NEW DELHI — The European Union (EU) has officially suspended trade preferences for the majority of Indian exports under its Generalised Scheme of Preferences (GSP), a move that industry experts warn could significantly impact India’s price competitiveness in the 27-nation bloc.

Effective January 1, 2026, the suspension applies to the 2026–2028 cycle. According to a report by the Global Trade Research Initiative (GTRI), nearly 87% of India’s current export value to the EU will now be subject to full ‘Most Favoured Nation’ (MFN) duties, stripping away the competitive edge Indian manufacturers have enjoyed for decades.

The “Graduation” Mechanism

The suspension follows the EU’s “graduation” rules, which mandate the withdrawal of tariff preferences when a country’s exports in specific product categories exceed a certain threshold of the EU’s total imports for three consecutive years. Under Commission Implementing Regulation (EU) 2025/1909, India has graduated out of 13 key GSP sections.

The affected sectors form the backbone of India’s industrial exports, including:

• Textiles and Garments: Duties will rise from 9.6% to the full 12%.

• Chemicals and Plastics: Broad categories will lose their 3–6% preferential margin.

• Engineering & Metals: Iron, steel, and machinery will face immediate tariff hikes.

• Gems and Jewellery: Precious metals and stones are also included in the withdrawal.

Impact Assessment: Industry vs. Government

While think tanks like GTRI describe the move as a “major setback,” the Indian Commerce Ministry has issued a more tempered analysis. Government officials clarify that because many Indian products already enter the EU at zero MFN duty, the actual “tangible impact” is limited to approximately 2.66% of India’s total exports by value.

“India’s graduation is a testament to the growing maturity and competitiveness of our industry,” a Ministry spokesperson stated. However, trade analysts warn that for price-sensitive sectors like apparel, even a 2–3% duty increase can shift European buyers toward duty-free competitors like Bangladesh and Vietnam.

The FTA Safety Net

The timing of the GSP withdrawal is particularly strategic. It comes just days before the anticipated conclusion of the India-EU Free Trade Agreement (FTA), expected to be announced on January 27, 2026.

Once the FTA is operationalized, the GSP framework will become redundant as the agreement aims to eliminate duties on over 90% of trade lines. However, as FTA implementation can take 12 to 18 months for full ratification, exporters face a “transitional gap” where they must absorb higher costs while also navigating the newly implemented Carbon Border Adjustment Mechanism (CBAM).

Strategic Outlook

The “double hit” of GSP withdrawal and CBAM compliance costs makes 2026 a pivotal year for Indian trade policy. With bilateral trade exceeding $136 billion in FY25, the pressure is now on negotiators to finalize the FTA to ensure Indian goods do not lose market share in their largest destination for manufactured exports.

China Achieves Historic $1 Trillion Trade Surplus on Robust Global Diversification

Digital Revolution at the Border: What the EU’s New Biometric Checks Mean for Non-EU Citizens

Delhi High Court Suspends Life Sentence of Kuldeep Singh Sengar in Unnao Rape Case