India-EU Trade: Tough Phase as Preferential Tariffs End

India-EU Trade: India’s trade relationship with the European Union has entered a challenging new phase as higher import duties on Indian goods take effect from January 1, 2026, following the EU’s suspension of Generalised Scheme of Preferences (GSP) benefits on nearly 87% of India’s exports. The development, flagged in a report by trade policy think tank Global Trade Research Initiative (GTRI), marks a decisive shift in market access conditions for Indian exporters.

With the withdrawal of preferential tariffs, a vast range of Indian products will now face full Most Favoured Nation (MFN) duties, ending decades of unilateral trade concessions extended by the EU to developing economies.

India-EU Trade: What Changes With GSP Withdrawal

Under the GSP framework, Indian exporters enjoyed a Margin of Preference (MOP)—a tariff reduction on MFN rates that averaged around 20% across textiles, garments and several industrial products. This advantage has now been removed.

For exporters, the impact is immediate and measurable. An apparel product that earlier attracted a 12% MFN duty but paid only 9.6% under GSP will now be charged the full 12%. While the difference may appear modest, GTRI notes that in price-sensitive sectors, such increases can decisively influence sourcing decisions.

EU buyers, especially in garments and textiles, may increasingly pivot toward duty-free suppliers such as Bangladesh and Vietnam, eroding India’s competitive position in one of its most important export markets.

Core Industrial Sectors Face the Heaviest Impact

The suspension of GSP benefits applies across almost all major industrial categories that anchor India’s exports to Europe. These include:

• Minerals and chemicals

• Plastics, rubber and stone products

• Textiles and garments

• Precious metals and base metals

• Iron, steel and engineering goods

• Machinery, electrical equipment and transport products

Together, these sectors account for the overwhelming bulk of India’s EU-bound shipments. By contrast, GSP preferences will now remain only for a narrow group of products—such as certain agricultural goods, food items, leather, wood and paper products, footwear, optical and medical instruments, and handicrafts—which together make up less than 13% of India’s exports to the EU.

India-EU Trade: FTA Optimism Tempered by Timing

While negotiations on the long-awaited India–EU Free Trade Agreement (FTA) are nearing completion, the agreement is unlikely to come into force for at least another year. Until then, exporters must absorb the cost impact of full MFN tariffs.

This timing is particularly difficult, as global trade remains fragile amid slowing demand, geopolitical uncertainty and rising compliance requirements. GTRI cautions that the gap between GSP withdrawal and FTA implementation could significantly squeeze exporter margins in the short term.

CBAM Adds a Second Layer of Pressure

Compounding tariff-related challenges is the launch of the tax phase of the EU’s Carbon Border Adjustment Mechanism (CBAM) from January 1, 2026. Indian exporters of steel and aluminium now face stricter carbon reporting obligations and the risk of being charged default emissions values if documentation falls short.

According to GTRI, the overlap of higher tariffs and CBAM compliance costs creates a “double pressure” scenario—raising both tariff and non-tariff barriers at the same time.

Why the EU Withdrew GSP Benefits

The EU’s GSP regime includes graduation rules, under which trade preferences are withdrawn once exports from a beneficiary country in a specific product group exceed defined thresholds for three consecutive years.

India has been formally graduated for the 2026–2028 period under Commission Implementing Regulation (EU) 2025/1909, adopted in September 2025. While the move follows established EU rules, GTRI highlights that the economic impact is front-loaded, with most Indian exports losing preferential access immediately.