Clipped from: https://www.business-standard.com/opinion/columns/india-uk-trade-deal-prospects-challenges-123110801248_1.html
Could a successful negotiation herald a new era in their modest trade relationship?
In December 2021, India surpassed the UK to become the fifth-largest global economy. In January 2022, both countries initiated negotiations for a comprehensive free trade agreement (FTA) in fast-track mode. Currently, negotiations are nearing completion, with teams from both countries working to resolve the last few remaining issues. The FTA may be signed by the end of the year.
India and the UK have a modest trade relationship, with the total bilateral trade in financial year 2022-23 exceeding $44.3 billion. India, with exports of $25.8 billion in goods and services, has a trade surplus of $8 billion. This data is from the Department of Business and Trade of the UK government. The Reserve Bank of India does not release bilateral services trade data for the public.
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What outcomes can we expect from the FTA between two large economies with modest levels of bilateral trade?
The FTA involves negotiations in 26 subjects, including trade in goods and services, sustainability, intellectual property rights, and labour issues. Through these subjects, the negotiators aim to capitalise on India’s burgeoning digital and consumer markets and the UK’s advanced technology and financial sectors, potentially benefiting both nations. Essentially, the FTA must leverage trade and economic complementarities between India and the UK. To what extent will they succeed? Let us examine the focus, hurdles, and possible outcomes in the major negotiating subjects.
Merchandise trade: Indian smartphones, petroleum products, medicines, diamonds, machine parts, aeroplanes, and wooden furniture currently enter the UK market duty-free. These products totalled $6 billion — half of India’s goods exports to the UK in FY23. The FTA will not help these already zero-tariff exports.
In contrast, Indian exports, such as textiles, apparel, footwear, carpets, cars, marine products, and certain types of fruit worth $5 billion, are subjected to UK tariffs ranging from 4 to 16 per cent. The FTA will benefit these sectors through tariff removal. However, achieving significant growth would require improvements in product quality, as the target market is a developed country with affluent consumers with a high per capita income of $47,400.
Currently, over 90 per cent of UK products face average to high tariffs in India. For example, silver, the UK’s largest export to India at $2.7 billion in FY23, currently faces a 12.5 per cent tariff (basic Customs duty). Other significant Indian tariffs are on cars (100-125 per cent) and Scotch whisky (150 per cent), with an average Indian tariff of 14.6 per cent on UK imports. India may offer concessions similar to those given to Australia for certain products, such as lamb meat, and reduce but not eliminate tariffs on UK automobiles and Scotch whisky. The FTA-led tariff cuts by India will give UK products an immediate cost advantage. UK supplied aluminium, ferrous, copper, and paper scrap valued at over $1.56 billion to India in FY23. Indian firms will gain from cheaper access.
The rules of origin ensure that products from third countries receive FTA benefits only if they undergo significant processing in the FTA partner exporting country. For silver, the UK’s top export, the challenge arises for India because the UK primarily refines and re-exports the imported metal with very low-value addition. However, beyond such low-value-added products, India might show flexibility in product-specific rules of origin. Indian industries like chemicals, electronics, and synthetic textiles that rely on imported inputs could benefit from relaxed rules.
In the services sector, the UK is a significant consumer of Indian information technology (IT) services, second only to the US. Indian IT companies cater to a variety of sectors in the UK, given the demand for digital transformation there.
India needs a more efficient visa process from the UK to facilitate the rapid deployment of its large number of professionals for short-term projects. However, the UK probably associates even short-term visas for professionals with immigration, a topic that has become particularly sensitive since Brexit.
Indian professionals working in the UK must contribute to the UK’s social security system, even though they often do not stay long enough to benefit from it. A potential solution within the FTA is a totalisation agreement, which would allow these professionals to be exempt from UK social security taxes, acknowledging that they do not reap the long-term benefits of these contributions.
The UK seeks India to treat the UK firms on a par with Indian firms for business in all sectors. India might agree to open up sectors of particular interest to the UK, but is unlikely to extend this equal treatment across the board.
Government procurement: The UK seeks access to India’s government procurement market to level the playing field with Indian firms. However, Indian companies find the UK’s equivalent market highly competitive and restrictive, offering limited opportunities. Therefore, India may approach this cautiously.
India should also exercise caution when negotiating terms related to non-trade issues such as the environment, digital trade, and intellectual property rights. For instance, agreeing to strict sustainability criteria might allow the UK to impose non-tariff barriers that negate the benefits India seeks from market access. Similarly, while India has committed to labour standards through the International Labour Organization (ILO), it should avoid making these commitments binding within an FTA, as it could lead to enforceable obligations. The same caution is advised for chapters on the environment and sustainability. Regarding digital trade, India may resist endorsing free cross-border data flows, a stance that even the US has adopted in recent World Trade Organization (WTO) e-commerce talks.
Both countries are negotiating a bilateral investment treaty (BIT) alongside the FTA and hope to sign them together, as the FTA and BIT complement each other.
The UK Government has launched a consultation on a carbon border adjustment mechanism (CBAM). Once CBAM is launched, UK products will continue to enter India duty-free, while Indian products may pay a 20-35 per cent tariff equivalent to CBAM charges. A suitable text may be inserted in the FTA chapters dealing with this possibility.
In sum, while being mindful of the potential hurdles such as non-tariff barriers and regulatory issues, the successful conclusion of the FTA negotiations could herald a new era of Indo-UK economic partnership, bolstering both economies and setting a precedent for future trade agreements.
The writer is the founder of the Global Trade Research Initiative, a research group focused on trade, technology and climate change
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