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NEW DELHI -- What if the world's largest market and the world's second-largest emerging economy deepen their trade relationship -- and Washington sleeps through it? While Democratic presidential candidates regularly bash trade, and the White House and Congress spar over an economically insignificant free-trade deal with Colombia, the European Union and India are quietly negotiating an unprecedented commercial relationship.

U.S. companies, at least, are paying close attention. "If Carrefour gets better access to the Indian market than Wal-Mart, there will be hell to pay," said Angela Marshall Hofmann, Wal-Mart's director of international corporate affairs. She reflects Wal-Mart's recent frustration with attempts to penetrate the Indian market and the company's apprehension about the potential gains that the French retail giant might realize from the E.U.-India negotiations.

Wal-Mart's concerns are well founded. Within two decades half a billion Indian consumers will have sufficient income to buy a television and other accoutrements of a middle-class lifestyle. That market will be a commercial plum for whoever gets there first.

So far, the E.U.-India talks are moving slowly, and negotiators have yet to agree on many details. A number of pending issues are likely to affect American business, including the exclusion of agriculture from the deal, a bigger slice for Europe of India's burgeoning public procurement spending, and new market opportunities for European bankers and insurance companies.

In the long run, the parameters of an E.U.-India accord will define the scope of any market liberalization deal that Washington might hope to achieve with New Delhi. The Confederation of Indian Industry would like to see U.S.-India free-trade talks begin in the next five years. Rep. David Dreier, R-Calif., will soon introduce a congressional resolution advocating such deliberations.

For years, the Bush administration has pursued a policy of competitive trade liberalization, playing one country off another in multiple bilateral trade negotiations. Now the European Union is giving the United States a taste of its own medicine by simultaneously negotiating with India and South Korea. Seoul has a free-trade deal penned with Washington, but Bush has not indicated when he'll send it to Congress. If Brussels succeeds in crafting a free-trade deal with New Delhi, Washington will be on the outside looking in.

India is rising rapidly on Europe's radar screen. Tata Motors, India's largest automaker, is nearing a deal to acquire Britain-based carmakers Jaguar and Land Rover. In 2006, India's Mittal Steel merged with Luxembourg-based Arcelor to form the world's largest steelmaker. India is the European Union's ninth-largest trading partner, more important than Brazil or Canada. The E.U. is the biggest investor in India, accounting for a quarter of India's foreign direct investment. By 2-to-1, Europeans see the emerging Indian economy as an opportunity and not a threat, according to a 2007 survey by the German Marshall Fund. (That's in contrast to China, whose economic rise most Europeans now fear.) With the Indian economy expected to grow 8.4 percent this year -- in effect, creating a new market opportunity larger than Denmark -- interest in India can only increase.

To be sure, Europeans face obstacles to doing business on the subcontinent. Although New Delhi has unilaterally cut its tariffs over the years, it still maintains high duties on petrochemicals, automobiles, finished steel products, and wines and spirits -- all goods that the European Union, and the United States, would like to sell to Indians. And foreign firms rarely win Indian government contracts for new airports, seaports, and roads.

The Indian services sector, likewise, remains relatively closed. The government maintains a 26 percent limit on foreign ownership of insurance providers. Restrictions on professionals bar Western accountants and lawyers from working in India. Brussels has brought nine cases against India for suspected violations of World Trade Organization rules. (The E.U. has filed only one such case against China.)

The free-trade negotiations between Europe and India are aimed at stripping away such market impediments and defusing growing tensions. An E.U. study suggests that a deal would enable European nations to increase their exports to India by up to $18 billion by 2020 and would boost Indian sales to the European Union by $9 billion. A study by the University of Sussex in England and CUTS International, a nongovernmental group based in Jaipur, India, concluded that a deal could increase the two-way flow of investment 30 percent.

These are not hugely significant gains. They reflect the limits of bilateral trade liberalization, and they underscore why such agreements need to go beyond cutting tariffs to also break down limits on foreign investment and other regulatory barriers. Cautioned Jim Rollo, co-director of the European Institute at the University of Sussex, "If the deal is largely confined to reducing border barriers, then there is a strong possibility that trade diversion [India merely substituting imports from Europe for imports from America] will exceed trade creation."

In the first round of Indo-European negotiations in October 2007, the parties immediately took agriculture off the table. The Europeans have no interest in selling farm commodities to Indians, beyond cheese and other processed foods. This suits the Indians, who have resisted U.S. demands to open their agricultural market as part of the current Doha Round of multilateral trade talks.

With regard to manufactured goods, the Indians assert that they face slightly higher tariffs on most of their exports to the European Union than they impose on E.U. imports. So, "we would stand to benefit from lower tariffs," says T.S. Vishwanath, head of international trade policy for the Confederation of Indian Industry. Both sides agree that textiles, automobiles, and auto parts are likely to be the main stumbling blocks in the negotiations.

"Services are where the real gains will be," Vishwanath predicted. Brussels and New Delhi are developing a common list of service sectors to be liberalized, including banking, insurance, express mail, accountancy, and legal work. This "positive list system" inherently limits liberalization, however, because only industries on the list will be opened to foreign competition. This is at odds with the "negative list system" that the United States has used in recent free-trade talks, in which all sectors are liberalized unless specifically excluded.

Much to Wal-Mart's dismay, Brussels wants Europeans to be able to own 100 percent of multiproduct retail outlets in India. Currently, foreign companies may own only 51 percent of stores selling a single product, such as sport shoes. Foreigners may not own multiproduct stores.

With the Indian government set to spend about $350 billion on infrastructure over the next five years, gaining the opportunity to compete for those contracts is a major European objective. New Delhi has suggested greater transparency in bidding. "Transparency is not good enough," retorted an E.U. official. "We want market access."

This issue has exposed a divide in the Indian business community. The CII, which is dominated by Indian multinational corporations, favors liberalization because it is anxious to sell more pharmaceuticals and information technology to European governments. The Federation of Indian Chambers of Commerce and Industry, on the other hand, wants to preserve the government's preferential treatment for its small and medium-sized members.

Brussels's desire for separate chapters in the agreement on sustainable development and human rights also bears watching. With global warming a growing concern in Europe, and with India hostile to curbs on its carbon emissions, negotiators' approach to carbon-intensive Indian exports could set a precedent for future accords. Meanwhile, European officials are worried that activists will try to use the negotiation to criticize India's caste system, which would introduce a new issue to trade talks.

An E.U.-India free-trade agreement is far from a foregone conclusion. For starters, E.U. Trade Commissioner Peter Mandelson and Indian Commerce and Industry Minister Kamal Nath do not get along. And European officials freely admit that no more than nine of the 27 member states of the European Union have much interest in the deal. Moreover, neither Europe nor India has a good track record with such agreements.

The European Union has failed for years to conclude a joint free-trade agreement with Argentina, Brazil, Paraguay, and Uruguay. And, writes Razeen Sally, director of the European Center for International Political Economy, "India has the worst [free-trade agreement] record of all the major Asian players. Its [deals] are appalling. Many are gimmicky, commercially nonsensical preferential-tariff agreements on a limited range of goods."

Still, the United States will discount the current E.U.-India negotiations at its peril. If a U.S.-India negotiation ever takes place, New Delhi will never concede to Washington more than it has given to Brussels. So at the very least, American farmers' access to the Indian market is at stake in these talks. Similarly, the Indo-European ceiling on foreign investment in India's service sector would cap U.S. companies' investment opportunities.

Americans' stomach for free-trade agreements may have soured. But trade liberalization is continuing around the world. And the trade deals that others strike will affect U.S. interests.