger than India’s. In paper, this asymmetry should present equal opportunities as challenges: a remarkable increase in Indian exports to the enormous European market combined with bigger FDI inflows from the continent, whereas European corporations step up or expand their businesses in India. However, a closer look at the course of the India-EU FTA negotiations reveals a different picture.

Recognizing the significance of exports to keep up with the country’s economic growth, the EU grants India with a preferential import rate, bringing down average EU tariffs on Indian imports to a mere two per cent. With India’s average duties on European products at a much higher 17 per cent, the FTA large removal of trade tariffs will have a greater negative impact on the Indian side. “Preference erosion is a key factor in determining the real economic value -and cost- of a deal with the EU,” points out Shefali Sharma, from the American Institute for Agriculture and Trade Policy.

The upcoming India-EU FTA will also deal with non-tariff barriers (NTB) to trade – a complex set of regulations on imports and investments that in the case of India, protects the country’s market from the might of global corporations. For instance, this FTA is expected to remove a number of limitations on European investments and liberalise the room for manoeuvre of EU firms if national rules are regarded as unfair or discriminatory. An illustrative case is the capacity that European tobacco companies may acquire to sue Indian states if measures to protect public health, such as overbearing tobacco warnings, are perceived as interfering with the multinationals’ investment.

Another long-held fear is the effect that opening up India’s public procurement to European firms may have. Given the size, bargaining power and expertise of EU business when it comes to working in emerging markets, it is plausible that several national players lose their bids in favour of newly-arrived European contesters. As a result, policies initially designed to boost domestic production and consumption as well as to foster Indian small and medium enterprises may well end up weakened. In developing countries, FTAs are infamous for the repercussions they frequently have in public services. Hence, the access of EU firms into the Indian health sector, energy and water supply industries should be carefully monitored.

Nevertheless, Indian officials should be applauded for having negotiated their way to limit the liberalisation of the country’s public procurement to a state level, leaving federal-planned development and infrastructure schemes out of the scope of European firms.

This FTA is likely to bring out a banking deregulation bound to strike large numbers of Indians that, in the last years, have become increasingly dependent on cheap loans to find their way out of poverty. If the Indian financial system is liberalised so that European financial institutions are removed from current restrictions to operate in the country, they will take a greater portion of the Indian banking pie. This will not make good news for poor Indians, given that “unlike their domestic counterparts, foreign banks are not required to open offices in rural areas, provide agricultural loans or to lend to people below the poverty line.” Certainly, it would add up to the pressures faced by domestic banks in more profitable urban operations, displacing resources to better compete in those threatened areas.

If New Delhi proves unable to keep the automobile sector away from the FTA, it may easily turn out to be the worse damaged industry of the whole agreement. Because of the high duties that fully-assembled cars have to pay if directly imported into the Indian market, today most EU carmakers partially manufacture their cars in India. If this trade deal removes those levies altogether along with other existing NTBs, EU automakers will have no incentive to put together their vehicles in India, and would rather ship them in from somewhere else. The price of these automobiles will then go down, undermining the competitiveness of local carmakers. Most European cars sold in India are luxury vehicles, so in order to prevent a major blow to the Indian automobile industry, it is hoped that “the abolition of tariffs [will presumably only apply] on high-end, luxury cars, while small and medium car makers retain a degree of protection,” said Pallavi Aiyar, Brussels correspondent for the Business Standard.

Along with the car industry, duties for European alcoholic beverages are proving to be one of the FTA’s trickiest items to work out. India’s flourishing, vast middle class makes a very attractive market for European spirits and wine multinationals. With a current tariff of more than 70 per cent, lowering duties for EU alcoholic beverages will considerably toughen competition on the business. In fact, neither the automobile industry nor the spirits and wine markets form part of any of India’s FTAs.

Distressing the Indian countryside

The possible FTA-triggered influx of cheap, heavily subsidised European agricultural products right into the Indian market should worry Indian farmers. Brussels allocates near 40 per cent of its entire budget to endow EU farmers, creating a large surplus of low-priced fruits and vegetables ready to export. It seems inevitable that, if tariffs are reduced or completely lifted, dumping will displace large chunks of Indian agricultural products from the country’s markets, hardening the lives of many small scale and subsistence farmers.

