25 May 2022
Amrita Saha is a Research Fellow at the Institute for Development Studies affiliated with the University of Sussex and Mattia Di Ubaldo is a Fellow of the UK Trade Policy Observatory and Research Fellow in Economics at the University of Sussex Business School.[1]
The third round of negotiations for the proposed UK-India Free Trade Agreement (FTA) were concluded in New Delhi on May 6, with news that a deal could be reached by the end of the year. Yet, there are diverse interests on both sides, so any deal would be hard negotiated. We reflect on the current UK-India trade relationship, the state of play of negotiations, and what businesses on both sides hope the FTA will deliver.
UK-India: Rising services trade
The UK and India have a unique trade relationship, with a rapidly growing dynamism in services trade. Strong business-to-business and government-to-business relations have been built over decades, with continued advocacy across sectors and supported by strategic advisory businesses, non-profit organisations, and a huge Indian diaspora in the UK. The UK is the sixth largest investor in India, whilst India stands as the second largest investor in the UK.
UK export of goods to India has seen little change over the last 10 years. Currently, UK-India goods trade is governed by the Generalized System of Preferences (GSP), a unilateral scheme originally created by the EU that grants Indian exporters lower than Most-Favoured-Nation tariffs (i.e. preferences) when exporting to the UK. However, due to India’s size amongst the members of the GSP, preferences have recently been revoked by the EU from sectors in which India is a particularly large exporter (e.g. chemicals, textiles, mineral products). The loss in competitiveness resulting from higher tariffs has led to a fall in trade with the EU relative to other GSP beneficiaries.[2] India’s textiles exports to the UK now attract an import duty of almost 10% relative to the duty-free access for other GSP beneficiaries such as Pakistan and Bangladesh.[3]
While the GSP has helped Indian exports grow over the past decades, its unilateral structure, its partial coverage (about two thirds of all products are GSP eligible) limited to goods trade, and the recent removal of some preferences, all call for a move away from this system towards an FTA. Furthermore, the Covid-19 pandemic has adversely affected the textile sector globally, creating hardships not only for Indian traders/exporters but also farmers in the textile value chain. The UK’s recent agreement for tariff concessions on India’s textile goods in an FTA would be seen as a welcome step.
Yet to fully understand rising UK-India trade, we must look towards services. Trade in services has seen huge growth, and now constitutes around 40% of the total value of bilateral UK-India exports and imports. The driving force behind this increase is ‘Other business services’, a set of potentially high-skill intensive services encompassing management consulting, professional and technical services. UK imports of these services increased from £1.9 billion in 2016 to £4.5 billion in 2020. UK and Indian negotiators would therefore do well to engage in deepening financial services cooperation and regulatory alignment for professional and business services. With India’s growing FinTech ecosystem and the UK’s strength in technology and knowledge-based businesses, digital services and investments are likely to be key drivers of future trade.
The road to an FTA: Where are we now?
Bilateral trade deals with India have been hard to come by, and even after many years of talks, full FTAs are still under negotiation. There are recent winds of change however, and India has signed bilateral agreements with Australia and the United Arab Emirates. And following negotiations in May 2021, an ‘Enhanced Trade Partnership’ (ETP) was agreed between the UK and India, comprising increased investment and opportunities for research and innovation collaborations on both sides. This certainly paved the way for FTA negotiations and served to highlight some strong mutual trade objectives, particularly in finance and technology as well as in healthcare and pharmaceuticals, in which both the UK and India are leading global players. Whilst there is quite a lot in terms of scope, the focus seems to be to prioritise early gains from reduced trade barriers relative to the GSP regime, with significant caution on critical regulatory aspects, like data localisation, tax treatment and regulatory co-operation.
The key sticking points for a full FTA are being negotiated. India, for example lamented the UK’s lack of flexibility regarding restrictions on the movement of people, especially affecting short-term visas. Although Prime Minister Boris Johnson has indicated that he may concede on this, intense negotiations lie ahead. For Indian companies in the UK looking to continue operations in Europe, questions remain over the significant trade barriers arising from the UK-EU Trade and Cooperation Agreement.
What will an FTA mean for development?
Although India is an emerging superpower, its policy space remains constrained by high levels of poverty and inequality. Hence, the potential impact on these outcomes of an UK-India FTA will be important, driven by differential effects emanating from trade policy across specific sectors and for consumers, workers and producers. For instance, the opportunities afforded by a potential FTA for labour-intensive sectors such as textiles and leather would be very welcome, with likely contributions to poverty reduction and to upholding human rights.
The UK’s interest in an FTA can also be viewed in the context of its recent cuts to Overseas Development Assistance (ODA), and a shifted priority towards trade. The UK has been a key partner in India’s growing participation in triangular cooperation[4], and a strengthened UK-India partnership could complement the UK’s support to South-South trade and development goals.
Last year, the Institute of Development Studies (IDS) collaborated with the UK India Business Council (UKIBC) to engage with businesses on expectations from a UK-India FTA. Market access, progress on digital trade and regulatory cooperation were of clear interest. The need to foster mutual understanding between businesses on both sides was highlighted, along with fostering partnership programmes and agreements providing footholds to new markets. The recent rounds of negotiations based on wide consultations with businesses and civil society demonstrate attention to these aspects, providing more clarity on positions on both sides.
The path ahead may not be very long. In spite of complicated negotiations ahead, and an overall ‘cautiously ambitious’ approach, there is general optimism around the opportunities that will come from a future UK-India FTA. Increased trade would bring benefits to both countries, increasing both business activity and incomes. However, facilitating trade while identifying and protecting small businesses and displaced workers will be important, as will giving priority to inclusive trade, and to areas of technology exchange, innovation and skill-building.
Footnotes
[1] The authors acknowledge inputs from Dr Ingo Borchert (UKTPO), Erin MacDermott (IDS) and Prof Dibyendu Maiti (Delhi School of Economics).
[2] Preliminary results from the ESRC funded research project “Unlocking the potential for India-UK trade and Development”.
[3] Preferences in the General Framework of UK’s GSP, which is the tier that India belongs to, do not reduce import tariffs in textiles to zero. Textiles imports are duty free for members of the Enhanced Framework (e.g. Pakistan) and the Least Developed Country Framework (e.g. Bangladesh).
[4] Triangular cooperation involves two or more developing countries in collaboration with a third party, typically a developed-country government or multilateral organization, contributing to the exchanges with its own knowledge and resources. See https://www.unsouthsouth.org/our-work/south-south-and-triangular-coordination/
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