Trade as industrial strategy

What Europe’s trade deals with India and Mercosur mean for industry

When Ursula von der Leyen took the stage in Davos on 20 January, she reversed the framing of today’s geopolitical shocks from a threat to be endured to a catalyst for building “a new form of European independence” in trade, energy, capital markets and security. To illustrate this shift, von der Leyen pointed explicitly to the EU–Mercosur agreement, as well as to negotiations with India, which she described as being “on the brink of a historic trade agreement”.

This was more than diplomatic rhetoric. It marked a quiet but decisive reframing of EU trade policy, moving beyond a point of no return from classic tariff arithmetic towards a broader understanding of trade agreements as strategic industrial instruments.

Market access for industrial growth

The EU-Mercosur agreement is often criticised in the policy circles as outdated, agriculturally disruptive or environmentally permissive. Much of this criticism reflects assumptions rooted in earlier phases of the negotiation rather than the agreement as it stands today. What often gets overlooked is that the EU-Mercosur agreement binds 31 countries and more than 700 million people to shared standards and legal commitments. In a global economy increasingly shaped by power politics, such frameworks are key for anchoring the international rules-based order while delivering the market access, predictability and stability European companies most need to operate abroad.

Moreover, the EU’s agreements with India and Mercosur are part of a broader industrial strategy. Manufacturing remains a backbone of the EU economy, though its configuration has changed. It is now more capital intensive, more technologically advanced and more export dependent. In this setting, access to large and fast-growing markets, such as India and Mercosur, becomes essential to achieving scale through sustained demand for Europe’s key industries, such as transport equipment, machinery and chemicals.

The EU–India agreement illustrates this logic clearly. Covering more than 90% of bilateral goods and services trade and spanning a combined market of roughly two billion people, the deal dismantles some of the most prohibitive tariff barriers faced by European manufacturers. Tariffs on cars fall from 110% to 10%, aviation duties disappear and levies on machinery and electrical equipment, which previously averaged 44%, are phased out over a decade.

Of course, such tariff concessions cannot be looked at in a vacuum. In particular, the tariff reduction for the automotive sector is phased over 5-10 years and limited to a maximum of 250,000 vehicles per year. However, when compounded, these gains are far more than marginal due to their long-term application, guaranteed by the agreement’s framework. In practice, they map the necessary conditions for the EU industry to align incentives with long-term investment and industrial planning.

More importantly, the agreement goes beyond trade flows, as it anchors cooperation in innovation, technology and industrial ecosystems. Initiatives, such as the EU-India Startup Partnership, the joint Innovation Hubs, the prospective Indian association to Horizon Europe, or future collaboration on semiconductors, AI and digital public infrastructure, perfectly portray a paradigm shift where trade policy increasingly functions as industrial coordination.

From risk buffer to political lever

The other half of the story is resilience. Beyond serving as export destinations, India and Mercosur are critical sources of raw materials, intermediate goods and industrial inputs. For Europe, whose strategic vulnerabilities have been exposed by over-dependence on China and by the increasing unreliability of longstanding partners, such as the US, this diversification is essential for its resilience.

Trade agreements, in this sense, play the additional role of risk-mitigation tools for firms navigating geopolitical volatility — whether determined by China’s overcapacity or by the recent US tariff policy – and of lasting hooks for strengthening Europe’s security.

One way the EU–India agreement makes this explicit is by linking trade to defence and security through a defence cooperation agreement, alongside the trade deal, which grants Indian firms access to EU defence procurement and enables joint naval exercises in the Indian Ocean. In this case, we can also consider that trade agreements are gradually increasing their function as political platforms for broader strategic alignment.

Moving the needle on EU standards

Geopolitical urgency must not become an excuse for sidelining environmental protection, labour rights or data governance. For example, the Trade and Sustainable Development chapters in some of these agreements, particularly in the one with India, are less robust than earlier EU templates, with enforcement relying primarily on dialogue, peer pressure and cooperation rather than on hard obligations.

But this approach is neither sudden nor unprecedented. As seen in last year’s discussions surrounding the EU-Indonesia agreement, which led to the one-year delay in applying the deforestation regulation, Brussels is starting to recognise that insisting on strict standards and timelines upfront can jeopardise deals altogether, which it can no longer afford in the current geopolitical context.

While some critics see this as a retreat from EU standards, maybe a more realistic reading is that it reflects political sequencing and incremental policy-making. The EU value-based constructivist policy, otherwise known as the Brussels effect, is shifting from firm conditionality towards political dialogue, regulatory cooperation and gradual alignment. Ultimately, this approach aims to reduce immediate resistance to the global objectives of the agreements while keeping the needle moving in the right direction over time on EU standards.

The cost of hesitation

Amidst strategic shifts, the European Parliament is scrutinising all these recent trade agreements closely — even closer than before.

In particular, on 21 January 2026, the European Parliament voted to refer the EU–Mercosur agreement to the Court of Justice of the European Union for an opinion on its compatibility with EU treaties. While under specific conditions the European Commission can decide on the provisional application of the agreement, proceeding this way would be politically sensitive, especially amidst intense negotiations on the upcoming EU budget. In practice, this means that the application of the agreement could be delayed by up to two years.

This hesitation is economically and strategically costly. The EU-Mercosur agreement was initially set to enter into force in 2021. Between 2021 and 2025 alone, the EU has foregone an estimated EUR 183 billion in exports and EUR 291 billion in GDP. Sectorally, the losses are concentrated precisely where Europe is most competitive, including in areas key for the manufacturing industry, such as transport equipment (EUR 94 billion in lost exports) and machinery (EUR 23.8 billion). Every additional year of delay weakens Europe’s position relative to more agile competitors, notably China, whose businesses are rapidly filling the vacuum in Mercosur markets. The strategic cost is waived growth and, maybe more importantly, diminished influence in global value chains, hurting our continent’s competitiveness at a time when we need to prioritise it most.

Overall, these trade agreements with India, Mercosur and other major partners advance Europe’s broader industrial resilience and security objectives. If implemented effectively, they could support market diversification for industry, potentially helping to reduce the risks of supply chain disruptions. They may also provide reduced tariffs on key goods, such as machinery and electrical equipment, along with opportunities for the exchange of innovation, technology and industrial expertise. Seen in this light, they have become a key part of the economic infrastructure of European power.