On the top of this, if the India-EU FTA ends up fully protecting the intellectual property rights of European agribusiness, these very farmers may see the price of seeds, the bloodstream of their livelihood, substantially going up. As Shefali Sharm says, “the EU advocates for a system of plant variety protection that favours plant breeder’s over farmers rights to seeds.”

Indian negotiators should prevent this trade pact from distressing the living conditions of millions of rural dwellers in India- just like members of the European Parliament (EP) have been doing to protect EU farmers. In a resolution issued in May, the EP called to shield European farming businesses by taking into account “any negative impact on European agriculture, particularly in opening up of markets, GMOs, milk, beef, intellectual property protection and origin labelling.”

Moreover, the powerful European agricultural lobby is pressing EU negotiators to not include certain products in the liberalisation bill, fearing that Indian exports will distort the EU market of certain commodities. A good example is the claim made by Cope-Cogeca – the main farmer lobby in Europe- that the EU should not incorporate rice in the FTA “due to the extreme market volatility for this product and erratic behaviour of India in imposing export bans.”

The mining industry is another sector prompting European investors to rub their hands. As the FTA liberalises the investment regime, European multinationals will be allowed to ship larger quantities of minerals out of India. A profitable business that will multiply mining concessions and therefore, revenue collecting in mineral-rich but poverty-stricken Indian states. That will augment these Indian states’ coffers, though adivasis and other marginalised communities may not welcome with such enthusiasm those European companies. “Deregulating investments in natural resources could displace people from their habitat and sources of livelihood. Furthermore, the misuse of raw materials would exacerbate ongoing struggles against land grabbing,” told Dharmendra Kumar, director of India FDI Watch, to this author.

Grey clouds over the retail sector

In order to contain foreign corporations from dominating large sections of India’s retail, investments of global multinationals in the country’s multi-brand retail are today partially restrained. If, as it has been discussed, the prospective India-EU FTA eliminates such constraints, European giant retailers such a Carrefour, Tesco or Metro Group will size a rather larger part of the Indian retail market, severely hurting the massive, unorganized sector of the Indian economy.

The unattainable standards -not necessarily in quality, but in appearance- of products sold in those supermarket chains may impede local suppliers to work with European outlets. Even if farmers are able to meet the newly-introduced requirements, it is not unusual that, once small-scale producers rely on big buyers to sell their products, wholesale retailers cut down prices, engulfing farmers in a trap that leads to “massive job and livelihood losses,” as a letter of leftist members of the EP put it recently.

In the cases where large outlets do not engage in such practice, farmers, small shop owners and street vendors are anyways likely to get hit by the increase of more competitive products on offer at the supermarkets’ shelves.

The exposure that this FTA will cause to India’s informal sector and small farmers is even recognised in a study carried out by the European Economic and Social Committee, an EU’s advisory body. The report claims that the current course of negotiations fails to “assess the likely economic and social risks of the FTA on Indian society.” In a country where, according to the United Nations Development Programme, “more than 90 per cent of the working population is in the informal sector,” such type of findings should be taken seriously.

Not all about bad news

One of the main bones of contention to conclude this FTA is the negative of Brussels to relax working and residence permits for skilled Indians. If New Delhi’s negotiators are eventually capable to persuade their European counterparts, the agreement will not only loosen up existing requirements for Indians professionals to work in the EU, but could also ease the EU criteria to recognise qualifications. Coupled with the liberalisation of legal services that this pact will bring about, banking, accounting and IT experts may want to keep an eye on the opportunities that this FTA might deliver.

Even if the EU is under fire for its unrestrained defence of corporative interests, Brussels should be credited for trying to safeguard Indians from the worse effects of the European multinationals expansion in the country. The India-EU FTA should “ensure that investors respect core International Labour Organization standards [with an emphasis on child labour], social and environmental governance, and international agreements so as to ensure a balance between economic growth and higher social and environmental standards,” stated the EP in a resolution in 2009.

A tough one to swallow

It is far from certain that the great lost of tariff revenues that this FTA will cause to the Government of India –being the EU India’s larger trade partner- will be compensated by a theoretical surge of FDI from and exports to the European market. “Undoubtedly, this [trade agreement] will have serious implications for government spending in social sectors,” asserted to this author Dharmendra Kumar.

