Last month, the UK and the EU separately announced their intention to negotiate a free trade agreement (FTA) with India. This is a significant development, not only from an international trade perspective, but also from geo-politics perspective. For India, FTAs with the UK and the EU have the potential of integrating it with the dominant global value chain of trade, and for the UK and the EU, FTAs with India would not only provide them an enhanced access to one of the largest and fastest growing markets as well as manufacturing hubs in the world, ensuring supply chain resilience, but would also enhance their economic and political influence in the Indo-Pacific region.

In this two-part series, we analyse the prospects and challenges of a potential FTA between India and the UK in this first part. In the second part of this blog, we will discuss the prospects and challenges of a potential FTA between India and the EU.

The backdrop

Although India has entered into a number of FTAs, a look at the data suggests that a majority of India’s  trade is generally being done in terms of the WTO’s multilateral ‘most-favoured-nation’ (MFN) principle and/ or under the allowed exceptions, rather than under its FTAs. The reason for this appears to be that most of the FTAs to which India is currently a party to are with developing countries and/ or their blocs and competing Asian peers, and they have by and large resulted in trade deficit for India. There appears to be a general feeling in the government that FTAs have not served India’s economy, in terms of increased exports or building capacities. In the Foreign Trade Policy during 2015-2020[1], the Indian government recalibrated its strategy toward foreign trade and made it quite clear that it wants to move towards an equal, fair and reciprocal trade with multiple countries and across regions and that its bilateral / regional trade engagements in the future would be with regions/ countries that are not only promising markets, but also major suppliers of critical input and have complementarities with its economy. In terms of the new strategy, the Indian government initiated review and re-negotiation of the existing FTAs with ASEAN, Japan and Korea, and at the same time, started trade talks with developed countries/ blocs such as the US, UK, EU, Australia and Canada. India sees more complementarities with developed countries/ blocs as they can support its need for technology, enabling it to build more advanced and efficient capacities and integrate itself into the dominant global value chain of trade. In return, they get access to one of the largest and fastest growing markets in the world (India), with significant export potential.

India’s withdrawal from the China-led Regional Comprehensive Economic Partnership (RCEP)[2] in November 2019, due to several unresolved concerns[3] also provided a significant momentum to its bilateral trade talks with developed countries/ blocks such as the UK, the EU and Australia. India felt that the RCEP was not an equitable arrangement for various substantive reasons. India’s ambition of becoming an equally competitive alternative manufacturing hub to China and other ASEAN countries, and, at the same time, being one of the largest trading partners for any country, even on a standalone basis, have played a big role in its decision to withdraw from RCEP and expediting trade talks with the developed countries/ their blocs.

The trade policy of a country tends to be closely linked to its geo-political outlook. The evolving geo-political scenario in the world and especially in the Indo-Pacific region after the COVID-19 pandemic has also provided a renewed push to such bilateral partnerships with India. India has presented itself as an equally competitive market and supply chain alternative to China, and at the same time, an important ally to counter-balance China’s growing economic and political influence in not just in the Indo-Pacific region (Africa), but also the domestic as well as neighbouring markets of most of the developed countries. 

Potential FTA between India and the UK

After many rounds of institutionalised bilateral dialogues between India and the UK and a thorough joint trade review, on May 4, 2021, the governments of India and the UK agreed on an Enhanced Trade Partnership (ETP), as a precursor to negotiating a comprehensive FTA[4]. To kick things off, India and the UK also agreed on an early harvest package (Interim Trade Agreement), comprising investments by both countries of around £1 billion and certain immediate export opportunities for UK businesses in India, across industries, including food and drink, fruits, medical devices, life sciences and the services sector. As an immediate measure, India agreed to lower non-tariff barriers on export of fruit, food and medical devices[5] from the UK. Both countries agreed to continue removing trade barriers and facilitate market access in specific sectors of mutual interest, on the path to a comprehensive FTA, and adopted a roadmap to 2030[6] to steer cooperation for the next ten years. In addition to the ETP, India and the UK also signed a number of other MoUs to discuss, partner, cooperate and/ or set standards in the areas of joint innovation and investments, migration of professionals and students, digital technology, energy security, defence, telecommunication, customs, protection of intellectual property (IP), data protection and interoperability, medical devices and pharmaceuticals. 

The catalyst

After its exit from the EU, the UK government intends to secure FTAs covering 80% of UK trade by the end of 2022[7]. Having concluded FTAs with the EU, Japan and Singapore post Brexit, India is the largest market with which the UK seems to be keen on having an FTA, engaging across forums. The trajectory of the trading relationship between India and the UK shows a year-on-year increase in trade between the two countries and in 2020 it was worth close to £25 billion, that too broadly balanced. There is also a strong interplay between foreign direct investment (FDI) and trade when it comes to India and the UK. The UK is the largest source of FDI in India out of the G-20, on the other hand, India is the second largest source of FDI in the UK and this is likely to be a big positive factor during FTA negotiations.

