EU FTA without CBAM, steel quota relief may slash India’s engineering exports by 10%

In February 2025, India and the EU decided to ramp up talks for the proposed free trade agreement

• EU steel safeguards, CBAM hinder India-EU free trade agreement
• Indian engineering exports to EU may drop 10 percent yearly if barriers persist
• CBAM and GSP loss will raise costs, hurting India's export competitiveness in 2026.

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As the free trade agreement between India and the European Union nears finalisation, the 27-nation bloc’s steel safeguard measures and the carbon border adjustment mechanism (CBAM) have emerged as major sticking points, which, if left unresolved, could leave the deal delivering limited benefits despite tariff reductions.

This concern is acute for engineering goods which could face a 10 percent annual decline in exports to the EU, despite the trade deal, if these barriers persist, according to Pankaj Chadha, chairman of the Engineering Export Promotion Council (EEPC).

The European Union was India’s second-largest market for engineering goods in FY25, accounting for 17.1 percent of exports, as overall shipments in the segment hit an all-time high of $116.7 billion.

While the sectors covered under CBAM include cement, iron and steel, aluminium, fertilisers, electricity and hydrogen, India's iron and steel, aluminium and cement industries are expected to be hit the hardest by the EU's carbon tax. Some of these are key inputs used in engineering goods.

In FY25, India’s steel and aluminium exports to the EU dropped 24.4 percent on-year to $5.8 billion.

Under the EU’s carbon border adjustment framework, importers must declare the carbon emissions embedded in these products. While exporters can submit actual, verified emissions data, the EU applies default emission values when such data is unavailable or unverifiable.

These default values are set deliberately high, above typical actual emissions, which can translate into CBAM costs of 400–500 euros per tonne, compared with 250–400 euros per tonne if verified emissions data is used, depending on the product. The inflated default values raise the carbon cost of imports, making Indian exports significantly more expensive in the EU market and indirectly subsidising European producers, Chadha said.

“While there is optimism over the conclusion of the Free Trade Agreement, Indian exporters will, in reality, confront higher trade barriers in the near term, as the loss of GSP preferences coincides with the start of the tax phase of the EU’s CBAM. With the FTA’s implementation likely to take at least a year, if not longer, India’s exports to the bloc will face a difficult period marked by higher tariffs, rising compliance costs and weakened competitiveness, hitting exporters just as global trade conditions remain fragile,” according to Ajay Srivastava, Founder, GTRI.

CBAM’s scope could also widen leading to a disproportionate impact on engineering goods, which rely heavily on steel and aluminium inputs. Engineering goods to the bloc account for around 18 percent of India’s total exports in the segment, Chadha added.

Chadha said, “Addressing both safeguard restrictions and CBAM-related costs could support at least 10 percent annual growth in India’s engineering exports to the EU.”

The European Commission on October 7, 2025 announced the proposal to limit tariff-free import volumes of steel to 18.3 million tonnes a year, reducing it by 47 percent compared to the quota set in 2024, while also doubling the out-of-quota duty to 50 percent.

This proposal will replace the steel safeguard measure set to expire by June 2026.

And, the CBAM was introduced by the EU on October 1, 2023, a duty that will translate into a 20-35 percent tax on select imports from January 1, 2026 with an aim to reach net-zero greenhouse emissions by 2050.

The EU has already extended and broadened its suspension of GSP benefits for 87 percent of Indian exports from January and with the FTA expected to take at least a year to come into effect, Indian exporters will continue to face full MFN (most favoured nation) tariffs.

With GSP suspension renewed, Indian engineering exports will keep facing the bloc’s standard MFN tariffs, typically in the 4–8 percent range.

Moneycontrol had earlier reported that issues related to the EU’s CBAM are unlikely to be part of the proposed India–EU free trade agreement, with any concessions sought by New Delhi expected to be discussed separately.

Even as India continues to seek a carve-out from the CBAM, but this issue remains under negotiation.

At the same time, India is also pushing for lower tariffs and relaxed quotas on steel exports to the EU in exchange for reducing import duties on automobiles, making steel safeguards a key bargaining point in the negotiations.

In February 2025, India and the EU decided to ramp up talks for the proposed free trade agreement, targeting to initially close it by the end of that year to tide over ongoing disruptions from volatile trade policies.

They are expected to publicly announce the FTA on January 27.

In 2024‑25, India’s merchandise exports to the EU totalled $75.85 billion, while imports from the bloc reached $60.68 billion, making it the South Asian nation’s largest trading partner for goods.

“Until the India–EU FTA is implemented, 2026 is likely to be one of the toughest years for Indian exports to Europe in more than a decade,” GTRI’s Srivastava said.