Even though the India-EU FTA is expected to more than double the bilateral trade to EUR 160 bn by 2015, two leading European think tanks estimate that EU exports to India will increase by 56.8 per cent, while India’s to the EU will do a mere 18.7 per cent.

Since the outset of these FTA talks, business interests have been driving the negotiations, while areas like sustainable development and poverty reduction have been neglected. It does not imply though that New Delhi cannot strike vital conquests in some of these social areas, as the data exclusivity exclusion in medicines research proves – allowing generics to be produced when it is in the benefit of the public health.

This FTA runs the risk of hurting millions of Indian families who rely on vulnerable jobs to barely make ends meet. The agreement is widely assumed to be concluded at the end of the year, so there is still some room to better protect these livelihoods. Time is running out to make of the India-EU FTA signing something to celebrate instead of something to bemoan.

Javier Delgado Rivera is a Brussels-based freelance research-journalist with a focus on the European Union (EU) ties with Asia. You can check out his stories at www.euasiaintelligence.com & follow him on twitter at @EUAsiaIntel
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Sanskar Shrivastava is the founder of international students' journal, The World Reporter. Passionate about dynamic occurrence in geopolitics, Sanskar has been studying and analyzing geopolitcal events from early life. At present, Sanskar is a student at the Russian Centre of Science and Culture and will be moving to Duke University.

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Fears of a 2019 European Economic Slowdown Loom

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Although the spotlight is on the trade war between the United States and China, one aspect that is currently ignored by the media is represented by signs of weakness in the European continent.

Germany slows down

After posting a -0.3% GDP contraction in the third quarter of 2018, the economic indicators released from Germany in 2019 cannot support a positive economic picture. The manufacturing sectors continue to show signs of weakening, with the Markit PMI Composite now at 51.6, down from 52.3.

Industrial Production had been contraction by 1.9% in November, and both imports and exports had been down by 1.6% and 0.4%, respectively. DAX trading had also suggested there is growing concerns among investors and the main German stock index peaked out in July 2018, being now down by 15%.

Germany relies mostly on exports, being the third exporter in the world, only surpassed by the United States and China. That is why the weakness we see in Germany is actually a symptom of what’s happening in other European countries as well.

Italy and France not too encouraging

The new populist government in Italy, formed by La Lega and The Five Star Movement faced a serious challenge to get the EU’s approval for the 2019 budget, as the already high debt-to-GDP ratio (currently at 131.8%) raises concerns on whether the country will be able to meet its debt obligations in the future.

There are also serious concerns about the banking sector, which despite mergers and acquisitions, and huge capital available from the ECB, were unable to solve their problems which emerged after the 2008 financial crisis. The future of Italy is very uncertain, and analysts predict that the new government will not be able to meet their economic promises, given that we are at the end of a business cycle.

Speaking of France, the problems are social at the present time. President Macron was unable to stop the “Yellow Vests” protests, despite promises to increase the minimum wage and the overall standard of living for the very poor. France’s debt-to-GDP ratio currently stands at 97%, but given the latest promises, there are concerns whether the country will manage to keep the budget deficit below 3% in 2019, as the European treaties demand.

Although there’s a single currency in Europe, in terms of fiscal policy things were very fragmented, which is why the economic recovery had been very slow and the reason why investors predict Europe will face the greatest challenges to solve its economic, political, and social problems.

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Sterling Whipsaws as Brexit Negotiations Fall Flag

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brexit

Sterling whipsawed on Thursday, first tumbling and then rallying, and experiencing robust volatility. The GBP/JPY also experienced a wild ride as the yen increased in value on safe-haven flows. Sterling has been trading under pressure following news that the European Union has no plans for further Brexit discussions. May is now stuck between a rock and a hard place and may have to exit from the EC without an agreement.

The EU Has No Plans to Continue Brexit Talks

The European Union announced through a spokesperson saying that they had no plan on further Brexit discussions with the UK. The British had hoped for additional assurances on the contested Irish backstop. Prime Minister May has been making the rounds with EU leaders ahead of this month’s vote in parliament, but her diplomacy appears to have failed to change any minds.

