*** 1/28/26 - What the ‘mother of all deals’ between India and the EU means for global trade + Why the EU-India trade deal matters + The World Files for Economic Divorce from America - What you do when your (trading) partner is abusive
Buzz Sawyer
"Three forces converged to make this deal happen. First, a growing need to diversify from traditional partners amid economic uncertainty.
Second, the Donald Trump factor. Both the EU and India currently face significant US tariffs: India faces a 50% tariff on goods, while the EU faces headline tariffs of 15% (and recently avoided more in Trump’s threats over Greenland). This deal provides an alternative market for both sides.
And third, there’s what economists call “trade diversion” – notably, when Chinese products are diverted to other markets after the US closes its doors to them.
Both the EU and India want to avoid becoming dumping grounds for products that would normally go to the American market."are adapting to American protectionism not by becoming protectionist themselves,
The world’s democracies are saying they want to trade, invest, and cooperate on rules-based terms."
What the ‘mother of all deals’ between India and the EU means for global trade
- Peter Draper
Professor, and Executive Director: Institute for International Trade, and Director of the Jean Monnet Centre of Trade and Environment, Adelaide University
- Mandar Oak
Associate Professor, School of Economics, Adelaide University
- Nathan Howard Gray
Senior Research Fellow, Institute for International Trade, Adelaide University
The deal will affect a combined population of 2 billion people across economies representing about a quarter of global GDP.
Speaking in New Delhi, von der Leyen characterised the agreement as a “tale of two giants” who “choose partnership, in a true win-win fashion”.
So, what have both sides agreed to – and why does it matter so much for global trade?
What has been agreed
Under this agreement, tariffs on 96.6% of EU goods exported to India will be eliminated or reduced. This will reportedly mean savings of approximately €4 billion (about A$6.8 billion) annually in customs duties on European products.
The automotive sector is the big winner. European carmakers – including Volkswagen, BMW, Mercedes-Benz and Renault – will see tariffs on their vehicles gradually reduced from the current punitive rate of 110% to as little as 10%.
The reduced tariffs will apply to an annual quota of 250,000 vehicles, which is six times larger than the quota the UK received in its deal with India.
To protect India’s domestic manufacturers, European cars priced below €15,000 (A$25,500) will face higher tariffs, while electric vehicles get a five-year grace period.
India will almost entirely eliminate tariffs on machinery (which previously faced rates up to 44%), chemicals (22%) and pharmaceuticals (11%).
Wine is particularly notable – tariffs are being slashed from 150% to between 20–30% for medium and premium varieties. Spirits face cuts from 150% to 40%.
In return, the EU is also opening up its market. It will reduce tariffs on 99.5% of goods imported from India. EU tariffs on Indian marine products (such as shrimp), leather goods, textiles, handicrafts, gems and jewellery, plastics and toys will be eliminated.
These are labour-intensive sectors where India has genuine competitive advantage. Indian exporters in marine products, textiles and gems have faced tough conditions in recent years, partly due to US tariff pressures. That makes this EU access particularly valuable.
What’s been left out
This deal, while ambitious by India standards, has limits. It explicitly excludes deeper policy harmonisation on several fronts. Perhaps most significantly, the deal doesn’t include comprehensive provisions on labour rights, environmental standards or climate commitments.
While there are references to carbon border adjustment mechanisms (by which the EU imposes its domestic carbon price on imports into their common market), these likely fall short of enforceable environmental standards increasingly common in EU deals.
And the deal keeps protections for sensitive sectors in Europe: the EU maintains tariffs on beef, chicken, dairy, rice and sugar. Consumers in Delhi might enjoy cheaper European cars, while Europe’s farmers are protected from competition.
Why now?
Three forces converged to make this deal happen. First, a growing need to diversify from traditional partners amid economic uncertainty.
Second, the Donald Trump factor. Both the EU and India currently face significant US tariffs: India faces a 50% tariff on goods, while the EU faces headline tariffs of 15% (and recently avoided more in Trump’s threats over Greenland). This deal provides an alternative market for both sides.
And third, there’s what economists call “trade diversion” – notably, when Chinese products are diverted to other markets after the US closes its doors to them.
Both the EU and India want to avoid becoming dumping grounds for products that would normally go to the American market.
A dealmaking spree
The EU has been on something of a dealmaking spree recently. Earlier this month, it signed an agreement with Mercosur, a South American trade bloc.
That deal, however, has hit complications. On January 21, the European Parliament voted to refer it to the EU Court of Justice for legal review, which could delay ratification.
This creates a cautionary tale for the India deal. The legal uncertainty around Mercosur shows how well-intentioned trade deals can face obstacles.
The EU also finalised negotiations with Indonesia in September; EU–Indonesia trade was valued at €27 billion in 2024 (about A$46 billion).
For India, this deal with the EU is considerably bigger than recent agreements with New Zealand, Oman and the UK. It positions India as a diversified trading nation pursuing multiple partnerships.
However, the EU–India trade deal should be understood not as a purely commercial breakthrough, but also as a strategic signal — aimed primarily at the US.
In effect, it communicates that even close allies will actively seek alternative economic partners when faced with the threat of economic coercion or politicised trade pressure.
