Whalesbook
Shift in EU-India Trade Landscape
Effective January 1, 2026, India's export landscape to the European Union has undergone a significant alteration. The EU has withdrawn Generalized Scheme of Preferences (GSP) benefits, impacting 87% of Indian goods previously eligible for reduced import tariffs. Under the GSP, Indian exporters historically enjoyed a tariff reduction, averaging approximately 20% on Most Favoured Nation (MFN) rates. This preferential access has now ceased for a broad spectrum of industrial products, including minerals, chemicals, plastics, textiles, iron, steel, machinery, and electrical goods. The EU's decision is based on its "graduation" rules, where benefits are removed for product categories that have consistently exceeded specific export value thresholds over three consecutive years. A regulation adopted in September 2025 formalized this change for the 2026-2028 period, affecting India's exports across key sectors.
The "Double Hit" of Tariffs and Carbon Costs
Exacerbating the impact of the GSP tariff increase, the EU's Carbon Border Adjustment Mechanism (CBAM) officially entered its definitive phase on the same date, January 1, 2026. CBAM imposes a carbon price on imported goods, introducing non-tariff costs related to emissions reporting and compliance. This confluence of higher direct tariffs from GSP withdrawal and increased indirect costs from CBAM is described as a "double hit" by the Global Trade Research Initiative (GTRI). Steel and aluminum exporters, in particular, are now navigating rising carbon reporting expenses and the risk of inflated default emissions charges under CBAM.
Competitiveness Under Pressure and Future Outlook
The combined economic pressures are anticipated to squeeze profit margins for Indian exporters and diminish their competitiveness against global suppliers. In price-sensitive markets, such as the garment sector, the increased cost burden may lead EU buyers to shift towards duty-free competitors like Bangladesh and Vietnam. While the India-EU Free Trade Agreement (FTA) is reportedly nearing finalization, with potential signing dates in late January 2026, its implementation is still expected to take a year or longer. This leaves Indian exporters to absorb the full MFN tariffs and CBAM costs in the interim. The GTRI forecasts that 2026 is likely to present one of the most challenging years for Indian exports to Europe in over a decade, given the current global trade environment.
Sectoral Impact and Diversification Efforts
While GSP benefits remain for agricultural products, leather goods, and handicrafts, these sectors constitute less than 13% of India's exports to the EU. The "graduation" mechanism has seen India removed from GSP for significant product sections, with new exclusions including minerals and rubber from January 1, 2026. Amid these shifts, some Indian exporters have been reorienting towards Asian markets due to external tariff pressures. However, reports also indicate increased traction in specific European markets like Germany and Belgium, suggesting a complex trade reallocation strategy.