SYLLABUS

GS-2: Bilateral, Regional and Global Groupings and Agreements involving India and/or affecting India’s interests.

GS-3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context: The European Union (EU) has suspended export benefits to sectors such as textiles and plastics under a preferential scheme for India and two other countries from January 1, a move that will impact the country's shipment to the 27-nation bloc.

More on the news

• According to the Official Journal of the European Union, the European Commission on September 25, 2025, laid down rules for the application of the regulation with regard to the suspension for 2026-2028 of certain tariff preferences granted to certain GSP beneficiary countries - India, Indonesia, and Kenya.

• The suspension shall apply from 1 January 2026 until 31 December 2028.

• The development is important as India and the EU are likely to announce the closure of negotiations for a free trade agreement (FTA) on January 27.

• The Indian Commerce Ministry has stated that the revised GSP rules will only affect about 2.7% of India’s exports to the EU.

• In 2023, EU imports from India totalled around €62.2 billion, but only €12.9 billion qualified for these preferential tariffs. With India graduating from 12 major product categories, about €1.66 billion of trade will no longer enjoy GSP benefits, leaving €11.24 billion still eligible under the scheme, the ministry clarified.

Key highlights of the Development

• Key Sectors Covered: The EU has removed GSP benefits across almost all major industrial sectors - minerals, chemicals, plastics and rubber, textiles and garments, stone and ceramics, precious metals, iron and steel, base metals, machinery, electrical goods and transport equipment - which together form the backbone of India's exports to Europe.

• Previous Graduation

• 2013 First Major Scaling Back: EU began reducing GSP tariff concessions for a range of Indian exported goods like minerals, chemicals and textiles
• Between 2019 and 2023: The EU expanded the list of products graduating out of the GSP.
• 2023 Widening the Withdrawals: Additional major export categories such as chemicals, plastics, leather, stone & glass products, precious metals, base metals, machinery and electrical equipment were progressively taken out of the preferential regime due to continued export competitiveness.
• 2026: Complete withdrawal of concessions for three years from 2026 to 2028.

• Legal Justification: The EU's move follows its GSP graduation rules, under which preferences are withdrawn once exports in a product group cross a threshold for three consecutive years.

• Accordingly, India has been graduated for 2026–2028 under Commission Implementing Regulation (EU) 2025/1909, adopted in September 2025.

Impact of GSP suspension on India

• High trade barriers in the near term: loss of GSP preferences coincides with the start of the tax phase of the EU's Carbon Border Adjustment Mechanism (CBAM).

• Impact on exports: Think tank Global Trade Research Initiative (GTRI) said from January 1, 2026, India faces a "major setback" in the EU market, as 87% of its exports begin paying higher import tariffs.

• Only about 13% of exports, including agriculture and leather, retain the benefits under the scheme.
• Now most products are entering at full MFN duty rates and eliminating an average of around 20% tariff advantage earlier enjoyed by Indian exporters.

• Setback for Apparel exporters: Pay full 12% duty instead of 9.6% under the GSP, reducing India's competitiveness and pushing EU buyers toward duty-free suppliers like Bangladesh and Vietnam.

About Generalised Scheme of Preferences (GSP):

• The EU's GSP is a unilateral trade arrangement that allows developing countries to export to the EU at lower-than-MFN tariffs.

• WTO compliant: The GSP is non-reciprocal and operates as an exception to the WTO’s Most-Favoured-Nation (MFN) principle.

• Its permanent legal basis under WTO law is the 1979 Enabling Clause, which allows developed countries to grant differential and more favourable treatment to developing countries.

• Different Types: The European Union offers different trade benefits under the GSP scheme.

• Standard GSP gives poorer and lower-middle-income developing countries, like India, easier access to EU markets.
• GSP+ is an enhanced version that provides more benefits, but only to countries that follow international rules on labor, human rights, the environment, and governance, while Everything But Arms (EBA) gives the poorest nations duty-free, quota-free access to almost all goods except weapons.

• Graduation Clause: Countries are grouped by income and export competitiveness, and benefits are withdrawn through 'graduation' once exports in a product group become large over time.