The EU and India finalize a free trade agreement: eliminating tariffs on over 90% of EU goods, with India providing an import quota of 250,000 vehicles

India and the European Union have finalized a historic free trade agreement, in which both sides will significantly reduce tariff barriers. India has committed to eliminating tariffs on over 90% of EU goods and will implement unprecedented openness in the highly protected automotive and alcoholic beverage markets. This agreement is seen as a turning point in redefining the economic relationship between the two parties.

Indian Prime Minister Modi announced this news on Tuesday and described it as the "mother of all agreements" in his speech at "India Energy Week." According to Xinhua News Agency, Modi is expected to issue a joint statement with European Commission President Ursula von der Leyen later on Tuesday at a summit in New Delhi, formally disclosing the details of this agreement, which took nearly two decades of intermittent negotiations to finalize.

This move comes amid escalating global geopolitical tensions and is viewed as a strategic hedge by New Delhi and Brussels against the U.S. tendency towards trade protectionism. Following U.S. President Trump's imposition of a 50% punitive tariff on Indian goods last August and the breakdown of India-U.S. trade negotiations, India urgently needed to find alternative export markets. The agreement will establish closer ties between India's 1.4 billion population and the European market.

Under the terms of the agreement, India will significantly relax market access for EU automakers, with the quota scale far exceeding previous agreements with other countries, while also drastically reducing import tariffs on wine, spirits, and beer. Although formal signing will require an expected legal review lasting five to six months, Indian officials have stated that the agreement is expected to be formally implemented within a year.

Unprecedented Access Quotas for the Automotive Industry

The reduction of automotive tariffs is one of the key highlights of this agreement. According to media reports, India has agreed to grant EU automakers an annual import quota of up to 250,000 vehicles, which is more than six times the quota previously granted to the UK (37,000 vehicles), demonstrating India's significant concessions to reach the agreement.

In specific details, for approximately 160,000 fuel vehicles within the quota, import tariffs will be reduced to 10% over five years; to protect India's emerging electric vehicle market, tariff reductions for 90,000 electric vehicles will start in the tenth year. Additionally, for fuel vehicles outside the quota, tariffs will also be reduced from the current maximum of 110% to 35% over ten years. This will directly benefit European automotive giants such as Volkswagen, Mercedes-Benz, Stellantis, and Renault.

In return, the EU will also provide up to 625,000 import preferential quotas to Indian automakers such as Mahindra & Mahindra, Tata Motors Passenger Vehicles, and Maruti Suzuki India. Furthermore, both sides have agreed to reduce tariffs on automotive parts to zero to support deep integration of the supply chain.

Broad Tariff Reductions and Breakthroughs in Sensitive Areas

According to media reports, in addition to the automotive industry, the agreement covers a wide range of product categories. India will eliminate tariffs on over 90% of EU goods, and has specifically proposed zero tariffs on steel products, which is a key priority for India In the long-disputed alcoholic beverage sector, India has agreed to significantly reduce tariffs: wine tariffs will be adjusted to 20% to 30%, spirits tariffs will be lowered to 40%, and beer tariffs will be reduced to 50%. Modi specifically mentioned in his speech that this agreement will strongly support industries such as textiles, jewelry, leather, and footwear.

Although agriculture has always been a "mutually sensitive" issue in negotiations between the two sides, an agreement has been reached to eliminate or reduce high tariffs on EU agricultural products. Hosuk Lee Makiyama, director of the European Centre for International Political Economy, told CNBC that given both sides have protectionist tendencies and that it is difficult to reach a similar agreement in the US-China market, this is already "one of the best agreements that can be obtained" for both India and the EU.

Strategic Choice to Hedge Against US Tariff Pressure

For New Delhi, this agreement is a key measure to respond to US trade pressures. Since Trump imposed a 50% tariff on the Indian economy last August, the US, as India's largest export market, has gradually tightened its doors, prompting India to accelerate its search for alternative markets. This is the fourth major trade agreement India has recently finalized, following agreements with the UK, Oman, and New Zealand.

The EU is also seeking partners to cope with the uncertain US-EU relationship. Von der Leyen previously emphasized at the Davos Forum that the EU chooses "fair trade rather than tariffs, partnership rather than isolation." Previously, the EU had signed relevant agreements with the Southern Common Market, Indonesia, Mexico, and Switzerland.

Trade Scale and Future Outlook

According to a draft government statement cited by the media, by the fiscal year ending March 2025, the trade volume of goods between India and the EU is expected to reach $136.5 billion. Data from the European Commission shows that the EU is one of India's largest trading partners, primarily exporting machinery, transport equipment, and chemicals to India, while India exports textiles, metals, and mineral products to the EU.

This agreement will create a huge market covering 2 billion people. Although experts point out that this agreement cannot completely replace the necessity of the India-US trade agreement—India's trade surplus with the US in 2024 is $45.8 billion, far exceeding the $25.8 billion with the EU—it provides crucial diversification support for India in the global trade landscape. The agreement also includes review clauses that allow for regular reassessment of quotas based on the prosperity of the Indian automotive market and future concessions with other partners (including the US).