This post has been authored by Punyaa Juneja and Purujit Dash, Economic Analyst Interns at Arthashatra Intelligence

India’s association with European Union dates as far as the 1960s, with the European Union being one of the very first bloc nations that laid the foundations of the bilateral diplomatic relations. The cooperation agreement signed in the year 1994, transformed the bilateral relationship in a way that opened up diversified paths to trade and economic cooperation. In 2004, the relationship underwent an evolution by redefining economic cooperation to the echelon of ‘Strategic Partnership’. The two evolving counterparts embraced a Joint Action Plan in 2005, which was reconsidered in 2008. The plan intended to build a formidable dialogue and discourse mechanism in terms of political and economic dimensions while improving foreign exchange investments and bringing socio-cultural collaborations.

Following these events, a primary intent of both parties was to work towards a resonating, clear, unrestricted, mandatory anticipated regulatory and business environments, while bearing in mind the protection of their investments and intellectual property. The focal point for these deals was to unlock the dynamic unwarranted potential. To achieve this broad objective, the partners started negotiation talks for the elaborate Free Trade Agreement in 2007. The expectation from this deal was to remove the many barriers concerning the trade. Unfortunately, these negotiations were deferred until further notice, in 2013, the reason for which was a gap in the level of ambition between India and the European Union. The European Union stipulated much higher accessibility for automobiles, wine and spirits, and further went on for expansion of the financial services sector such as banking, insurance, and e-commerce.

The European Union continues to provide support to India in various forms to further expand its economy with the intention to improve upon its international competitiveness, and reap benefits through better integration with global value chains, and increase its share in global trade, aligning more with its growing share of global GDP.

It is imperative to start the negotiations for both trading counterparts as the European Union is one of the vital and India’s largest trading partners, the assistance gained by increasing trade volume would be indeed advantageous for both parties. It is also important as both India and the EU represent extensive and diverse markets and the huge demographic dividend which is in the favour of India while also helping the European Union. Recognizing its importance, Trade Promotion Council of India (TPCI) organised a panel discussion on India-EU trade relations, where experts discussed the proposed pact.

To analyse the potential of trade prospects, we have used some of the comprehensive trade indices i.e., revealed comparative advantage and trade complementarity index. The revealed comparative advantage index, constructed upon the Ricardian theory of comparative advantage, was first proposed by Bela Balassa (Balassa 1965). The Index explains the corresponding advantage or disadvantage with respect to certain sectors of goods and services based on the trade flow. The trade complementarity index was proposed by Peter Drysdale in 1969, giving insights if the exports of a nation complement the imports of the partner nation. The index is formulated by the product of the revealed comparative advantage index that is measured through the exports of one country and the revealed comparative disadvantage index measured through the imports of another country in the same commodity class. (Drysdale 1969), (Zheng, et al. 2018). These indicators are also used by international trade researchers to strategically study the different nuances of bilateral trade deals at different verticals.

In our analyses, we have divided the 27 nations of the European Union into two groups based on ranking GDP per capita of the nations within the European Union. The top-12 nations (group 1) represent the nations that have the aggregate GDP-per-capita of US$ 30,000 or greater, while the remaining 15 countries (group-2) show a value of GDP-per-capita less than US$ 30,000, where Luxembourg was seen to have the highest and Bulgaria was seen to have the lowest GDP-per-capita, as per the data available at UNCTAD statistical database in the year 2019.

In the dawn of the 21st century, India enjoyed a strong comparative advantage in groups like Manufactured goods, agricultural proceeds with RCA indices having values well beyond 2. However, by 2007 agricultural products started to grow weaker in terms of advantage. The reason for this could have been the changes in tariffs and exchange rates. Few new sectors indicative of comparative advantage for India emerged post-2008. Prominent among these were Mineral fuel, Chemical products which include pharma products as well. Of the 4 most competitive sectors for India in 2000, 2 groups retained their advantage in 2019. While secondary goods drop out of the top 3 sets, Chemical products, mineral fuel, agricultural products made an entry to India’s most competitive sector, India being the top ten exporters of commodities in these sectors with a boost of policy changes that have possibly led to this recovery in recent years, and Products relating to fats and oils, consisting of vegetable oils and animal fats and crude raw materials that had a strong comparative advantage in the year 2004 saw a drastic decline in the period of this study. While in 2000, Minerals outperformed themselves and gained a substantial percentage of the trade in subsequent years, and by 2019 its RCA was more than 1. Machinery and Transport equipment has been India’s largest importing commodity of India, i.e, 1.5% of the global imports in 2014 with power equipment being heavily imported during 2017 could be one of the reasons for no change in competitiveness in this sector and Beverages and tobacco despite the massive spending on these commodities and India being the largest producer of raw tobacco exporting to more than 115 destinations still show a sort of plateaued pattern throughout the period of the study. Other commodities consisting of non-monetarily exchanged coins and golds which are unclassified in other groups show an erratic trend, and are seen to be the least competitive over this commodity.

Having Known India\’s Export stance and the competitiveness of India’s exports at a global level, in order to understand India’s relationship with the European union and understand the future of this relationship we dwell into the trade complementarity index.

