In April, the European Parliament enacted a unique law that requires exporters of certain products to certify that their items sold in the European Union (EU) did not contribute to deforestation and forest degradation. The EU Deforestation Regulation applies to various products, including coffee and wooden furniture, and requires that they do not come from deforested areas after 2020. This new legislation has caught the Government of India off guard as it is currently working towards a favorable free trade agreement (FTA) with the EU. Indian exporters, particularly those shipping commodities such as coffee, leather, oil cake, and wooden furniture, will bear the brunt of this regulation.
Aside from the Deforestation Regulation, three other EU laws related to climate change and subsidies may prove to be major obstacles for traders worldwide, affecting Indian exporters as well. The EU is India’s largest export market, accounting for 16.5% of the country’s exports. In the last fiscal year, India exported goods worth $74.8 billion to the EU, showing a growth rate of 15%. In the first two months of this fiscal year, the EU’s share increased to 17.4%, indicating the increasing importance of the European bloc for India’s export trajectory.
The Indian government has two options to respond to these EU laws. Officials and experts suggest that they can either impose tariffs on European goods as a retaliatory measure or negotiate with the EU for waivers and more time to comply. The other three EU laws, namely the Foreign Subsidy Regulation (FSR), the Regulation for Shipping Sector, and the Carbon Border Adjustment Mechanism (CBAM), are likely to have significant impact on Indian businesses, particularly in the iron, steel, and aluminum sectors. Additionally, Germany’s Supply Chain Due Diligence Act, which focuses on forced labor and human rights in global business supply chains, will demand greater accountability from Indian suppliers.
Critics argue that the EU’s measures, especially the CBAM and the Deforestation Regulation, will adversely affect Indian industries by increasing compliance costs and reducing price competitiveness. They claim these measures are protectionist and driven by the EU’s desire to shield its own industry and farmers from import competition, rather than genuine environmental concerns. Some experts also accuse the EU of hypocrisy, as it has little primary forest cover compared to the global average, yet imposes regulations to protect forests worldwide.
Indian trade experts emphasize the need for a bilateral approach to address these contentious issues, given the near-defunct state of the World Trade Organization’s dispute settlement mechanism. Retaliatory measures, similar to those imposed on the US in 2019, are seen as a viable option to protect Indian interests. However, a more diplomatic and legal response is also recommended. Suggestions include implementing a carbon border adjustment measure based on per capita emissions, considering the significant disparity between EU and Indian emission levels. Data privacy concerns and the potential influence of other countries, such as China, also need to be considered when formulating a response.
Some Indian companies have already started preparing for these new green challenges, recognizing the potential impact on their exports to the EU. The Steel Authority of India Ltd. (SAIL), for example, is re-examining its operational processes to reduce its carbon footprint. The government is examining the recently notified CBAM regulations at all levels and may seek concessions through engagement with the EU rather than opting for a confrontational approach. Retaliatory measures, however, are not entirely ruled out.
Overall, the EU’s new laws related to deforestation, subsidies, and climate change pose significant challenges for Indian exporters. The Indian government must carefully strategize its response to protect its interests while engaging with the EU to find favorable solutions.
Navigating New EU Regulations: India’s Dilemma of Tit-for-Tat Tariffs or Waiver Talks
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