The Financial Times reports that a EU source said no dialogue has occurred over the past 10-days and that PM May spoke to the EC head Donald Tusk on January 2. The EU is sticking to their word and appears to reflect the view that EU officials have gone as far as they can as it relates to the Irish backstop. They also revealed that if a backstop was triggered that EU negotiators would use “best endeavors” to negotiate a replacement agreement.

Strong US Private Payrolls Help Buoy US Yields

Sterling was also shaken by a rebound in the dollar which was buoyed by an uptick in US yields. US yields tumbled on Wednesday as traders removed all the potential tightening of interest rates in 2019. In fact, the yield curve shows that 1-year yields are less than current yields. This came despite a stronger than expected private payroll report, released by ADP on January 3.

ADP reported that Private payrolls rose by 271,000 in December, beating expectations that jobs would increase by 178,000. You can follow the private payroll report on Vestle news. The strong jobs numbers should help lift wages which is an argument for why the Fed should remain vigilant. The increase in private payrolls was the largest climb in nearly 2-years and increased the 2018-month average of private payroll gains to 203,000.

The report showed the increase in jobs was mainly drive by professional and business services which increased by a solid 66,000 while education and health services contributed 61,000 and leisure and hospitality added 39,000. In all, service-related industries were responsible for 224,000 of the new hires, while goods producers rose by 47,000. This include an increase in construction which grew by 37,000 and manufacturing added 12,000. Natural resources and mining lost 2,000 positions.

Brexit Graph

Sterling rebounded after making a fresh low of 1.24 which is a 20-month low on sterling versus the greenback. The exchange rate is likely to remain volatile until there is a solution to the UK exit from the EU.  The trend is also downward sloping, and with momentum negative, the path of least resistance is for a lower exchange rate for sterling.

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Manufactured goods and industry: a symbol of German decline

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German industrial power and quality levels became a national symbol in the latter part of the 20th century, and to some extent the lifeboat of post-war reconstruction. Even throughout the industrial rise of Asia at the end of the century, the German island remained sanctuarize from the competitive attacks of Eastern developing countries. But several German industries have been increasingly struggling in the past decade and gasping for air. Is Germany at the end of its prosperity cycle, for having rested on its laurels?

Germany, along with its wartime Japanese ally, impressed the world with its rise from its ashes in the latter half of the 20th century. Starting with the Marshall plan quickly followed by self-standing growth, Germany speedily re-built its industrial capacity, and its reputation for top-notch quality. As soon as in the 1960s, German brands invaded the global market with their sturdy reputation preceding them: if the product said “Made in Germany” then the customer could feel sure there was nothing better on the market. At the end of the century, a large share of the top global engineering segment was German: BMW, Bosch, Rheinmetall, Merck, the list is endless. Economic historian Werner Abelshauer describes [1] how the label “made in Germany” became a symbol of quality: “The label “Made in Germany” ultimately developed into a sign of quality, though it took a while.” But the era during which Germany levitated above the rest of the industrial world is coming to an end. While Germany remained unharmed by Asian competition for longer than its neighbors, it is now fighting on a level field with all other manufacturers in the field, and worse: it’s not doing all that well. Economic reporter Chris Papadopoullos placed [2] the start of the decline during the year 2015: “Total production, which includes construction, manufacturing and mining, dipped 1.2 per cent in August compared with July, German statistical office Destatis said. The production of capital goods fell 2.1 per cent while consumer goods dipped 0.4 per cent. Construction and energy output also posted declines “.

Of course, the Volkswagen scandal caused a major dent in the image of industrial Germany. Consulting group ALVA published an extensive study of the post-scandal consequences on the image of Volkswagen and German quality altogether, and wrote [3]: “After the emissions scandal revelations, we can see a very different picture, with all Advocacy drivers having moved into negative territory to a greater or lesser extent. This is indicative of a reverse halo effect in which a negative emotional response to a company due to an erosion of trust spills over and clouds rational judgement of all of its traits.” Until then, German car manufacturers had been above suspicion, thanks to their reputation for industrial quality and business performance: when one is the best, there is no need to cheat. Through the fraudulent emissions revelations, Volkswagen, one of Germany’s flagships, showed that “Made in Germany” wasn’t all it was cracked up to be, and that they had flown too high on borrowed wings. The scandal shed doubt over other German flagships in its wake, as reported [4] by automotive journalist James Mills: “German media allege that US authorities have discovered that Daimler, parent of Mercedes, developed software for its diesel-powered vehicles that would shut down vital emissions equipment after driving just a short distance. Daimler is reported to have come up with programs that would shut down certain functions of the selective catalytic reduction filter after just 16g/km of NOx is admitted.” And the damage extended beyond the automobile world, into the whole industry.