This interpretation is reinforced by both the deal’s timing and how it was announced. The announcement came even though key details still need to be negotiated and there remains some distance to go before final ratification.
That suggests the immediate objective was to deliver a message: the EU has options, and it will use them.
What does this mean for Australia and India?
For Australians, this deal matters more than you might think. Australia already has the Australia-India Economic Cooperation and Trade Agreement, which came into force in late 2022.
Australia has eliminated tariffs on all Indian exports, while India has removed duties on 90% of Australian goods by value, rising from an original commitment of 85%.
This EU-India deal should provide impetus for Australia and India to finalise their more comprehensive Comprehensive Economic Cooperation Agreement, under negotiation since 2023.
The 11th round of negotiations took place in August, covering goods, services, digital trade, rules of origin, and – importantly – labour and environmental standards.
The EU deal suggests India is willing to engage seriously on tariff liberalisation. However, it remains to be seen whether that appetite will transfer to the newer issues increasingly central to global trade, notably those Australia is now trying to secure with Indian negotiators.
Chasing an Australia-EU deal
Australia should take heart from the EU’s success in building alternative trading relationships.
This should encourage negotiators still pursuing an EU–Australia free trade agreement, negotiations for which were renewed last June after collapsing in 2023.
These deals signal something important about the global trading system: countries are adapting to American protectionism not by becoming protectionist themselves, but by deepening partnerships with each other.
The world’s democracies are saying they want to trade, invest, and cooperate on rules-based terms.
Why the EU-India trade deal matters
On Tuesday, the world’s largest trading bloc and the world’s most populous country cinched a deal that will slash or reduce tariffs on the vast majority of the products they trade. If approved by the European Parliament and the Indian cabinet, the deal will cut duties on nearly 97% of EU exports to India, while the EU will grant preferential access to 99% of Indian exports.
The deal is huge. European Commission President Ursula von der Leyen dubbed it the “mother of all trade deals.” Aside from the scale of the two parties involved, it marks yet another trade agreement since US President Donald Trump returned to office that has been struck between two “middle powers” – a term that appears to be gaining popularity. The latest agreement follows the EU’s deal with the South American trading bloc Mercosur, reached a few weeks ago, as well as India’s recent pacts with the UK, Oman, and New Zealand.
“With this, India now has got all of its major trading areas sealed up, except for China and the United States,” said Eurasia Group’s South Asia expert Pramit Pal Chaudhuri. He added that the deal opens India up to more European investment, boosts Indian textile firms, and theoretically gives them – and Europe – leverage when dealing with the United States.
This deal won’t necessarily bring economic benefits in the short run, according to Grégoire Roos, Europe director at the London-based think tank Chatham House. Given India’s expected growth over the coming decades, though, it will bring some in the long term.
“For the EU, which is ageing and growth-constrained, this is strategic plugging into future demand,” Roos told GZERO. “In a way, this trade deal buys the EU a seat at the table of tomorrow’s economy.”
What pushed it over the line? The two sides had been hammering out the deal for nearly 20 years, but negotiations stalled when Europe demanded that non-trade terms be included, such as sustainability measures and labor protections. The two sides didn’t speak about the deal for nine years.
But then Trump returned to office and started announcing tariffs on virtually all of the US’s trading partners. He was particularly heavy-handed with New Delhi and Brussels. In India’s case, he slapped 50% tariffs on its imports, half of which was a penalty for the country’s refusal to stop buying Russian oil. With the EU, punishingly high tariffs pushed the bloc to agree to a deal critics called uneven.
“The US weaponised tariffs, prioritised domestic reshoring, and used trade as leverage rather than integration,” said Roos. “That actually made the EU look like the adult-in-the-room trade partner. India did notice.”
The Trump factor, according to Chaudhuri, made India and the EU “willing to make concessions that they wouldn’t have even considered in a pre-Trump era.” Europe agreed to omit many of the non-trade terms it had initially desired, while India allowed the deal to move forward without an agreement on some agricultural products.
Where does their foreign policy move going forward? In recent decades, India has had a policy of non-alignment, refusing to hew itself too closely to any one power. But Delhi may have amended that strategy since Trump returned to the White House, focusing on building links outside the two leading global powers. Just two days before he did, India’s foreign minister S. Jaishankar gave a speech in Mumbai that was eerily similar to the one Carney delivered last week.
“In a world that is less forthcoming on commitments, India also recognizes the role of middle powers,” said Jaishankar, while highlighting that India’s relationship with the US and China has become more challenging.
For Europe, this marks yet another step away from the United States, according to Eurasia Group’s Managing Director of Europe, Mujtaba Rahman. The trading bloc suspended approval of its deal with the US after Trump upped his threats to take Greenland. The two sides have grown increasingly distant in their stance on Ukraine. The Board of Peace, initially formed to oversee the future governance of Gaza, now includes Russian President Vladimir Putin but not the US’s longstanding allies in Western Europe.
Instead, the EU is looking elsewhere for trade: on Thursday, it upgraded its relationship with Vietnam, its fourth-largest trading partner.
