India-UK FTA: Potential gains, challenges in post-Brexit world

India-UK FTA
India-UK FTA will need both sides to make strategic choices to unlock the full potential of the pact, especially in labour-intensive sectors.

India and the United Kingdom are working towards a free trade agreement which will offer some advantages for Indian exports of textiles, apparel, footwear, and agricultural products. This article delves into the nuances of the India-UK FTA negotiations and explore the strategic choices that both countries must make to foster mutual benefits.

The India-UK FTA is expected to have a modest impact on India’s merchandise trade. This is primarily because a significant portion of Indian exports to the UK already enjoy low or zero tariffs. In fiscal year 2023, India’s merchandise exports to the UK were valued at $11.41 billion. Over half of these products enter the UK without any tariffs, with an average tariff of 4.2% on the rest. A report by the Global Trade Research Initiative has highlighted the critical role of product quality improvements in driving substantial growth in bilateral trade.

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While the FTA will undoubtedly benefit certain Indian exports worth $5 billion, including textiles, apparel, footwear, cars, marine products, grapes, and mangoes, it is imperative to recognise that tariff reductions alone will not guarantee substantial growth. The key to unlocking the full potential of Indian labour-intensive exports lies in improving product quality. Experience from previous FTAs suggests that merely signing an agreement does not lead to significant increases in exports.

For instance, India’s textiles and apparel exports to Japan did not experience significant gains from their FTA. From 2007-09 to 2019-21, India’s exports to Japan grew by 43.1%, whereas India’s global exports increased by approximately 67.9% during the same period. This indicates that natural growth factors played a more substantial role in export growth than the FTA itself.

Tariff cuts under India-UK FTA

On the flip side, the UK’s exports to India face substantial tariffs, particularly on items like cars, Scotch whisky, and wines. The FTA presents an opportunity to reduce these tariffs, potentially opening up new avenues for trade. Some of the UK products that stand to gain from tariff reductions under the FTA include precious metals like silver, unwrought platinum, unwrought gold, diamonds, metal scrap, petroleum products, Scotch and other alcoholic beverages, machinery, medicines, and makeup items.

In sectors like automobiles and Scotch whiskey, India may consider reducing tariffs, albeit not eliminating them entirely. For luxury cars, a reduction from 100% to 50% or even a lower tariff for a limited quantity could be on the table. Similarly, tariffs on Scotch whiskey could be reduced over a phased period, mirroring the approach taken with Australian wines. These reforms in high-tariff sectors are essential for fostering growth and expanding market opportunities.

Navigating the issues in dairy products trade

One of the most politically sensitive issues in the FTA negotiations is dairy products. India has been hesitant to reduce tariffs on dairy due to concerns about farmer welfare and opposition from dairy cooperatives. The report suggests that India could selectively open the dairy sector to imports by allowing tariff reductions on predetermined quantities. This approach encourages Indian firms to improve their systems and offer healthier choices to consumers, without negatively impacting farmers.

It is worth noting that Foot and Mouth Disease (FMD) is a significant concern in India, causing substantial economic losses. Around 80% of these losses are attributed to decreased milk production. Therefore, selective imports aim to enhance domestic quality rather than primarily benefiting the partner country.

Flexibility in rules of origin

Rules of origin play a crucial role in FTAs, ensuring that products from third countries do not receive FTA benefits unless they undergo significant transformation in the exporting country. India tends to prefer more conservative rules of origin compared to most developed countries, which can lead to prolonged negotiations. However, as Indian firms in sectors like chemicals, electronics, and synthetic textiles increasingly rely on imported inputs, flexibility in rules of origin becomes imperative.

The India-UK Free Trade Agreement presents a complex tapestry of potential gains and challenges. As negotiations continue, both nations must strike a delicate balance between economic interests and political sensitivities. While tariff reductions are essential, they alone will not lead to substantial growth in trade. Product quality improvements, especially in labour-intensive sectors, must go hand in hand with tariff reductions to unlock the full potential of this FTA.

As India and the UK navigate these intricate negotiations, they must remain committed to enhancing the quality of traded goods, addressing political sensitivities, and making strategic choices that benefit both nations. The road ahead may be challenging, but with the right approach, the India-UK FTA can be a win-win for both countries and contribute to strengthening their economic ties in a post-Brexit world.”

Digital trade, IPRs, sustainability

The digital economy is rapidly growing in both India and the UK, and the FTA presents an opportunity to boost trade and investment in this sector. Both countries should aim to include ambitious provisions on digital trade in the FTA, such as data flows, cross-border e-commerce, and electronic signatures.

This would allow businesses in both countries to take advantage of the growing digital economy and create new opportunities for innovation and job creation. It would also help to promote the free flow of information and ideas, which is essential for a vibrant and dynamic economy.

India and the UK have different approaches to IP protection, which could be a sticking point in the negotiations. India should seek to balance the interests of its domestic IP creators with the need to attract foreign investment and innovation. For example, India could consider providing a limited period of data exclusivity for foreign pharmaceutical companies, while also strengthening its IP enforcement mechanisms.

This would allow India to benefit from the latest technological advances while also protecting its domestic IP creators. It would also send a strong signal to foreign investors that India is committed to protecting intellectual property rights.

The FTA should be designed to promote sustainable development in both countries. This could include provisions on environmental protection, labour rights, and corporate social responsibility. India could also seek to use the FTA to promote its renewable energy sector and other sustainable technologies. This would help to ensure that the benefits of the FTA are shared equitably and that it does not have a negative impact on the environment or labour rights. It would also help to position India as a leader in the global transition to a sustainable economy.

Both countries should ensure that all stakeholders have a voice in the FTA negotiations and that the final agreement is made public for scrutiny. This is essential for building public support for the FTA and ensuring that it meets the needs of all stakeholders. By making the negotiations transparent and inclusive, India and the UK can avoid potential pitfalls and create an FTA that is beneficial for all.