The India UK Free Trade Agreement, Opportunities and Challenges (GS Paper 2, International Relation)
Context:
- While the final outcome of the negotiations remains to be seen, a few studies have tried to examine the likely impact of the India-UK Free Trade Agreement on the partner countries.
Global trade growth:
- In its October 2023 released Global Trade Outlook and Statistics Update, the World Trade Organization (WTO) has painted a gloomy outlook for global trade growth. This is likely to have serious implications for GDP growth in countries across the world as growth in international trade and GDP growth are positively correlated with each other.
- This is also evident in the WTO October 2023 report where world merchandise trade growth is expected to decline from 3.0% in 2022 to 0.8% in 2023 while the economic growth is expected to decline from 3.1% in 2022 to 2.6% in 2023.
Role of FTAs:
- One strategy to boost trade and commerce is for countries to enter into free trade agreements (FTAs) with partner countries.
- Such FTAs are aimed at liberalizing trade in goods and services, and increasingly, facilitating movement of investment, capital and labour.
- India and the UK are also negotiating a trade deal and the two countries first met at the negotiating table in January 2022.
- Since then and as of now, 13 rounds of bilateral talks have already been concluded and the next round is planned for January 2024.
Issues in India-UK FTA:
- There are several contentious issues on both sides. Both countries are grappling to resolve issues covering broad areas related to intellectual property rights, rules of origin, financial services, work visas, and tariff cuts on certain crucial items among others.
- India expects that UK companies should exhaust all the local judicial remedies before seeking international arbitration for resolving contentious issues; and that the FTA provides greater access to skilled Indian professionals in IT and healthcare to the UK market, besides enabling market access to other products at zero tariffs.
- Amongst other issues, the UK would like
- higher protection for geographical indication (GI) products such as scotch whisky, stilton cheese and cheddar cheese etc.;
- enhanced market access for UK services in telecommunications, legal and financial services; and
- waiver of duties for fully assembled electric vehicles (EVs).
Impact of the India-UK FTA on the partner countries:
- Most studies on the likely effects of FTAs on partner countries and the rest of the world include different trade liberalization scenarios. The conservative scenarios entail lower tariff reductions and little liberalisation of non-tariff barriers (NTBs) to trade.
- The more ambitious scenarios, on the other hand, consider substantive reductions in tariffs across sectors and meaningful liberalisation of NTBs.
- There are significant gains to be had from the liberalisation of NTBs such as product standards, technical barriers to trade, legislation pertaining to the protection of intellectual property, government procurement regimes, regulatory requirements for investment and services etc.
- These are mostly behind the border issues that can typically be more easily addressed in preferential trade negotiations rather than in a multilateral setting.
- The magnitude of economic gains from the India-UK FTA would therefore also depend significantly on the extent to which these regulatory issues are covered in the eventual agreement.
Boost to GDP:
- A report by the Department of International Trade, Government of UK, suggests that measured in 2019 prices, the FTA could boost UK GDP by around £3.3-£6.2 billion depending on the depth of the negotiated outcome; this is equivalent to a long-run increase in UK GDP of between 0.12% and 0.22%.
- Similarly, India’s GDP could go up from £3.7 to £8.6 billion in 2035, which constitutes a 0.07% to 0.16% rise. The gains emanate from a significant increase in bilateral merchandise and services trade as a result of the agreement.
- By 2035, UK exports to India could increase by around £8.8 billion (50%) to around £16.7 billion (95%), with the corresponding increase in bilateral imports ranging from £5.2 billion (30.7%) to around £10.9 billion (63.7%).
- However, the gains would not be uniform across sectors and industries; moreover, there would be both winners and losers.
Beneficiaries:
- The study suggests that India’s gains from this FTA are likely to be concentrated in labour intensive sectors such as textile exports, apparel, gems and jewellery while for the UK, transport equipment including motor vehicles and parts; manufacturers of machinery and electrical equipment; and the beverages and tobacco sectors are likely to be the major beneficiaries.
- While the UK is als o expected to gain in most services sectors, it could lose out in communications, other financial and other business services (if the agreement is not far-reaching in coverage) as well as in agriculture and allied, food-processing and the textile and apparel sectors.
- At the same time, the FTA could also facilitate closer integration of UK and Indian supply chains, especially in the textiles and motor vehicles sectors, through improved access to imported intermediate inputs.
Way Forward:
- While consumers in both markets are likely to benefit from the availability of high-quality and low-priced products and services as a result of the tariff liberalization under the FTA, small and medium enterprises in particular would gain from meaningful liberalization of non-tariff measures such as product standards and technical regulations as these impose prohibitive market access costs on small producers in both countries.