While analysing the Trade complementarity index, We found that of Manufactured goods sector, in particular again,  India’s exports complements the highest to the European Union group-1 nation’s imports, this is due to the two well-known factors India over the years, has grown in terms of having one of the largest informal sectors globally, and hence is the largest exporter and therefore, specializes in this sectors, It is one of the sectors which will largely gain a boost from this agreement. Agriculture is another such sector, India being a country with an established agricultural base, has shown a trade surplus with the European Union nations from the years 2010-11 to 2013-14, while showing rising exports thereafter, explaining one of the reasons why the agriculture sector produce, is the second of the highest complementary traded commodity. Fats and Oils had higher complementarity initially but showed a decline in majority of the years but have also shown towards 2019 some optimistic trends that might improve over the years if the agreement takes place. Raw materials and Fats and Oils sector possibly have suffered due to the tariff structure and exchange rate disruptions, another probable reason could be the import duty faced by the nations and inflationary pressures that individually affects every nation and rise in the Indian imports relative to exports. Machinery and Transport Equipment is in such an area that India needs to rethink its strategy for expansion, with high competitiveness shown by China and lack of diversification in the product base of India there are a lot of reforms needed in this area that can be useful once investment from India-EU BITA is on-board. Secondary goods consist of jewelry, footwear, apparel textiles where India has a diversified product base. The supply chain has a big influence on this sector, and the recent take on negotiations with respect to import-export regulations, duties and investment into the domestic industries could help this sector grow at global level. And the agreement could also help build new global value supply chains.

When we take a look at the Trade Complementarity Index of European Union group two consisting of middle or lower-income countries and India, it can be again seen that even though the Manufacturing sector trade has seen its share of ups and downs, it is by far the most complementing sector among the nations, a similar trend was seen in the previous charts as well, clearly being the sector where India has a comparative advantage throughout, adding to the reasons mentioned above, the manufacturing sector consists of products like aircraft equipment and pearls and precious stones among others that considered to be the most traded commodities in the recent years. In group two nations as well, Agricultural products seem to be the highest trade commodities as many products such as shrimp, prawns, cashew nuts, soya are some principal commodities traded from India, there are whole host of commodities such as milk powder, coconut oils, maize, etc. that European union might seek to import from India. Bilaterally, India expects the EU to cut down on agricultural subsidies while the EU expects to expand the already defined market base of dairy products even further. Chemical commodities even though have not shown much variation throughout the period of the study but India has a significant stronghold in the commodities within this sector, for example, India comes under the top 10 exporters of pharmaceuticals in the world, and initially, the negotiations had stopped due to the difference, in patents and authorizations, but in the light of re-initiation of the agreement shows a way forward in increase of trade. Tobacco-Beverage sector goes through a plethora of variations in the form of taxations that are implemented in the product class that make them less tradable or in a way less complementary to exports and imports which in gives a possible reason for plateaued form of trade.

While there is a striking similarity in the complementarity trends between two groups in the European Union. The primary difference between the complementarities of India and two groups of countries in the European Union is the fact that the countries with High Income countries have more complementarity with Indian exports as compared to the countries with lower income, countries like Germany, Belgium, Luxembourg, Denmark and others in this group all show relatively higher prospects of a favourable trade arrangement, as many sectors in these higher income nations would gain in terms of respective sectors from this agreement. In the charts there is an unusual behaviour in certain commodities that can be seen during the 2007-10, when world merchandise exports saw a drop of -22% this is primarily due to the financial crisis that even though did not directly impact the trade as such but it did give rise to geopolitical instability in many regions around the world, for example, the gulf countries were in a disarray also called the “Arab Spring” during 2010-12 due to which the mineral fuel prices, were disrupted around the world, leaving a mark in India-EU trade as well.

From the above study, the revealed comparative advantage index on one hand explains, as said in Ricardian language, which Indian sectors are able to produce goods efficiently. On the other hand, on the complementarity index, explains the favourable prospects of trade arrangement while, identifying the compatible sectors as well. Therefore, it can easily be understood how imperative it is for India to have a potential strategic agreement with the European Union. India is a well-known trade partner of the European Union, after the initiation of the agreement post-2007, there can be seen a formidable increase in both imports and exports from India. China’s significant dominance over world production has the European Union attracted towards other strategic partners in the Asian countries, which can be India. As there can be multifarious advantages on both sides, for example, the ease of trading between the two countries will be positively affected given the tariff rates will come down and support the FDI. If the agreement is concluded India will be able to expand its efforts to develop new strategic relationships, France is already interested to form the trans-pacific partnership with India as one partner, another agreement could also be in the pipeline i.e, the trans-Atlantic partnership. This could help India achieve its 2030, multilateral efforts. While India is facing protectionism restrictions from several countries, this agreement could have a successful impact in trade dynamics in post-Covid era. While strategic relationships with countries like Germany, France, Belgium with whom India already has good relations could help expand the trade even further. With climate change being the highlighted topic in the negotiations, joint investment into renewable energy, information technology, and sustainability projects, which can help India’s overall development and expand its product base in emerging products of the future.

References

• Balassa, Bela. 1965. \”Trade Liberalization and Revealed Comparative Advantage.\” Manchester School of Economic and Social Studies 33: 99-123.
• Drysdale, Peter. 1969. \”Japan, Australia, New Zealand: The Prospect for Western Pacific Economic Integration.\” The Economic Record 45 (3): 321-342.
• Zheng, Xiaosong, Lijun Jia, Jiawen Bao, and Jiao Chen. 2018. \”A study of trade complementarity between China and the Baltic States and its development strategies.\” Amfiteatru Economic Journal 20 (49): 788-803.