The Economic and Geopolitical Implications of the EU-India Free Trade Agreement - A Report

The European Union-India Free Trade Agreement (EU-India FTA), signed on January 27, 2026 after more than two decades of negotiations represents an inflection point in both trade and geopolitical priorities of the two partners.

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Using data from the WITS and COMEXT databases, this study employs a partial equilibrium model to estimate the expected change in EU exports of motor vehicles (HS-4 8703) and components (HS-4 8708) to India, outlining the expected effects from new trade created, trade diversion, and price effects in global value chains. The findings reveal differential benefits across European industries as well as asymmetric impacts in foreign economies, fundamentally altering the map of automotive global value chains.

The EU-India relationship dates back to the 1960s, with India among the first countries to establish diplomatic relations with the European Economic Community. Over the decades, the relationship developed after the reformation and liberalisation of India’s economy in 1991. In 1994, the EU-India Cooperation Agreement established a foundational treaty of a formal framework for political, economic, and development cooperation between the two.

In 2004, the EU-India Strategic Partnership bolstered a formal partnership that created a political framework to deepen cooperation across political, security, and economic domains, which extended the stage to formal summits.

The 7^th India-EU Summit in 2006 paved the way for more comprehensive trade negotiations, which resulted in the 2007 EU-India Bilateral Trade and Investment Agreement (BTIA) that focused on a formal Free Trade Agreement that extensively covers goods, services, investment, and regulations. The negotiations faced challenges because of disagreements over high tariffs, market access, intellectual property, the automotive industry, and regulatory standards.

Negotiations from both ends slowed and eventually stalled in 2013, resulting in the stagnation of the EU-India FTA until 2022 due to the unresolved diplomatic differences regarding the FTA.  

In 2022, the leaders of the EU and India reached a common consensus to resume the talks on trade agreements to diversify supply chain rearrangements post COVID-19 and China’s dominance. The initiative came into light after the EU-India virtual Summit in May 2021 between Piyush Goyal and EC VP Valdis Dombrovskis, where both agreed on a ‘balanced, ambitious, comprehensive and mutually beneficial’ Free Trade Agreement alongside other agreements.

In 2026, the talks reached an advanced stage where both sides agreed to conclude the decades-old Free Trade Agreement on 27^th January, 2026 EU-India Summit in New Delhi. The landmark agreement marks a historic deal between India and the European Union because, in recent times, the Trade Agreement has become a crucial one for both due to the recent shifts and realignments in geopolitical conditions around the world. The emerging trade agreement is expected to change the future of the automotive industry and the export and import of the same.

HISTORY OF THE AUTOMOTIVE INDUSTRY: EXPORTS OF THE EU TO INDIA  

The automotive exports to India have historically been confined and restrictive for the EU. Germany, the Slovak Republic, Czech Republic are a few of the European countries that account for one of the biggest exporters of vehicles, but India imports a small fraction of EU automotive exports. Due to India’s high tariffs on imports, which accounted to 125% in 2023 for fully built cars, the Indian market discouraged direct exports from Europe to India in the automotive sector; this resulted in India importing around $330-340 million in motors and vehicles in 2024. 

Critics have debated that the measure confined the industry to inefficiencies, where domestic firms are less pressured for innovation and competition, whereas consumers paid premium prices for imported as well as locally produced vehicles, since competition was restricted.

On the other hand, one should consider that India’s high tariffs on the automotive industry are a result of a wider trade strategy of protecting and nurturing the domestic automotive industry. This is due to the post-independence economic policy that emphasised import substitution industrialisation to reduce reliance on foreign goods.

This policy has maintained a stringent focus on control of imports via tariffs and licensing, discouraging the import of goods primarily through high tariffs. Thus, European automotive companies have established manufacturing and assembly operations in India to produce cars for the domestic market as well as export the same in other countries; this localisation of production was in line with Prime Minister Narendra Modi’s ‘Made in India’ vision.

On 27th January 2026, the EU-India FTA concluded the agreement, where the automotive sub-part of the EU-India FTA highlights a significant turn in the trade deal. The deal will considerably reduce the import duties on European cars from 125% to 40% and eventually to 10%. This move signifies an important turn of events for the Indian and European Markets and Economy by making European vehicle prices competitive in the Indian market.

According to the agreement, the Electric Vehicles are expected to be excluded from the tariff brackets initially, for approximately five years, which significantly increases the market for the production and investment of Electric Vehicles. Trade between India and Europe is thus expected to surge due to tariff reductions, as well as complementary investment protection and legal harmonisation agreements that are still in draft.

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For all official and academic purposes, use the following as a citation, which follows the Chicago Manual Style.

Tanuka Das and Achilles Tsirgis

“The Economic and Geopolitical Implications

of the EU-India Free Trade Agreement”

THE GEOSTRATA, April 14, 2026.

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BY TANUKA DAS AND ACHILLES TSIRGIS

CENTRE FOR DIPLOMACY & INNOVATION

TEAM GEOSTRATA AND EU HUB

info@thegeostrata.com