GSP withdrawal by EU: The European Union’s decision to suspend export preferences for India comes at an awkward moment. Indian exporters are already adjusting to higher US trade barriers and weak global demand. The EU’s withdrawal of Generalised Scheme of Preferences (GSP) benefits—alongside similar action for Indonesia and Kenya—means that nearly 87% of India’s exports to the bloc will lose preferential tariff access. The impact will be felt most in textiles, plastics, and other labour-intensive manufactures.
The timing matters. India and the EU are expected to announce the closure of negotiations for a free trade agreement on January 27. The suspension of preferences will apply despite the FTA, creating a transition gap that exporters must navigate without protection.
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GSP graduation rules take effect
The change comes from a regulation adopted by the European Commission in September 2025. It sets out GSP graduation rules for 2026–2028. Countries that cross competitiveness thresholds in specific product categories lose tariff preferences. India has crossed those thresholds in most major industrial groups.
From January, close to 87% of Indian exports to the EU will enter at full most-favoured-nation tariff rates. Earlier discounts are gone. Only a narrow set of agricultural products, leather goods, and handicrafts—together accounting for roughly 13% of export value—remain under preference.
This is a technical decision, but its commercial consequences are immediate.
Margin pressure in price-sensitive sectors
The first casualty will be margins. In apparel and home textiles, a tariff increase of a few percentage points can decide whether an exporter remains on a buyer’s shortlist. According to the Global Trade Research Initiative (GTRI), a garment exporter that earlier paid 9.6% duty under GSP will now face the full 12% MFN rate.
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In segments where buyers source on price, this is enough to divert orders to Bangladesh or Vietnam, both of which continue to enjoy lower-duty access to the EU.
The list of affected sectors is extensive: minerals, chemicals, plastics and rubber, textiles and garments, metals, machinery, electrical goods, and transport equipment. These also happen to form the bulk of India’s export basket to Europe. India has built capacity and scale in these industries over two decades. It is now competitive enough to lose preferences, but not yet embedded deeply enough in value chains to absorb the cost without losing share.
FTA timing mismatch
In theory, an India-EU free trade agreement should neutralise the loss of GSP by restoring preferential access on a reciprocal basis. In practice, trade agreements take time to translate into lower tariffs, revised sourcing contracts, and stable market access.
The GSP suspension applies from 2026 to 2028. Even if negotiations conclude on schedule, exporters will face a period of higher tariffs without compensating benefits. That window is where vulnerability lies.
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CBAM adds a second layer of cost
The tariff shock coincides with a regulatory one. From 2026, the EU’s Carbon Border Adjustment Mechanism enters its tax phase. Carbon-intensive imports—steel, aluminium, cement, and select chemicals—will attract carbon-linked charges.
GTRI has warned of a double squeeze: higher tariffs from the loss of GSP, and rising compliance and tax costs under CBAM. For exporters operating on thin margins, the combination matters more than either measure in isolation.
The US factor and market concentration
The external environment offers little relief. The United States has returned to a more overtly protectionist stance, with tariffs again central to trade and industrial policy. Indian exports to the US are already under pressure.
The EU’s action is rule-based and non-discretionary. Its economic effect, however, is similar. When two of India’s largest export destinations simultaneously become more expensive to serve, diversification ceases to be a long-term aspiration and becomes a near-term necessity.
GSP withdrawal by EU: Graduation is not a grievance
It is worth stating what this is not. GSP is a unilateral concession, not a right. The EU is within its mandate to withdraw benefits once a country reaches defined competitiveness thresholds. The scheme exists to support those who need it most.
India’s own trade numbers underline the point. Bilateral goods trade with the EU exceeded $136 billion in 2024-25, making the bloc India’s largest goods trading partner. Exports alone were close to $76 billion. That scale weakens the case for continued unilateral preference.
Graduation is the price of success.
What matters now is adjustment. The government’s task is not to contest the logic of graduation, but to ease the transition—by cutting logistics costs, improving trade facilitation, and pushing firms towards higher-value segments where price sensitivity is lower.
The near-term outlook remains difficult. Global trade growth is fragile. EU preferences are being withdrawn just as new regulatory costs take effect. On its own, the GSP suspension would not qualify as a crisis. Combined with other pressures, it may yet feel like one.