In a summit that concluded in May, India and the European Union announced that they would resume talks to conclude a free trade agreement between them.

Talks on an India-European Union free trade agreement first began in 2007 but stalled after 16 rounds of discussion between the parties over six years. The resumption of talks on an agreement has raised hopes for the many Indian manufacturers and exporters who participate in the 60 billion+ euro annual trade with the European Union. This has renewed debates about whether the reciprocal reduction of tariffs and trade barriers between India and a developed economy like the European Union would actually benefit the country economically.

Given that the European Union is India’s third-largest trading partner, however, countless Indian industries will undoubtedly benefit from the lower tariffs and significantly improved access to the European Union market that a trade agreement would bring.

As negotiations progress between India and the European Uunion on this front, a second, oft-ignored dimension to a trade agreement worth considering is changes to India’s legislative and regulatory framework that the European Union will likely insist on as a pre-condition to entering into an agreement.

Called “level playing field” provisions, these mandatory regulatory changes have been in the limelight for over a year now owing to grave disagreements on them between the United Kingdom and the European Union in the context of the post-Brexit trade deal. A decision by the European Union to insist on the imposition of similar requirements on India will likely be a massive stumbling block in the progress of the freshly resumed negotiations, but if incorporated into any eventual free trade agreement, can cause significant positive changes in crucial areas like labour and environmental rights in India.

Level playing field

Level playing field provisions in free trade agreements require that the regulatory conditions in which goods and services are freely traded between partner countries be virtually identical. The logic behind them is simple – once tariffs and other barriers to trade between two countries or territories have been significantly reduced or eliminated by a free trade agreement, a lax or less stringent regulatory structure in one partner country compared to the other would give producers of the same good operating under the lax regulatory structure an unfair advantage.

In the example of a potential India-European Union agreement, for instance, this would mean that if the costs imposed on producers to comply with mandatory labour and environmental regulations in India are lower (owing to a more lax structure that is implemented poorly) than those of their competitors in the European Union, Indian producers might be able to produce comparable goods at a significantly cheaper price than their European Union competitors, allowing them to capture the European market and crowd their competitors out.

In addition to regulatory compliance costs in areas like labour rights and the environment, level playing field provisions typically also govern rules surrounding the granting of subsidies by states to producers, ensuring that such state subsidies do not artificially allow producers in one partner country to reduce prices and capture the market in the other partner country.

Level playing field provisions would require that India to upgrade its labour regulation standards to match those enforced in the European Union. Photo credit: Arun Sankar/AFP

The European Union has long placed great emphasis on including such provisions in its free trade agreements – in addition to its post-Brexit trade deal with the UK, level playing field provisions find a prominent place in the recently concluded European Union-Japan, European Union-Canada and European Union-Korea agreements, among others.

While the specific terms of these provisions are the subject of particular negotiations, the overall philosophy behind them is clear – the European Union places great value on the (stringently enforced) labour and environmental protection standards it applies to producers of various goods in its economy, and insists on protections of a similar standard being similarly stringently enforced on producers of competitive goods in its free trade agreement partner countries.

Applying provisions to India

If applied to India, level playing field provisions would, roughly, require that India upgrade its labour and environmental protection standards to match those enforced in the European Union. This would operate at two levels.

First, on the issue of the black-letter law itself, India will likely have to change a slew of labour and environmental regulations, covering issues like minimum wages, working conditions for labourers and limits on the release of harmful effluents to match the higher standards applied in the EU. Second, India will have to satisfy the EU that these higher standards are stringently and regularly enforced on producers of goods that are exported to Europe.

To meet this requirement, an India-European Union agreement will likely include some kind of a review mechanism, allowing the European Union to exercise some oversight over how these conditions are satisfied. Whether these changes are implemented across the board or only to goods produced in India for the purposes of export to the EU remains to be seen, but either way, they will likely have a massive impact on producers (and labourers) operating in a variety of sectors in India.

Indeed, at the very least, this mechanism in a potential agreement will ensure that the international minimum standards set by bodies like the International Labour Organisation in the areas of labour rights and environmental protection are directly enforced in India.

In my view, this is, in and of itself, a positive development. By trading some of its absolute regulatory sovereignty for the economic benefits that come with easier market access to the European Union, India will be committing to upholding and enforcing labour and environmental rights of a higher standard and will be accountable to an external entity (the European Union) for such enforcement. Even if these labour and environmental upgrades eventually apply only to producers exporting to Europe, this will benefit a large number of Indian labourers and cause significant positive environmental externalities.

In addition to this, such external constraints will reverse the increasing nonchalance with which Indian authorities have recently approached such rights-based issues. An example, from last year, is the absolute suspension of many labour laws (including core legislations governing minimum wages, maternity benefits and the right to form trade unions) in many Indian states as a way of reducing production costs and “supporting” struggling producers during the first Covid-19-induced lockdown.

Positive effects

While producers in a variety of sectors have, unfortunately, continued to struggle due to Covid-19, the decision to suspend all labour rights benefitted struggling producers at the cost of destitute labourers, opening up the possibility of them being legally exploited through abysmally low pay and inhuman working conditions during the peak of the first Covid-19 wave.

The inclusion of level playing field provisions will make such drastic measures, which view the labour and environmental protections as a cost or a nuisance that can be waived to provide a stimulus for economic growth, significantly rarer. Given the importance placed on these protections by the EU, India will have to similarly view them as untouchable and sacrosanct, as long as it wishes to preserve the economic benefits of low tariffs and reduced barriers to trade with Europe that its producers enjoy under a potential India-European Union agreement.

The eventual shape that such provisions will take, if any, in an India-European Union free trade agreement remains very uncertain. Almost certainly, however, they will be among the more hotly debated and negotiated issues between India and the European Union as they kick off negotiations. As limited as their impact may be, however, it is clear that any pressure from the European Union that results in improvements to the state of India’s labour and environmental protections is a cause for optimism and must be celebrated.

Siddharth S Aatreya is a lawyer based in Bangalore and London.