EU Delivers Setback Ahead of Mega Trade Deal; Can India Compete with Bangladesh and Vietnam?

New Delhi: Just days before the expected announcement of what is being described as the world’s largest trade deal, the European Union (EU) has delivered a setback to India by withdrawing export tariff benefits on several Indian goods. The move comes at a sensitive time, as negotiations between India and the EU on a Free Trade Agreement (FTA) are in their final stages, with an official announcement expected around January 26.

The EU has suspended benefits under its Generalised Scheme of Preferences (GSP) for a wide range of Indian exports, including textiles, jewellery, chemicals, plastics, metals, machinery, and transport equipment. As a result, these products will now face higher import duties in the European market starting January 1, 2026.

Loss of Tariff Advantage

According to trade experts, Indian exporters earlier enjoyed tariff concessions of up to 20% on many of these products under the GSP framework. With the withdrawal of these benefits, exporters will now have to pay the full Most Favoured Nation (MFN) duty, increasing costs and affecting price competitiveness.

For instance, textile products that earlier attracted a 9.6% duty under GSP, instead of the standard 12%, will now be charged the full rate. This change is expected to impact margins, especially for small and medium exporters.

CBAM Adds to Pressure

Compounding the challenge, the EU has also implemented its Carbon Border Adjustment Mechanism (CBAM) from January 1, further tightening compliance requirements and potentially increasing costs for Indian exporters in carbon-intensive sectors.

What Is GSP and Why It Matters

The Generalised Scheme of Preferences (GSP) is a trade mechanism through which developed economies offer lower tariffs to developing countries to support their exports. However, under revised EU rules, only around 13% of India’s exports—mainly agricultural and leather products—will now continue to receive GSP benefits.

The Ministry of Commerce and Industry stated that the EU has been gradually reducing GSP benefits for India since 2016, and this decision is part of that ongoing process. In FY2025, nearly 47% of India’s exports to the EU (worth $35.6 billion) were already outside the GSP framework, while 53% (around $40.2 billion) remained eligible.

India vs Bangladesh and Vietnam

Export bodies warn that the decision could weaken India’s competitive position in the EU market. Ajay Sahai, Director General of the Federation of Indian Export Organisations (FIEO), said that the EU has effectively withdrawn GSP benefits on almost 87% of Indian exports, eliminating an average 20% tariff advantage.

“This significantly affects India’s price competitiveness, particularly against countries like Bangladesh and Vietnam, which continue to enjoy preferential access to the EU market,” Sahai said. Both nations are major competitors in textiles and manufacturing and still benefit from lower tariffs under EU trade arrangements.

Impact Timeline

As per EU regulations issued on December 1, 2025, the suspension of GSP benefits will remain in effect from January 1, 2026 to December 31, 2028. Industry stakeholders fear that unless the upcoming India-EU FTA offers compensatory market access or tariff relief, exporters could face sustained pressure in one of India’s largest export destinations.

Despite the setback, the Indian government maintains that the impact will be limited and that the forthcoming trade agreement is expected to unlock new opportunities and restore long-term competitiveness in the European market.