India-EU FTA negotiations – how deep can we go?



India and the European Union (EU) will soon launch the free trade agreement (FTA) negotiations. While the two parties have set the ambition to conclude a comprehensive agreement including commitments on trade in goods and services, investments, and geographical indication, it must be acknowledged that there are fundamental differences in the design, or the template of the trade agreements signed by India and the EU so far.
In terms of their coverage, the EU agreements are both wide and deep, implying that they not only cover a large range of issues that goes beyond liberalisation of trade in goods and services and investment, but they also take binding commitments for most issues. Compared to this, trade agreements signed by India are increasingly becoming comprehensive (or wide), but not necessarily binding for most aspects other than liberalisation of goods, services, and investments. Quite a few commitments are on best-endeavour basis. A critical variation is the confluence of trade and sustainable development as embedded in the agreements signed by the two countries.
Coverage of Trade and Sustainable Development
One of the cornerstones of the EU’s trade strategy is trade and sustainable development, and it culminates into provisions related to environment and labour standards in the trade agreement.
The EU-Korea agreement signed in 2011 for instance, extends the scope of the agreement to measures affecting trade-related aspects of labour and environment. The agreement specifically requires that the parties ensure that they provide for high level of environmental and labour standards. The provisions are more detailed under the EU-Vietnam agreement. As an institutional mechanism, the EU agreements establish treaty bodies – what it calls the Domestic Advisory Group (DAG) and the Panel of Experts that oversees the implementation of the commitments. The DAG is more of an informal mechanism with representation from the two parties, however, the Panel of Experts is constructed in accordance with the formal, third-party dispute settlement mechanism. In fact, in case of non-compliance, the decision of the Panel of Experts is binding in nature and may require the contracting parties to make changes to their domestic regulations. In 2019 for instance, the EU requested the Panel of Experts to be convened regarding a dispute involving labour rights obligation in Korea. The Panel ruled in favour of the EU, requiring Korea to make amendments to its domestic legislation. Eventually, Korea had to ratify three International Labour Organization (ILO) Conventions and made amendments to its Trade Union and Labour Relations Adjustment Act.
India’s approach to trade-related aspects of environment and labour is significantly different. For instance, while in most of India’s agreements, including the one with Korea, the parties recognise that trade liberalisation should be in accordance with objective of sustainable development, but there are no specific chapters or commitments on trade-related aspects of labour and environment, leave alone binding commitments. Even in the subsequent agreements, no such commitments are made. In such a scenario, it would be interesting to see how the negotiations unfold on this issue between India and the EU on this aspect, considering that there are differences in their multilateral and regulatory positions and domestic standards on these aspects.
Differences in Multilateral Positions and Nature of Enterprises
At the multilateral level for instance, as of date, India has ratified six out of eight Core Conventions of the ILO. Two Conventions namely – Freedom of Association and Protection of Right to Organised Convention and the Right to Organise and Collective Bargaining Convention – are not yet ratified by India. Therefore, for India, while making any commitments in the trade agreement with respect to trade-related aspects of labour, it is important to assess what it will translate into, from a domestic policy perspective. More importantly, since labour falls under the concurrent list of the Indian Constitution, the state legislatures can make laws regulating labour in a specific state, amending the central acts. On some aspects, there is a likelihood of discrepancies on the positions of states and the centre and across states.
When it comes to regulatory policies, the burden of compliance falls on the enterprises. The nature of enterprises in India and the EU is quite different. To begin with, most of the enterprises in India are in the informal sector, implying that these enterprises are not registered, and they may not necessarily adhere to all rules and regulations. The size of the informal sector is larger in the case of micro and small enterprises. According to a study, almost 98% of all micro enterprises and 70% of the small enterprises in India are in the informal sector. Even when it comes to formal sector micro, small and medium enterprises, the compliance costs are onerous. According to another report, the annual cost of compliances for a typical MSME in India is about Rs 2 million and about 40% of this is the cost of compliance to the labour regulations alone. This is nearly 2.4% of the total turnover of the largest micro enterprises. In such a scenario, binding commitments of trade-related aspect of labour and environment may either increase the compliance cost for enterprises interested to export or will, by default, leave them out from integrating into global trade.
Addressing these Issues during FTA Negotiations
This is not to say that trade-related aspects of labour and environment are non-essential to trade negotiation. Infact, they may act as an incentive for firms with export interest to adopt good regulatory practices and international standards and accelerate their integration into global trade. To that end, the chapter on Trade and Sustainable Development is an important chapter from a long-term perspective. However, keeping in view the nature of enterprises and the large size of the MSME sector in the country, a deliberative approach to negotiations may be useful. Taking bindings commitments on trade-related aspects of labour and environment may not immediately yield the desired results for India, specifically terms of promoting inclusive growth and integrating the MSMEs in global trade.
To institute a Domestic Advisory Group for a proper implementation of the agreement and civil society dialogue mechanism may be helpful in filling the implementational gaps in the first few years of the trade agreement and overtime, the parties may consider a gradual transition to a more binding mechanism, with dispute settlement procedures, say in 5-7 years. Given the differences in the regulatory space and the structure of enterprises in the two parties, a balance approach while designing the chapter on Trade and Sustainable Development may yield promising results for both India and the EU.
The writer is Consultant, Indian Council for Research on International Economic Relations (ICRIER).