EU trade setback: Indian goods lose preferential access amid FTA talks

Indian exports to the European Union have taken a major hit from January 1, 2026, after the EU withdrew tariff preferences on nearly 87 per cent of Indian goods, forcing exporters to pay higher import duties at full Most Favoured Nation (MFN) rates.

The withdrawal follows the suspension of benefits under the EU’s Generalised Scheme of Preferences (GSP), which earlier allowed Indian products to enter European markets at tariffs lower than MFN rates. With the suspension now in effect for 87 per cent of export value, Indian exporters are required to pay the full tariff burden, significantly raising costs.

Under the GSP framework, exporters earlier enjoyed a “margin of preference”, typically averaging around 20 per cent for products such as textiles, garments and industrial goods. For instance, apparel that faced a 12 per cent MFN tariff paid only 9.6 per cent under GSP. With the benefit withdrawn, exporters must now absorb the entire 12 per cent duty, directly impacting pricing and margins.

The impact spans almost all major industrial sectors that anchor India’s exports to Europe, including minerals, chemicals, plastics, textiles, iron and steel, machinery and electrical goods. GSP benefits now apply only to a narrow set of products such as agriculture, leather goods and handicrafts, which together account for less than 13 per cent of India’s exports to the EU.

The EU’s decision stems from its “graduation” rules, under which tariff preferences are withdrawn when exports in specific product categories cross prescribed thresholds for three consecutive years. India has accordingly been “graduated” for the 2026–2028 period under regulations adopted in September 2025. While the move is legally valid, a report by the Global Trade Research Initiative (GTRI) notes that the economic impact is immediate and severe, with most Indian exports losing preferential access overnight.

The timing has compounded the challenge for exporters. Even as negotiations for the India-EU Free Trade Agreement progress, the loss of GSP benefits coincides with the launch of the tax phase of the EU’s Carbon Border Adjustment Mechanism (CBAM) from January 1, 2026. GTRI describes this as a “double hit”, combining higher tariffs with rising non-tariff costs.

Indian exporters of steel and aluminium are already grappling with increased carbon reporting and compliance expenses, along with the risk of being charged higher default emissions under CBAM. Together, these pressures are expected to squeeze margins and weaken India’s competitiveness against global peers.

In highly price-sensitive sectors such as garments, even modest tariff increases could push EU buyers towards duty-free suppliers like Bangladesh and Vietnam. With the India-EU FTA likely to take at least a year or more to be implemented, Indian exporters will have to operate under full MFN tariffs in the interim.

Against a fragile global trade backdrop, GTRI warns that 2026 could be one of the toughest years for Indian exports to Europe in over a decade, as exporters navigate higher tariffs, carbon costs and intensifying competition.

(With inputs from ANI)