On 27 January 2026, India and the European Union announced for concluding negotiations for a comprehensive Free Trade Agreement (FTA), called as ‘Mother of all Agreements”. This historic pact eliminates duties on nearly 99.5% of Indian exports, fundamentally altering the competitive landscape of South Asian trade. For decades, India’s South Asian neighbors—primarily Bangladesh and Pakistan—have enjoyed a distinct "tariff advantage" over India in the EU market. Bangladesh (via LDC Duty-Free Quota-Free access) and Pakistan (via GSP+ status) exported textiles and leather at 0% duty, while India faced Most Favored Nation (MFN) tariffs of 9–12%. The India-EU FTA neutralizes this advantage overnight, creating a "preference erosion" shock for these countries.

Bangladesh, the region’s largest garment exporter, faces the most immediate risk - the EU is its top market, absorbing around 60% of its ready-made garment exports under DFQF duty-free access. Bangladesh faces the most acute challenge as its export was built on the 9–12% price advantage it held over India. At the same time, Bangladesh faces another challenge as it is set to graduate from Least Developed Country (LDC) status in late 2026. While it retains access for a transition period (typically 3 years), it faces a cliff-edge in 2029. If it reverts to standard GSP (paying ~9% duty) or MFN terms while India pays 0%, Bangladesh could suffer a massive diversion of trade to India. Indian exporters, who are more vertically integrated (producing their own cotton and yarn) than their Bangladeshi counterparts, can now match or beat Bangladeshi prices.

Pakistan’s GSP+ status since 2014 allows duty-free access for ~66% of tariff lines, crucial for its textile sector. The India-EU FTA grants Indian exporters broader access (nearly 100% of tariff lines) without the stringent periodic reviews on human rights and labor standards that hang over Pakistan’s GSP+ status.  India has a larger, more diversified industrial base. With tariffs removed, European buyers may prefer sourcing from India to consolidate supply chains (e.g., buying apparel, machinery, and chemicals from one country), leaving Pakistan isolated as a "textile-only" supplier.

Sri Lanka, also a GSP+ beneficiary with strengths in apparel, faces similar pressures. Smaller LDCs like Nepal and Bhutan may see limited direct impact due to lower export volumes, but indirect effects could arise if regional supply chains shift toward India.

The India-EU FTA is a wake-up call. While it strengthens India’s global position, it exposes vulnerabilities in neighboring economies reliant on unilateral preferences. Proactive structural reforms and strategic diversification are essential to turn potential threats into opportunities for sustained growth.

Recommendations

With the growing Free Trade Agreements being entered by EU and other major markets, the preference erosion for the LDCs of South Asia and countries benefitting from GSP ++ schemes have become a reality and these countries must prepare themselves to counter these challenges. With the unilateral preferential market access, the beneficiary countries have got better market access, however, it did not create efficiency in production chain, nor the countries expand their manufacturing base and thus these free trade agreements will impact their economy negatively. The ultimate aim, thus, should be to create efficiency within the country and not always relying on unilateral preferences. 

The graduating LDCs and GSP ++ beneficiaries must act faster in this regard. Some of the policy options for these countries are:

1. Boost competitiveness: Bangladesh and Pakistan should prioritize energy efficiency and skill development to offset cost disadvantages. They must have a plan to invest in productivity, automation, and compliance with EU sustainability, labor, and traceability standards (e.g., CBAM and due diligence regulations). 

2. Diversify markets: There is a need to reduce EU dependence by targeting high-growth regions—the US (via bilateral deals), UK, Middle East, Africa, and ASEAN. Bangladesh could leverage its recent UK trade continuity agreement more aggressively.

3. Pursue trade diplomacy: One option is to initiate negotiating a bilateral FTAs or seek enhanced EU preferences. Pakistan could work to maintain or upgrade GSP+; Bangladesh should prepare post-LDC strategies, including WTO negotiations for extended preferences.

4. Promote regional cooperation: Despite political uncertainties in the subregion, it is important for Bangladesh, Pakistan and other countries to strengthen supply-chain linkages under SAFTA or BIMSTEC, allowing smaller economies to integrate with Indian manufacturing for mutual benefit rather than direct competition.

5. Focus on value addition: Shift from low-margin assembly to design, branding, and higher-value products to build resilience.