How US tariffs fuel the EU India trade pact: EU and India are planning new trade routes

Published on: March 3, 2025 / Updated on: March 3, 2025 – Author: Konrad Wolfenstein

How US tariffs are fueling the EU-India trade agreement: EU and India are planning new trade routes – Image: Xpert.Digital

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The European Union and India announced at the end of February 2025 their intention to conclude a comprehensive free trade agreement that same year. This undertaking is situated within a complex international context in which the United States plays a significant, albeit indirect, role. Recent developments in American trade policy and the geopolitical shifts under the Trump administration have been a major factor in the EU and India accelerating their negotiations with renewed momentum.

Trade policy tensions with the USA as a catalyst

The tariffs threatened by US President Donald Trump against numerous countries, including the EU and India, have acted as a key catalyst for intensified negotiations between Brussels and New Delhi. EU Commission President Ursula von der Leyen, during her visit to the Indian capital, stated that “the geopolitical circumstances require decisive action”—a clear reference to US trade policy. The announcement of punitive tariffs of 25 percent against the EU has triggered concern in Brussels and accelerated the search for alternative trading partners.

Since Donald Trump's re-election as US president, the EU has significantly intensified its efforts to reach trade agreements with third countries. In addition to negotiations with India, the European Union has already concluded agreements with the Mercosur countries in South America, as well as with Mexico and Malaysia. This diversification strategy is a direct response to the US's shift away from its traditional trading partners and the resulting uncertainty in the international trading system.

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The USA as a geopolitical factor

The increasing estrangement of the US from its European allies under the Trump administration has led the EU to seek new partners, including in security policy matters. Against this backdrop, the EU is now examining the possibility of a security and defense partnership with India. During her visit to New Delhi, von der Leyen stated: “I can announce that we will be exploring a future security and defense partnership with India, modeled on the partnerships with Japan and South Korea.”.

This development illustrates how the changing American foreign policy not only has direct trade policy consequences, but also indirectly restructures strategic alliances and partnerships in international politics. In light of the uncertain transatlantic relationship, the EU is seeking alternatives to protect its economic and security interests.

Competition in the Indian market

In the competition for the increasingly important Indian market, the EU is in direct competition with the USA. Currently, the European Union is already India's largest trading partner – ahead of the USA and China. Bilateral trade between the EU and India reached a value of €120 billion last year. A successful free trade agreement would further extend this lead and strengthen the competitive position of European companies against their American rivals.

India's economic importance is steadily growing. For 2023 and 2024, the International Monetary Fund and the Asian Development Bank forecast high economic growth rates of over 6 percent for India – significantly higher than the expected growth rates for China. This dynamism makes the Indian market a strategically important target for the trade policies of both the EU and the USA.

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The USA in a triangular relationship with China and India

Another important aspect of the American role in the context of the EU-India free trade agreement is the US position towards China. The EU hopes that improved relations with India will enable it to "better counter China's growing influence in the Asia-Pacific region." The EU shares this goal with the US, which is also seeking to counter China's growing influence in the region.

The concerns expressed by the US regarding “China’s non-market-compliant trading practices” and the criticism of Chinese industrial policy are also reflected in European positions. Both the EU and the US are striving to develop alternatives to China, particularly in strategic areas such as “building resilient supply chains and regulating new technologies, including artificial intelligence”.

Trade policy differences between the US and the EU

However, relations between the US and the EU are not only characterized by their shared competition with China, but also by their own internal tensions. The US National Trade Estimate Report on Foreign Trade Barriers criticizes numerous EU trade barriers, including technical standards, intellectual property regulations, and restrictions on digital trade.

These divergences are also reflected in the different approaches to trade policy. While the US, under the current administration, is increasingly relying on unilateral measures and punitive tariffs, the EU continues to pursue a multilateral approach by concluding comprehensive free trade agreements. These differing strategies also influence their respective relations with India.

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Impact on the global trade architecture

The trade conflicts originating in the US and the reactions of the EU and other trading partners have potentially far-reaching implications for the global trade architecture. The intensification of relations between the EU and India can be seen as part of a broader realignment of the international trading system, in which regional and bilateral agreements gain importance while multilateral institutions such as the World Trade Organization (WTO) come under pressure.

In this context, German businesses emphasize the importance of India's "constructive role in WTO reform," since "over half of EU foreign trade is only secured by WTO rules, including trade with India." Given the "erosion of WTO dispute settlement," bilateral agreements with "enforceable provisions" are seen as a crucial source of "planning certainty for German businesses.".

The USA as an indirect driver of EU-India rapprochement

In summary, the US plays a significant, albeit largely indirect, role in the context of the EU-India free trade agreement. The protectionist trade policies pursued by the Trump administration and the threat of punitive tariffs acted as a key catalyst for the accelerated rapprochement between the EU and India. This development is part of a broader realignment of international trade relations, in which both the EU and India seek to safeguard their economic interests in an increasingly uncertain global environment.

The proposed free trade agreement between the EU and India, which according to EU Commission President von der Leyen would be “the largest of its kind in the world”, could therefore not only strengthen bilateral economic relations, but also send an important signal for the future of international trade policy in a time of growing protectionist tendencies.

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