External Affairs Minister S Jaishankar discussed the India-UK Free Trade Agreement (FTA) with Britain’s Prime Minister Rishi Sunak and Foreign Secretary David Cameron this week. On Monday, Jaishankar said in London that the FTA was “very much the focus of what the Indian and British systems are negotiating, and we hope that we will find a landing point that works for both…”, PTI reported.
When signed, the India-UK FTA will serve as a template for an agreement with India’s second-largest trade partner, the European Union (EU). Breaking from the look east policy for trade deals under the UPA that saw widening deficits with Japan, South Korea, and ASEAN countries, the government is counting on economic integration with Western and African nations to fuel export growth.
The disruption of supply chains during the pandemic brought home to Western companies the risks of over-dependence on China, and the need for a ‘China-plus one’ policy.
Australia’s tensions with China, along with the complementarities with the Indian economy, presented a case for a trade deal with India; similar factors brought New Delhi and London to the negotiating table.
India, after exiting the China-dominated Regional Comprehensive Economic Partnership (RCEP), has been looking at trade deals with the UK, Australia, the EU and, until recently, Canada, to hold off China in the region.
A trade deal with India is crucial for the UK as the ruling Conservatives face a tough election in early 2025. The insecurities that spurred the vote for Brexit is a reason why the UK is hesitant to offer work permits to Indian service sector workers under the FTA — however, the size and potential of the Indian market offers London a way to compensate for the loss of access to the European Single Market.
India’s labour-intensive sectors such as apparel and gems and jewellery have seen a steep decline in market share over the last five years. Indian textile exports face tariffs walls as high as 10% in the UK; a trade deal could put India on par with competition such as Bangladesh, and revive textile exports. However, the British Parliament has been warned in a report that granting zero-duty access to Indian textiles under the FTA could bring stress on Least Developed Countries such as Bangladesh.
Past deals with Japan and the ASEAN countries have shown that the elimination of duty does not automatically result in export growth. Also, many Indian exports to the UK already enjoy low or zero tariffs, while British exports to India such as cars, Scotch whisky, and wines, face considerable tariffs of 100-150%. Tariff reductions on these goods will potentially offer them deeper access into Indian markets.
Notably, the average tariff on goods imported from India into the UK is 4.2% but the average tariff in India on goods imported from the UK is 14.6%
Modern FTAs go beyond tariff reduction. India could use the negotiations to eliminate non-tariff barriers (NTBs) that have historically been a concern for exporters, especially for agri exports. NTBs often come in the form of regulations, standards, testing, certification, or preshipment inspection that are aimed at protecting human, animal, or plant health and the environment. Vegetable and fruit exporters often face strict limits imposed by European economies on pesticides and other contaminants in agri imports. In manufacturing too, Indian products face high rejection based on conformity assessments and technical requirements.
Like the EU, the UK is looking to impose a levy on metal imports based on carbon emissions. An EU-style carbon border adjustment mechanism (CBAM) will hurt India’s exports to the UK even if India wins significant removal of tariffs. The UK’s carbon tax could be harsh, as one of its aims is to reduce dependence on Russian energy imports.
According to a consultation paper on the CBAM, the UK has shortlisted products such as cement, chemicals, glass, iron and steel, non-ferrous metals, non-metallic minerals, paper and pulp, refining, fertilizers, and power generation.