“Last year, the EU clearly made a conscious decision to de-risk itself from its dependence on American security,” said Rahman. “An effort is now underway to better bolster its trading relations [elsewhere] as well.”
The World Files for Economic Divorce from AmericaWhat you do when your (trading) partner is abusive
On Monday India and the European Union concluded negotiations on a breakthrough free trade agreement. Ursula von der Leyen, the president of the European Commission — the EU’s executive branch — called it “the mother of all deals.” That description is somewhat over the top. Yet the agreement is in fact historic and important in ways that go beyond economics. For it shows that the world is becoming ever more estranged from an erratic, abusive United States. In other words, other countries are moving, step by step, toward an economic divorce from America. Unlike Donald Trump, who thinks of international trade as a zero-sum game, the Europeans and the Indians understand that a free trade agreement between them is a very good deal for both parties. They are two very big economies. Although Trump administration officials like to sneer at European economic performance, the economy of the European Union is roughly the same size as ours. And India, which a few decades ago had a huge population but a small economy, has made massive economic strides and is now a major player on the world economic scene:
Source: World Bank And the two economies complement one another. Europe will face much lower tariffs on its exports to India of goods ranging from cars to olive oil. India will gain access to the European market for its exports of labor-intensive products:
Source: Bloomberg Furthermore, this is a real trade deal, not some vague expression of intent. It involves measurable, enforceable reductions in tariff rates, regulation of services, and more. This is in striking contrast with the fantasy international “deals” Donald Trump claims to have negotiated. In the Trump deals, other countries have offered vague promises to invest in America – promises that few observers expect to be fulfilled – in return for Trump’s promise not to impose destructive tariffs. Tariffs, I should say, that American consumers, American businesses, and American investors will pay and are overwhelmingly against. Let me take a minute to walk you through Trump’s fantasy deals. Trump claims that other nations have committed to invest $18 trillion in the U.S., repeating that claim in the economy speech he gave in Iowa Wednesday. Nobody knows where he got that figure. A new brief from economists at the Peterson Institute for International Economics concludes that the announced promises sum up to about $5.7 trillion, less than a third of Trump’s number. Furthermore, when you dig into these promises, there’s a definite whiff of smoke and mirrors. Roughly two-thirds of the total pledged comes from Gulf oil states, countries that are perennial Trump enablers. As the Peterson economists note, it’s hard to see how these governments can make good on their promises, since “the [Gulf] countries are not currently major investors in the United States, and they do not trade extensively with it.” The pledges from the non-Gulf oil countries are vague, with no clear mechanism for delivering on the promises. The EU’s pledge of $600 billion, in particular, is almost pure vaporware. This is in stark contrast to the EU-India deal, which is a proper, detailed trade agreement with all the i’s dotted and t’s crossed. But beyond the economic advantages, there is something of much greater importance happening with the EU-India deal: It’s a major step toward economic divorce from the United States by the major global economies. While the economic case for an EU-India agreement has been clear for years, closing the deal required overcoming special interests on both sides. What tipped the balance, clearly, was the fact that both parties are looking for ways to pivot away from trade with America. Europeans have multiple reasons to feel aggrieved with the Trump Administration, from fake claims that the E.U. has been taking advantage of the U.S. through economic trade, to bullying tactics on behalf of the tech broligarchy, to interference in Europeans’ domestic politics on the side of the European fascist right, to the recent threats to seize Greenland. However, India has even more reason to pivot than the Europeans. Trump has imposed high tariffs on its exports, with an average rate of 34.5 percent, almost as high as the average rate on Chinese exports. It’s a bizarre move in both economic and diplomatic terms. Previous American administrations deliberately cultivated a relationship with India as a counterweight to China, which is a dangerous rival. But that was when the U.S. president was sane. In fact, governments aren’t the only ones pivoting away from the U.S. Foreign private companies are also shifting away. Here are three recent headlines:
Source: Bloomberg, Reuters At the time of writing Trump hadn’t reacted to the EU-India deal. Maybe nobody in his administration told him because they are in crisis over the Pretti murder fall-out. At some point, however, I expect him to rage-tweet about it, he did about Canada’s more modest trade deal with China. In general, we can expect Trump to threaten to put tariffs on everyone trying to pivot away from dependence on a nation whose policies are, well, driven by rage tweets. But more U.S. economic intimidation isn’t going to work, because Trump doesn’t have the cards. Access to the U.S. market just isn’t as important to other countries as he imagines. Here’s a number that I think is important: Imports by the United States from the rest of the world, measured as a percentage of the rest of the world’s GDP. This measure tells us how much of other countries’ output they sell to the United States. The answer, on average, is less than 5 percent, and much lower when you exclude Canada and Mexico:
Source: World Bank
Source: World Bank And as the chart also shows, when you compute the same number for the European Union, it’s almost twice as large. Basically, the world needs access to the EU more than it needs access to the US. The world trading system as we knew it lasted for three generations after World War II. It was a rules-based system, in which everyone considered the U.S. a reliable, trustworthy partner. But now US economic relations with other nations have turned abusive, and the world is moving toward divorce. And this will make Americans measurably poorer. |
