Navigating The Final Lap: India-UK Free Trade Negotiations Zoom Into Critical Issues

Trade negotiators from both sides have reached an understanding on 20-plus negotiating subjects and are working to bridge differences over a few unresolved issues such as product specific rules of origin, reduction in import duties on wines and automobiles (more specifically electric vehicles), easier visas for Indian professionals for short UK work visits and access to professional services etc.

If New Delhi’s diplomatic row with Canada and the escalating war in West Asia do not play party pooper, the India-UK FTA might see the light of the day before the year ends. Media reports have speculated that it could come as early as Diwali or after the state polls are over.

New era in India’s FTA journey

The agreement will herald a new era in India's FTA journey for two significant reasons:

Firstly, it shifts India's focus from the East to the West in terms of preferential trade partnerships. India’s most important FTAs are with countries located to its east – Asean, Japan, S Korea, and Australia. Lately New Delhi is increasingly looking to the West, the UK, the EU, the USA, Switzerland, Norway, and Canada (now paused).

Secondly, in all new FTAs, India is negotiating many new non-trade areas such as the environment, labour, gender, digital trade, data governance, etc., reluctantly changing its earlier approach to focus only on traditional market access subjects such as merchandise and services trade..

The soon-to-be-completed FTA with the UK will be the first important FTA that extensively deals with non-trade areas, besides cementing a new phase in India’s look-west policy shift.

The India-UK FTA would cover 26 subjects: Market Access for Goods, and Services, Intellectual Property, Government Procurement, Sanitary and Phytosanitary Measures, Technical Barriers to Trade, Competition, Rules of Origin, Trade Facilitation, Customs Cooperation, Small and Medium-Sized Enterprises, Trade and Sustainable Development, Labour, Gender, Digital Trade, Dispute Settlement, General Provisions and Transparency.

Focus, hurdles and possible outcomes

Merchandise Trade: The FTA is expected to have a limited impact on increasing merchandise exports because more than half of Indian products already enter the UK with low or no tariffs. The average tariff on goods imported from India into the UK is 4.2 per cent.

Export of products such as petroleum goods, medicines, diamonds, machine parts and wooden furniture – valued at about $6 billion – won’t benefit much from the FTA as they already face almost no tariffs in the UK.

However, there will be gains from reducing duties on such Indian exports as textiles, apparel (shirts, trousers, women's dresses, bed linen), footwear, carpets, cars, marine products, grapes, and mangoes, which are valued at $5 billion. These products face relatively low to moderate tariffs in the UK. For example, tariffs on yarn and fabric are 4 per cent, while tariffs on shirts, trousers, women's dresses, and bed linen range from 10 per cent to 12 per cent. Handbags and trunk cases face 8 per cent tariffs, and footwear tariffs vary from 4 per cent to 16 per cent. These products will benefit from any tariff reductions under the proposed FTA.

India’s merchandise imports from the UK were $8.96 billion in FY2023, about 90 per cent of which enters the Indian market on payment of average to high tariffs duties. For example, import of cars attract 100 per cent import duty, while Scotch whisky and wines are taxed at 150 per cent. The simple average tariff in India on goods imported from the UK is 14.6 per cent.

Possible Tariff Cuts: India has not only maintained a trade surplus with the UK over the past two decades, the surplus has been growing over the years (See Chart), which is why Britain has been pushing hard for a reduction in tariffs on products such as automobiles and alcohol.

India may reduce, but not eliminate, tariffs on automobiles and Scotch whiskey from the UK. For luxury cars like those from JLR, Bentley, Rolls-Royce and Aston Martin, the UK might want zero tariffs, but India could agree reduce them from 100 per cent to 50per cent. India might also consider allowing a few thousand units at a 25-per-cent tariff. It could reduce tariffs Scotch whisky and wine from 150 per cent to 50 per cent over a few years, similar to what it did for Australian wines.

Rules Of Origin: Rules of origin ensure that products from third countries don't 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, leading to extended discussions and negotiations in its FTA talks, including with the UK. However, India may need to be more flexible in its Rules of Origin framework, especially as its firms in sectors like chemicals, electronics, and synthetic textiles are increasingly using imported inputs.

Services: As India exports IT and business services to the UK on a very large scale, an area of immediate attention is to get the UK to issue priority visas to Indian professionals who travel to the UK to perform short term assignments. In all FTA negotiations, this has been a key demand of India. However, most countries take the stand that visa is a larger political issue, linked to immigration and not to FTA negotiations.

In the UK too, India may face challenges in obtaining a large number of short-duration business visas for its professionals, as the UK erroneously associates it with immigration, a sensitive issue since Brexit.

UK firms may like to operate in expanding Indian telecommunications, legal and financial services like banking and insurance sectors. The UK may push for Indian commitments on these sectors.

Government Procurement: Government Procurement is one of the limited policy tools still available to the government to incentivise domestic producers. India should not agree to stop preferential treatment to domestic suppliers. Allowing the UK producers to sell to India’s government sector would bring them on par with Indian firms. On the other hand, Indian firms face a very competitive and restricted government procurement market in the UK with little business prospects. India needs be conservative and careful.

Labour Standards, Gender, Environment, Digital Trade, IPRs:These subjects have been included in the FTA on British request. India must make domestic rules/standards before making commitments under these heads.

India should not agree to free cross-border data flows. Even the United States has withdrawn its support from such issues at the WTO e-commerce negotiations. While negotiating labour standards, India should not agree to reiterate the ILO conventions agreed. Commitments at ILO are the best endeavour, but reiterating those under an FTA becomes binding and actionable. This logic applies to environment, sustainability and other chapters also.

Text in the sustainability chapter may provide legal justifications to the UK for imposing non-tariff barriers on imports to promote sustainability. If this happens, the market access that India might expect under the FTA could get undermined. India must negotiate these issues carefully. New Delhi must avoid taking onerous obligations on all non-trade Issues that require sacrificing its domestic policy space.

Investment Treaty:The Indian finance ministry is now negotiating a new bilateral investment treaty with the UK separately from the FTA. One key difference in these negotiations is the mechanism for settling disputes. India wants foreign firms to exhaust local judicial remedies before resorting to international arbitration, but its partners resist due to the lengthy nature of Indian judicial proceedings. Britain is keen on pairing a new investment treaty with the FTA.

Carbon Border Adjustment Mechanism: The UK government has launched a consultation on a carbon border adjustment mechanism (CBAM), along lines similar to what the European Union has done. It intends to introduce emissions reporting in 2025 and a phased implementation of the CBAM in 2026. Once CBAM is launched, the UK products will continue to enter India at zero duties but Indian products may pay 20-35 per cent tariff equivalent as CBAM charges. A suitable text may be inserted in the FTA chapters dealing with this possibility.

In conclusion, the India-UK FTA will stand out not merely as a contract of trade and commerce but as a testament to strategic diplomacy and economic foresight, with India poised to recalibrate its trade axes westward while embracing a broader array of modern trade concerns.

As India charts its course through these negotiations, it does so with an acute awareness of the delicate equilibrium between yielding immediate economic dividends and preserving long-term national interests. The ultimate success of the India-UK FTA will hinge on this delicate balance, potentially setting a precedent for India's future trade engagements on the global stage.

(Ajay Srivastava, a former Indian Trade Service Officer, is the founder of Global Trade Research Initiative, a New Delhi-based think tank. Views expressed are personal)