On 27 January, the EU and India announced the conclusion of a free trade agreement, nearly twenty years after talks first began.
Beyond the trade concessions, the calculation is clearly geopolitical. The EU’s aim is to anchor India more firmly in a European‑centred trade architecture, despite frictions over the EU’s Carbon Border Adjustment Mechanism (CBAM) and against the backdrop of intensifying US‑China rivalry.
Concessions on Both Sides
India accounts for only a modest share of the EU’s trade in goods (2.4% in 2024), which makes it the EU’s ninth‑largest trading partner, far behind the United States (17.3%), China (14.6%) and the United Kingdom (10.1%).
For New Delhi, however, the equation looks very different: the European market is central, with the EU alone absorbing 11.5% of India’s foreign trade, and goods flows between the two economies have surged by nearly 90% over the past decade.
The agreement provides for a gradual reduction of Indian tariffs on European agri‑food products, in particular wines and spirits (from 150% to 20–50% depending on the product), cars (from 110% to 10% with an annual quota of 250,000 units) and certain cosmetics.
In return, the EU will reduce its customs duties on almost 99% of Indian imports. Duties on olive oil imported from India will fall from 45% to 0% over five years. Another example: tariffs on Indian textiles will also be cut from 10% to 0%.
The Price of Carbon Borders
CBAM remains a major political irritant for New Delhi, and on this point EU negotiators have not blinked.
The mechanism requires importers of certain carbon‑intensive products (steel, cement, aluminium, etc.) to buy certificates mirroring the carbon price they would have paid had those goods been produced within the EU. The bill depends both on the products’ actual emissions and on the CO₂ price on the European carbon market.
Since 1 January 2026, the mechanism has been fully in force and importers must purchase and surrender carbon certificates for their covered imports, according to a calculation that takes into account the free allocations that European producers continue to receive and that are being phased out gradually until 2035.
On 17 December, the European Commission proposed extending CBAM to more downstream products in value chains, such as washing machines or certain automotive components, which could enter into force as early as 2028.
India, but also Brazil, South Africa and China, criticise CBAM as discriminatory. This creates a structural tension: the EU wants to be a champion of open trade, while increasingly resorting to unilateral tools such as CBAM to green its imports, at the risk of fuelling accusations of green protectionism.
India is among the countries most exposed to the mechanism, because of its steel and aluminium exports to the EU.
“India has been very concerned about CBAM and tried, in the context of the FTA negotiations, to obtain bilateral commitments from the EU. The EU has not, however, granted any specific preference to India (which CBAM in any event does not allow for), and India’s proposal for a rebalancing mechanism authorising unilateral retaliation was not taken on board,” explains Nicolas Köhler Suzuki, associate researcher at the Jacques Delors Institute.
During the trade talks, India also feared that the EU might grant exemptions to the United States under its agreement with President Donald Trump, which would have placed India at a disadvantage.
The EU promises to apply CBAM in strict compliance with the WTO most‑favoured‑nation principle, with transparent and non‑discriminatory criteria based on the carbon intensity of products, not on their origin. This promise does not in practice change anything, since EU law already prohibits granting differentiated CBAM treatment to certain countries.
India’s sensitivity is explained by the importance of the European market for Indian steel — around 60% of India’s steel exports — while Indian steel is estimated to be 30–50% more carbon‑intensive than the world average.
To sweeten the pill, the EU is also promising to mobilise 500 million euros to help Indian industry — particularly steel, cement and aluminium — cut emissions. These sectors sit at the heart of bilateral trade and will be directly hit by CBAM. The funding has a dual purpose: to support India’s climate transition and to defuse trade tensions by narrowing the carbon‑intensity gap between European and Indian producers.
This envelope serves two objectives: supporting India’s climate transition and easing trade tensions by narrowing the carbon‑footprint gap between European and Indian producers.
This approach marks an interesting shift: CBAM no longer appears solely as a defensive instrument to protect the European market, but also as a lever for industrial cooperation.
By financing the decarbonisation of key sectors in India, the EU is attempting to turn a source of trade friction into a platform for partnership, and to prepare, in the longer term, a gradual convergence of low‑carbon standards and of systems for measuring, reporting and verifying industrial emissions.