India-EU FTA: Key benefits for India and impact on competing countries

India’s products face several hurdles related to rules of origin and product profiles. The EU’s non-tariff barriers, especially on India’s labour-intensive sectors like textiles, have come under scrutiny in India’s discussions. India has advocated for textiles to be listed as non-tariff items due to the high tariffs imposed on the sector, alongside various non-tariff barriers it must overcome to access a large market like the EU. Currently, India’s textiles and apparel need to improve their product profile to benefit from the Free Trade Agreement (FTA). However, a scenario where tariffs are reduced to zero per cent would provide Indian exporters insight into which products, especially high-value-added items like apparel that currently face the highest tariff rates under the Developing Countries Trading Scheme (DCTS), would benefit if tariffs were lowered. The analysis is conducted using the SMART tool of WITS with the 2022 (latest) database available. Fibre2Fashion analyses how much apparel will gain if the India-EU FTA is signed and identifies the potential losing countries.

Exhibit 1: India’s apparel exports in EU’s apparel imports in the UK (in $ Bn)

Source: ITC Trademap, F2F Analysis; * forecasted

India’s apparel exports to the EU 27 have seen fluctuations over the years. In 2018, exports were at $4.60 billion, which declined to $4.38 billion in 2019, and further dropped to $3.35 billion in 2020, likely due to the global disruption caused by the COVID-19 pandemic. However, the sector showed strong recovery post-pandemic, with exports rebounding to $3.92 billion in 2021 and reaching $4.69 billion in 2022, surpassing pre-pandemic levels. In 2023, exports declined slightly to $4.06 billion, reflecting potential global economic pressures and challenges such as supply chain issues and inflation in the EU. The forecast for 2024 is $4.24 billion, indicating a modest recovery from 2023, suggesting a stable but cautious outlook for India’s apparel exports to the EU in 2025.

Exhibit 2: Export values of apparel for CY 2023 (Jan-Apr) and CY 2024 (Jan-Apr)

Source: ITC Trade map, F2F Analysis

India’s apparel exports to the EU experienced fluctuations during the first four months of 2024 compared to the same period in 2023.

• January 2024: Exports stood at $440.64 million, a slight decline of 2.8% compared to $453.30 million in January 2023.
• February 2024: Exports increased to $450.20 million, up 2.3% from $440.17 million in February 2023.
• March 2024: A significant growth was observed, with exports reaching $431.74 million, reflecting a 6.3% increase over $405.97 million in March 2023.
• April 2024: Exports amounted to $355.48 million, a modest growth of 2.1% compared to $348.21 million in April 2023.

Overall, while January saw a slight decline, the subsequent months demonstrated positive growth, with March 2024 recording the highest increase among the four months. These trends indicate a recovery and improvement in India’s apparel export sector to the EU, aligning with predictions for CY 2024. Further data from the remaining months will provide more clarity on the overall trajectory.

Table 1: India’s revenue changes after tax reduction (in $ Mn)

Source: Analysis using the WITS tool

The data indicates a significant increase in India’s apparel export revenue due to the reduction of tariffs by the European Union (EU). Specifically, for HS Code 61 (which covers knit apparel), exports are projected to rise from $3,097.14 million to $3,727.41 million, reflecting an increase of $630.27 million. Similarly, for HS Code 62 (non-knit apparel), exports are likely to grow from $2857.76 million to $3421.34 million, showing an increase of $563.59 million. This boost in export revenue demonstrates the positive impact the EU’s zero per cent tariff will have on Indian apparel, making Indian products more competitive and accessible in the EU market, thereby enhancing trade volumes and revenue for the Indian apparel sector.

India should consider concentrating on the non-knit category falling under HS Code 62. At present, knitted apparel exports to the EU are dominated by Bangladesh and Vietnam. India has the chance to position itself as a leading exporter to the UK with respect to HS Code 62 of non-knitted apparel.

Table 2: India’s trade creation and trade diversion effects post tariff reduction (in $ Mn)

Source: Analysis using the SMART tool

The data on India’s apparel exports to the EU, following the implementation of a zero per cent tariff, shows notable effects for both HS Code 61 (knit apparel) and HS Code 62 (non-knit apparel). For HS Code 61, the trade creation effect is $256.29 million, reflecting the increase in demand for Indian knit apparel in the EU due to the removal of tariffs. Additionally, the trade diversion effect is $373.98 million, indicating that a significant portion of India’s export growth would be the result of shifting market share from other competing countries. Trade diversion refers to the shift in India’s export patterns where Indian products displace those from other countries that previously faced higher tariff rates. As the EU removes tariffs, Indian goods will become more competitively priced compared to products from other countries that are still subject to tariffs, allowing India to capture a larger share of the market. The total effect on India’s knit apparel exports is projected to be $630.27 million, combining both the creation of new trade opportunities and the redirection of trade flows.

For HS Code 62, the trade creation effect is $236.19 million, reflecting the new demand for Indian non-knit apparel in the EU market. The trade diversion effect here is $327.39 million, suggesting that India will be able to capture a portion of the EU market previously held by other exporters due to the removal of tariffs. The total effect on India’s non-knit apparel exports would be $563.59 million, driven by both increased demand and the diversion of trade from competitors. In both categories, the larger trade diversion effects underscore how the tariff reduction would enable India to secure a larger market share in the EU, while also expanding its overall export revenue. By benefiting from trade diversion, India would gain a competitive advantage in the EU market, particularly as it displaces goods from countries that continue to face tariffs, further boosting its export performance.

Exporter view analysis

Table 3: Top 10 countries set to lose from the trade deal between India and the EU (in $ Mn)

Source: Analysis using the SMART tool

Table 3 shows the trade diversion effects for both HS Code 61 (knit apparel) and HS Code 62 (non-knit apparel) when tariffs are reduced to zero per cent. For both categories, the primary countries affected by trade diversion are similar, reflecting how the removal of tariffs benefits India at the expense of other competitors. For HS Code 61, Bangladesh, China, and Türkiye will experience the largest losses in trade, with Bangladesh seeing the most significant diversion at -$160.82 million. Similarly, for HS Code 62, China and Bangladesh face notable trade diversion effects, with China losing $102.03 million and Bangladesh losing $59.63 million. This pattern shows that both Bangladesh and China are key competitors in both knit and non-knit apparel sectors, and India’s tariff-free access to the EU market allows it to gain market share from these countries.

Other countries such as Türkiye, Morocco, and Vietnam also face trade diversion across both categories, though the values are lower.

Way forward

This analysis is an attempt to understand Indian apparel’s standing in the EU market. Indian apparel should particularly focus on improving its product profile given the EU’s insistence on continuing with the Carbon Border Adjustment Mechanism (CBAM) and product requirements that have the possibility of acting as a non-tariff barrier. Currently, the China +1 policy has found focus due to the US-China tariff war. This might be either a case where India can benefit from the growing resentment towards Chinese exports, or it would be harder for Indian apparel to penetrate the EU market even after a tariff reduction due to China’s increased attention to EU markets. In the present scenario, Bangladesh benefits from the GSP, which makes its apparel cost-effective for EU consumers. However, if Indian apparel is put on the non-tariff list, India will not only become more cost-effective but will also prove to be a higher-quality alternative to Bangladesh apparel. India’s current emphasis on using high-quality inputs for finished goods will only boost its numbers in the EU market.

Fibre2Fashion News Desk (NS)