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Innocent Bystanders

Implications of an EU–India Free Trade Agreement for Excluded Countries

image of Innocent Bystanders
The European Union, under its ‘Global Europe’ initiative, has since 2006 been pursuing trade agreements with its major global trading partners. An EU–India Free Trade Agreement is currently under negotiation; if successfully concluded it is likely to have knock-on effects on other countries’ trade with both India and the EU, the trade of the ‘innocent bystanders’ excluded from the agreement.



The authors consider the implications of the EU–India Free Trade Agreement for various groups of other countries, including the ACP countries and those in South Asia, the latter group being most strongly impacted. The analysis considers not only trade in goods but also trade in services, and focuses not only on quantities but also on the prices at which trade is conducted.



The authors then consider how excluded countries might respond to the Free Trade Agreement, both at an individual level and at a systemic level.

English

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Trade similarity

In terms of changes in the volume of trade, the negative impact of the EU–India agreement on excluded countries can arise in two circumstances. The first negative impact is the well known trade diversion effect which occurs when non-preferential imports are replaced by preferential imports solely due to the preferences granted. The second negative impact arises through the ‘correction’ of existing trade diversion. This happens when the EU was importing from a preferential partner due solely to the preferences granted. Reducing tariff barriers with a new partner could re-orientate trade towards this new partner if it is more efficient in producing the given good. This is a gain for the EU in terms of efficiency, but a negative effect for preferential countries, who now lose their trade diversion advantage. An example of this is that if an agreement such as the EU-South Africa was already trade diverting, and if India were the least-cost producer, the EU–India FTA would change the direction of trade in favour of the latter, and although this would be to the EU’s advantage, it would still harm South Africa. We refer to such outcome as the trade re-orientation effect.

English

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