India needs to watch out for a remodelled EU that’s taking shape

June elections to European Parliament saw far-right parties making major gains and cornering a majority. The impact of this on existing policy frameworks is still unclear, though some consensus decisions—such as tighter migration rules—seem imminent. 

The EU’s slowing economy, with the bloc’s GDP growing 0.8% during 2023, could see the community reasserting some of its historic characteristic traits to regain revenue and growth.

All this could spell turbulent India-EU trade ties. The right-wing resurgence, coupled with the centre-right European People’s Party gaining the most seats, is likely to see a hardening of the EU’s protectionist trade measures, and a renewed attempt to unilaterally exercise extra-territorial jurisdiction over Indian capital market institutions. India’s trade with the EU (imports plus exports) contracted by almost 5% between March 2023 and March 2024.

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The EU’s protectionist measures are marked by non-tariff barriers. Indian commerce minister Piyush Goyal recently expressed disappointment over the slow progress of India-EU free trade agreement talks. 

Nine rounds have been concluded so far with no sign of progress. The minister’s view is that the EU’s insistence on including sustainability issues—what he termed “extraneous issues"—in the negotiations is creating roadblocks.

One contentious issue creating heartburn across trade platforms is the EU’s imposition of a new import levy under its Carbon Border Adjustment Mechanism (CBAM), a tax based on greenhouse gases emitted during the production of imported goods. 

The EU’s reasoning is that since European companies are mandated to offset emissions arising from their production processes, entailing a monetary outgo, imported goods that do not invest similar amounts in offsetting emissions would gain an edge. 

The CBAM is likely to affect developing and poor nations the most. The 2024 Trade Preferences Report from the United Nations Conference on Trade and Development estimates that CBAM levies on African imports is likely to reduce the continent’s GDP by almost 1%.

The CBAM has also been pilloried for being unjust: European nations and companies have emitted indiscriminately over the past century but want developing nations to foot the bill. 

Developing and poor countries are being asked to bear the costs of climate change, despite their emissions being lower than those of most EU member countries and their lack of financial capacity to either monitor emissions or invest in decarbonization. 

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A Brookings Institute study from July 2024 contends that measuring carbon emissions is a difficult task and invariably leads to unreliable data-sets, implying that this could be a source of future trade conflicts. 

The paper also says that by targeting industrial manufactured products (like steel), the EU might be giving a pass to other highly polluting industries like transport and agriculture.

The EU’s intransigent behaviour is also reflected in its insistence on auditing and gaining oversight over Indian bond clearing houses. Changes in the European Market Infrastructure Regulation has forced the European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, to blacklist six Indian clearing corporations, or central counterparties, from providing clearing and settlement services to European banks undertaking bond and derivative transactions in India. 

Of the six de-recognized platforms, two are regulated by the Reserve Bank of India (RBI), two by securities market regulator Sebi and two by the International Financial Services Centres Authority.

ESMA’s decision seems to have been prompted, in the main, by RBI refusing to grant the European regulator audit and inspection rights over one particular clearing platform, Clearing Corporation of India (CCIL), which oversees the bulk of government bond trading and settlement. 

RBI, in turn, seems to have been emboldened by a similar agreement with the Bank of England that is “based on mutual respect for each jurisdiction’s current regulatory regime and each authority’s supervisory practices."

Addressing the media in December 2023, RBI deputy governor T. Rabi Sankar had observed: “These MoUs or agreements with respect to market infrastructure agencies like CCIL should be underpinned by the word that is used in their regulations—cooperation. They should be cooperative documents. We believe that they should follow the principle of mutual respect and the principle of mutual trust. They should also be characterized by the principle of deference to local regulations. In other words, we are not comfortable with the regulations anywhere which are characterized by extraterritorial jurisdiction."

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Social scientists have observed that EU’s attempts at cross-border partnerships seem influenced more by a historical mindset, one that still harbours remnants of an expansionist and extraction-based economic model, rather than treating other nations as equal partners. 

With a near-stagnant economy, a large chunk of its population past the working age and a far-right machinery now administering policy, the last thing the world wants is the EU’s political and economic model resembling a medieval fortress.