When European railways dismantled internal freight tariffs in the 1960s, prices fell but efficiency did not rise. Routing rules redirected cargo along politically convenient paths rather than economically efficient ones. Delivery times lengthened and costs increased. Liberalisation failed because it altered relative incentives, not because tariffs were cut insufficiently. That episode captures a central lesson of trade policy: prices matter less than structures.
The India-European Union free trade agreement, signed on January 27, 2026, after nearly two decades of stalled negotiations, should be read through that lens. Its significance does not lie primarily in tariff arithmetic. It lies in how US trade coercion distorted incentives so severely that two reluctant partners were pushed into strategic alignment. In that sense, American tariffs have acted as a catalyst.
When Pressure Backfires
Trump's tariffs and the steady stream of jibes from Navarro, Bessent and Lutnick aimed at India have done something spectacularly unintended. They've turbo-charged a quiet re-wiring of India-EU economic ties. Trade diplomacy, it turns out, has a spite multiplier. Small wonder that Scott Bessent's recent TV appearances have the unmistakable air of 'FOMO' (somewhere between disbelief and regret) after hearing about the so-called "mother of all deals" being stitched together without Washington at the table.
On conventional metrics, the deal appears not very overwhelming. The EU's average applied tariff on Indian goods prior to the agreement was about 3-4%. Over 75% of Indian exports to the EU already faced tariffs below 1%. By contrast, India's applied tariffs on EU goods averaged 10-12%, with peaks of 110% on automobiles, 150% on wines and spirits, and over 40% on machinery. Liberalisation is, therefore, asymmetric: India concedes more on paper than it receives.
A Changing Order
Yet, trade agreements cannot be evaluated on the basis of tariff lines alone. As Jacob Viner argued in his theory of customs unions, the welfare impact of preferential trade depends on whether agreements generate trade creation or trade diversion. India's pre-2020 trade architecture was a textbook case of the latter. Preferential agreements with ASEAN, Japan and Korea eliminated tariffs on 74-85% of tariff lines, far exceeding WTO requirements, while non-tariff barriers in partner markets constrained precisely those sectors where India was competitive. India's trade deficit with ASEAN widened from roughly $5 billion at entry into force to over $21 billion by FY2019. Market access existed formally but not functionally.
That model became untenable once global value chains destabilised. Between 2018 and 2024, US tariff coverage expanded to affect over $500 billion of global trade annually. India faces direct duties of up to 50% on exports to the US, including on auto components, gems and jewellery, marine products and electrical machinery. The EU faced steel and aluminium tariffs of 25%, threats of additional levies linked to technology regulation, and explicit geopolitical pressure tied to Greenland and defence policy. Even countries with signed trade frameworks discovered that access to the US market was no longer rule-based but contingent.
The economic response was predictable. Firms reallocated trade flows away from tariff-exposed routes. Indian export data from late 2025 illustrate this clearly. Gems and jewellery exports to the US collapsed by over 75% year-on-year in September, yet total exports declined by barely 1.5%, as shipments to the UAE rose nearly 80% and to Belgium by 8%. Auto component exports to the US fell 12%, while shipments to Germany and other European markets helped total exports grow by 8%. Marine product exports rose over 20%, driven primarily by EU demand.
Mother Of All Deals
The India-EU FTA institutionalises this re-routing. Covering economies that together account for roughly 25% of global GDP, 30% of world population, and over $11 trillion of global trade, the agreement eliminates or reduces tariffs on 96.6% of EU exports to India and grants preferential access to over 99% of Indian exports by value. For the EU, annual tariff savings are estimated at EUR 4 billion, with goods exports projected to double by the early 2030s. For India, the value lies less in tariff reduction and more in regulatory certainty across a customs union of 27 countries.
The agreement's technical depth reflects that logic. Beyond goods, it binds services liberalisation across 144 EU subsectors and 102 Indian subsectors, exceeding commitments India has made to the UK or Australia. It embeds mobility frameworks for intra-corporate transferees, contractual service suppliers and independent professionals. It introduces rapid-response mechanisms to escalate non-tariff disputes, a tacit admission that standards, quality controls and procurement rules are the binding constraints in contemporary trade.
Most tellingly, the agreement addresses future regulatory shocks. The EU's carbon border adjustment mechanism threatens to raise effective tariffs on carbon-intensive Indian exports by double-digit percentages. Rather than litigate the principle, India negotiated MFN-style assurances, verifier recognition, and technical and financial support. It may end up acting as an insurance against regulatory weaponisation in future.
A Hedge Against Coercion
Both sides frame the deal as an economic security partnership. Europe seeks to reduce dependence on China in critical technologies and raw materials. India seeks predictable access to advanced markets at a time when the US has demonstrated willingness to weaponise trade. The US Treasury secretary's public criticism of the deal (arguing that Europe was "financing war against itself" by trading with India) only underscores the point. The agreement is a hedge against coercion, not an endorsement of any single geopolitical alignment.
Critics (outside India) argue that the deal remains incomplete. Agriculture is largely excluded. European industry remains wary of Indian standards regimes. Indian exporters remain vulnerable to EU regulatory density. All valid. But incompleteness does not negate strategic value. The failure of the 2013 negotiations stemmed from the absence of leader-level ownership and a narrow conception of trade gains. The 2026 agreement succeeds precisely because it internalises uncertainty and embeds adaptation.
In that sense, the India-EU FTA is less about liberalisation than about resilience. US tariffs did not make India and Europe more competitive. They made dependence more expensive. They distorted incentives, which, in turn, led to forced rerouting. The agreement formalises that rerouting into a durable architecture.
History suggests this is how trade systems evolve, i.e., not smoothly, but through shocks that reveal hidden fragilities. If so, the paradox will endure. America's attempt to reassert control over global trade flows may instead be remembered as the moment when two large, cautious economies finally chose to design routes that bypassed it.
(Aditya Sinha writes on macroeconomics & geopolitics)
Disclaimer: These are the personal opinions of the author
