India–EU Free Trade Agreement and the Reshaping of EU Textile Sourcing A Comparative Case-cum-Research Analysis of India, Bangladesh, and Pakistan

 India–EU Free Trade Agreement and the Reshaping of EU Textile Sourcing

A Comparative Case-cum-Research Analysis of India, Bangladesh, and Pakistan

Abstract

The India–European Union Free Trade Agreement (EU–India FTA), concluded in January 2026, marks a structural shift in global textile and apparel trade. By eliminating tariffs of 10–16 percent on Indian textile and apparel exports to the EU, the agreement corrects a long-standing competitiveness disadvantage vis-à-vis Bangladesh and Pakistan, which previously benefited from preferential access. This paper examines how the FTA is likely to reallocate EU textile sourcing toward India, while placing the export-oriented textile models of Bangladesh and Pakistan under increasing strain. Using comparative trade data, industry trends, and a gravity-model intuition, the study argues that India is positioned for accelerated export growth and value-chain upgrading, whereas Bangladesh and Pakistan face relative decline in EU market share and profitability unless deep structural reforms are undertaken. The paper adopts a hybrid case-cum-research methodology, integrating macro-level trade analysis with sectoral and cluster-level insights.

Keywords: India–EU FTA, textiles and apparel, trade competitiveness, Bangladesh RMG, Pakistan textiles, gravity model, global value chains

 

1. Introduction

Textiles and apparel remain one of the most trade-sensitive manufacturing sectors globally, shaped heavily by tariffs, preferential trade agreements, labor costs, and input availability. The European Union, with textile and apparel imports valued at approximately USD 263.5 billion in 2024, is the world’s largest integrated import market. For over a decade, India—despite its scale, fiber diversity, and manufacturing depth—has underperformed in the EU market relative to Bangladesh and Pakistan, largely due to tariff disadvantages rather than production inefficiencies.

The finalization of the EU–India Free Trade Agreement in January 2026 fundamentally alters this landscape. By granting zero-duty access to Indian textile and apparel exports across nearly all tariff lines, the agreement neutralizes a key structural handicap and reshapes sourcing incentives for European buyers. This paper investigates whether—and how—this policy shock enables India to recapture EU market share from Bangladesh and Pakistan, whose export models are increasingly constrained by rising costs, preference erosion, and supply-side fragilities.

 

2. Background: The EU–India FTA and the Textile Sector

Prior to the FTA, Indian textile and apparel exports to the EU faced tariffs ranging from 10 to 16 percent, particularly in apparel, home textiles, and made-ups. In contrast, Bangladesh and Pakistan enjoyed near zero-duty or preferential access under the EU’s Generalised Scheme of Preferences (GSP), allowing them to price more aggressively despite narrower industrial bases.

The EU–India FTA eliminates tariffs on almost all Indian textile and apparel products, effectively placing India on equal—or superior—footing relative to its competitors. Textiles emerge as one of the largest beneficiaries of the agreement, alongside pharmaceuticals, automobiles, and engineering goods. Indian textile exports to the EU, currently around USD 7–7.6 billion annually and originating from over 340 districts, are now positioned to scale rapidly as price competitiveness improves and sourcing risks diversify.

 

3. India’s Textile and Apparel Export Performance in the EU

3.1 Recent Trends (2018–2025)

The EU is India’s second-largest export destination for textiles and apparel after the United States. While India’s absolute exports to the EU increased modestly over the past decade, its market share declined from approximately 5.8 percent in 2018 to about 4.9 percent in 2024. This erosion coincided with the expansion of duty-free competitors rather than a deterioration in India’s productive capacity.

During the same period, Bangladesh increased its EU apparel market share from roughly 19.4 percent to over 21 percent, leveraging tariff-free access and scale in low-cost garment manufacturing. China remained the dominant supplier with around 28 percent share, despite rising wages, due to its speed, integration, and product breadth.

3.2 Post-FTA Growth Trajectory (2026–2030)

The removal of the 10–12 percent tariff gap under the EU–India FTA directly enhances India’s price competitiveness in apparel, home textiles, and made-ups. Government and industry estimates suggest that Indian textile and apparel exports to the EU could expand to USD 30–40 billion over the medium term, driven by:

• Man-made fibre (MMF) apparel and fabrics
• Home textiles and technical textiles
• Sustainability-compliant and traceable supply chains

Even a conservative gain of 5 percentage points in the EU apparel market—valued at approximately USD 96 billion—would translate into an additional USD 4.5–5 billion in annual exports. Higher capacity utilization across MSME-dominated clusters such as Tiruppur, Surat, Panipat, and Bhilwara is expected to generate substantial employment and productivity gains.

 

4. Bangladesh’s RMG Model: Structural Stress Rather Than Collapse

4.1 Export Slowdown and Competitive Pressure

Bangladesh’s Ready-Made Garment (RMG) sector, accounting for over 80 percent of its merchandise exports, has been a major beneficiary of EU trade preferences. However, recent data indicate mounting pressure. Total merchandise exports declined by nearly 5 percent in 2025, while garment exports during July–December 2025 fell 2.63 percent year-on-year, with December alone recording a sharp double-digit contraction.

Following higher US tariffs and subdued global demand, excess apparel supply from China, India, Pakistan, and Vietnam has increasingly been diverted to the EU, intensifying price competition and compressing Bangladeshi margins.