Of course, if the problem were limited to the automobile world, Germany could survive on the others. But the slipping in industrial standards, the resulting loss of performance, and finally the need to resort to unsavory business practices to survive, seems to have contaminated all fields of the German industrial apparatus. German shipbuilder TKMS recently illustrated the downfall: after decades of occupying high grounds on the submarine market, the engineering firm is facing such a severe string of problems that it is facing being sold off entirely and scrapped from the national heritage. After losing a major submarine contract in Australia, it delivered a few corvettes to the German Navy, which simply refused them on the dock, due to quality standards being overstepped. Wall Street Journal William Wilkes reported [5]: “Germany’s naval brass in 2005 dreamed up a warship that could ferry marines into combat anywhere in the world, go up against enemy ships and stay away from home ports for two years with a crew half the size of its predecessor’s. First delivered for sea trials in 2016 after a series of delays, the 7,000-ton Baden-Württemberg F125 frigate was determined last month to have an unexpected design flaw: It doesn’t really work.” Germany’s submarine fleet, also built by the same shipbuilder, is currently completely out of order [6]. In desperate need for new contracts, it resorted to bribing officials, resulting in a political and economic quagmire in Israel. In an attempt to secure a submarine purchasing contract in Tel-Aviv, TKMS allegedly transferred over 10 million dollars through shell companies to a top government Israeli official. News Site Haaretz [7] reports: “At least ten high-powered individuals have been identified as involved in the scandal, including very close associates of Prime Minister Benjamin Netanyahu. A multimillion dollar submarine deal with German shipbuilder ThyssenKrupp is the focus of a police investigation, which is probing possible wrongdoing involving Netanyahu’s personal lawyer and German shipbuilder ThyssenKrupp’s local representative.” For weathered investors, this time in which German manufacturers need to resort to cheating to make up for their slipping industrial standards is something completely new, and in some ways an earthquake. As a result, investments are scarce for start-ups [8], as well as for established businesses [9].

Germany’s downfall in the industrial world isn’t taken lightly by political forces, and the economic problem is turning into a political one, with worker unions stepping up their criticism of management, and politicians scrambling to stop the nosedive. Angela Merkel has been urgently addressing the problem, but so far too little or no avail. “Angela Merkel champions Industry 4.0, urging investment in new technology. German business isn’t heeding the call”, says Politico [10]. Unlike Angela Merkel, many in the country haven’t figured out that Germany had slipped from one industrial model to another: initially known for the superb quality of its products, it was caught up quickly by its direct competitors: United Kingdom, France, Japan and the United States in particular. The core of German’s added value today lies mainly in the machine-tools and high-tech subsystems of German equipment-makers. But as a whole, Germany no longer has the capacity to integrate large and complex systems such as aircrafts, frigates or new-generation submarines.

[1] https://www.dw.com/en/125-years-of-made-in-germany/a-16188583
[2] http://www.cityam.com/226018/german-industrial-production-sees-steep-decline
[3] http://www.alva-group.com/en/reputation-damage-vw-emissions-scandal/
[4] https://www.driving.co.uk/news/emissions-scandal-vw-mercedes-cheat-diesel-tests/
[5] https://www.wsj.com/articles/german-engineering-yields-new-warship-that-isnt-fit-for-sea-1515753000
[6] https://www.defensenews.com/naval/2017/10/20/all-of-germanys-submarines-are-currently-down/
[7] https://www.haaretz.com/israel-news/LIVE-the-israeli-submarine-scandal-what-we-know-1.5626626
[8] https://global.handelsblatt.com/companies/german-startups-drying-up-without-risk-ready-investors-863686
[9]https://www.reuters.com/article/germany-investment/big-investors-cautious-on-german-public-private-partnership-plan-idUSL5N0XK45Q20150423
[10]https://www.politico.eu/article/why-europes-largest-economy-resists-new-industrial-revolution-factories-of-the-future-special-report/

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