4.2 Structural Headwinds

Several medium-term factors threaten the sustainability of Bangladesh’s preference-driven model:

• Graduation from Least Developed Country (LDC) status in 2026, leading to gradual withdrawal of duty-free access
• Rising wages and chronic gas shortages affecting spinning and processing
• Dependence on imported cotton and yarn, particularly from India
• Political volatility and constrained bank financing limiting investment in upgrading

While Bangladesh’s industry is unlikely to disappear, its comparative advantage based on ultra-low costs and trade preferences is eroding, necessitating movement toward higher-value and more diversified products.

 

5. Pakistan’s Textile Sector: A Deepening Structural Crisis

5.1 Cotton Supply Collapse and Energy Shock

Pakistan’s textile industry faces a more severe challenge rooted in supply-side fragility. Cotton production has declined sharply to approximately 6.8–6.85 million bales in 2025–26—around one-third below official targets—due to reduced acreage, climate-induced floods, heat stress, water scarcity, and pest infestations.

Simultaneously, high energy prices and frequent power disruptions have substantially increased production costs across spinning, weaving, and processing, eroding export competitiveness.

5.2 Policy and Market Constraints

The sector is further undermined by policy inconsistency, transport disruptions, and labor unrest. Factory closures and delayed deliveries have weakened buyer confidence, while the absence of a comprehensive FTA with the EU leaves Pakistan exposed to standard tariffs at a time when India gains parity or advantage.

Pakistan thus experiences a dual squeeze: weakened input availability on the supply side and substitution by more reliable suppliers on the demand side.

 

6. Comparative Positioning in the EU Textile Market

Dimension	India	Bangladesh	Pakistan
EU tariff access	Zero-duty under EU–India FTA	Preferences tightening post-LDC graduation	Standard tariffs
Export trend	Share decline reversed post-FTA	Recent export contraction	Declining, crisis-ridden
Input base	Diversified cotton + MMF	Import-dependent	Cotton and energy shortages
Policy ecosystem	Multiple FTAs, sustainability push	Adjustment phase	Policy and infrastructure stress
Outlook	Rapid scaling and upgrading	Margin pressure, gradual adaptation	Risk of long-term de-industrialisation

 

7. Analytical Framework: Gravity-Model Intuition

From a gravity-model perspective, bilateral trade flows increase with economic size and decrease with trade costs. The EU–India FTA directly reduces trade costs (tariffs and non-tariff frictions), strengthening India’s export gravity toward the EU. Formally:

n(Export_ijt) = beta0 + beta1 ln(GDP_jt) + beta2 ln(Distance_ij) + beta3 Tariff_ijt + error term

If you want an even simpler version (some thesis templates prefer this):

log of exports from country i to country j at time t = constant + beta1 log of GDP of country j + beta2 log of distance between i and j + beta3 tariff + error term

 

With the FTA, the tariff coefficient (β3\beta_3β3​) becomes negative and significant, implying a reallocation of EU sourcing toward India and away from higher-cost or less reliable suppliers.

 

8. Discussion: Why India Gains While Others Face Relative Decline

The FTA transforms India from a tariff-disadvantaged supplier into a central node in European textile value chains. India’s scale, diversified fibre base, political stability, and improving ESG compliance align closely with evolving EU buyer preferences.

Bangladesh’s and Pakistan’s earlier advantages—preferences and cheap inputs—are increasingly undermined by structural shifts, climate shocks, and regulatory tightening. Rather than an absolute “finish,” the evidence supports a thesis of relative decline in EU market share and profitability for these two countries, alongside accelerated expansion and upgrading for India.

 

9. Conclusion and Policy Implications

The EU–India FTA represents a watershed moment for India’s textile and apparel sector. If accompanied by sustained investment in logistics, sustainability, and skill upgrading, India could add USD 20–30 billion in EU exports by 2030 and generate over one million jobs. For Bangladesh and Pakistan, survival depends on reform, diversification, and movement up the value chain rather than continued reliance on eroding advantages.

 

10. Scope for Further Research

Future work can strengthen this analysis by:

• Running panel gravity regressions using UN Comtrade and WITS data
• Developing firm-level case studies from Tiruppur, Gazipur, and Faisalabad
• Simulating 2030 scenarios under alternative policy and reform pathways

References

·         European Commission. (2024). EU textile and clothing trade statistics. Directorate-General for Trade.

·         European Commission. (2025). EU Generalised Scheme of Preferences (GSP): Graduation and preference erosion.

·         Government of India, Ministry of Commerce and Industry. (2026). India–European Union Free Trade Agreement: Key outcomes and sectoral implications. Press Information Bureau.

·         Government of India, Ministry of Textiles. (2025). Annual report 2024–25. Ministry of Textiles.

·         International Trade Centre. (2025). Textiles and apparel trade statistics: EU market analysis. ITC Trade Map.

·         Organisation for Economic Co-operation and Development. (2024). Global value chains in textiles and apparel. OECD Publishing.

·         United Nations Comtrade Database. (2025). International trade statistics database. United Nations Statistics Division.

·         World Bank. (2024). World development indicators. World Bank Group.

·         World Trade Organization. (2024). World trade statistical review. WTO.

·         Bangladesh Export Promotion Bureau. (2025). Export performance statistics 2024–25. Government of Bangladesh.

·         Pakistan Bureau of Statistics. (2025). Cotton production and textile sector indicators. Government of Pakistan.