Source[8]

Key issues for negotiations

India and the UK are generally in sync on most of the global trade issues. For example, both are aligned on not signing up for the stop-gap Multi-Party Interim Appeal Arbitration Arrangement before the WTO – its appeal mechanism. However, in their bilateral trade negotiations, there are a number of issues that would need to be addressed in order to tap the full potential of their trading relationship, such as market access, investment protection, barriers to trade, including technical barriers (such as technical regulations, standards, certification, and conformity assessment procedures)[9] and protection of IP and data.

Investment protection

India and the UK currently do not have any bilateral investment protection treaty (BIT). The previous BIT was terminated by India unilaterally in 2017. India will seek to negotiate a new BIT with the UK based on its 2015 BIT model[10]. In light of the number of ongoing disputes between the Indian government and the UK companies, involving the issue of investment protection, both sides are likely to negotiate a strong investment protection agreement to address their own concerns.

Tariff barriers

As regards tariff barriers, whilst the UK would expect India to bring down tariffs on certain key UK export items such as food and drinks (including scotch and whiskey), automotive, chemicals and life sciences (including pharmaceuticals and medical devices), India would expect greater market access for its engineering and auto components, readymade garments, gems and jewellery, food and agricultural products. However, it is likely to be less demanding on tariff barriers, given the already low MFN rates applied by the UK, especially, pursuant to the implementation of the UK Global Tariff (UKGT) from January 2021, replacing EU’s Common External Tariff, post Brexit. The UKGT ensures that going forward, 60 percent of trade will come into the UK tariff free on WTO terms or through existing preferential access and an FTA will increase favourable tariffs for Indian exports. India is already working to ensure that its tariff measures are WTO compliant and do not act as a trade barrier for its preferred partners. India should be willing to bring down the tariffs that are of a protectionist nature.

Non-tariff and technical barriers

Whilst reduction of tariff barriers is going to be an important topic of negotiation, the key focus area for both sides is going to be non-tariff and technical barriers. For example, India would expect the UK to be relatively more flexible with respect to the WTO-plus sanitary and phytosanitary requirements (food safety, animal and plant health standards), as applied by it on Indian food, agricultural and marine products, prior to its exit from the EU. Indian exporters also have issues with the rules on sampling, testing, rejection of consignment and customs in the UK.

The UK on the other hand would expect India to remove sectoral, non-tariff and technical barriers (including customs procedures, labelling, registration, certification and licencing and approval requirements) in respect of fruits, food and drinks, automotive, life sciences, healthcare, digital and data services. In addition, the UK would also expect India to strengthen its IP regime (especially with respect to patentability criteria and enforcement, enforcement of trademarks and brand protection) and bring its data protection regime (which is still in the legislative process) in line with the General Data Protection Regulation (GDPR), which was retained by the UK (with slight modifications) in the domestic law, even after its exit from the EU. Considering that it has a very significant effect on operations from a range of sectors, it is going to be an important area to be addressed by India.

Key issues in respect of trade in services

In addition to trade in goods, given that both India and the UK are major players in export of services, negotiations are likely to focus on reciprocal market access in the services sector. Based on the current trend, the UK is likely to focus on a more liberal Mode 3 access (cross-border investment and commercial presence) for information, communications and technology (ICT), educational, financial, telecom, travel, retail and energy related services. On the other hand, India has a greater comparative advantage in professional and computer related services (including IT/ITes), as well as medical, financial, audio-visual and tourism services and is likely to seek a more liberal Mode 4 access (movement and presence of professionals and students). Mode 4 access has been a sensitive topic between the developed and the developing countries (including India). Whilst the UK is likely to be relatively flexible on granting greater access to talented and skilled professions/ workers/ students from India in terms of its ‘Global Britain’ outreach (though domestic opposition cannot be ruled out!), it would expect India to provide Mode 3 reciprocal access (commercial presence) by liberalising tightly regulated professional services sectors, including accountancy, legal services, architectural and audit. Negotiations on trade in services are likely to require a balancing act from both sides.

Concluding thoughts

In terms of next steps, both sides will now undertake respective scoping, consultations and domestic processes with stakeholders. Press reports suggest that a 14-week timeline for such consultations has been agreed upon and formal negotiations could start towards the end of this year or early next year. The UK government has already launched its 14-week business consultation to prepare for the FTA negotiations. In India, the Ministry of Commerce and Industry and concerned government departments have also kicked-off the scoping phase. Exporters, importers, industry bodies, cross-border chambers/ councils for business promotion, export promotion associations, think tanks, consultants and other interested parties in both countries may use this opportunity to make representations and raise their concerns before the respective governments.

India and the UK are important trade and investment partners of each other and the deepening of their bilateral trade and investment relationship through an FTA could generate significant benefits for the UK and Indian economies, especially for their growing services sectors. The UK has been the preferred entry point as well as destination for Indian businesses/ exports in the EU prior to Brexit, and the UK seems to be highly motivated to compete with the EU in ensuring that it remains to be the case even post Brexit. The ‘Global Britain’ wants to have greater influence in world politics. An FTA with India would help it in having a strong partner in the Indo-Pacific region and, at the same time, ensure that it does not miss a preferential access to one of the fastest growing large economies in the world.

On the other hand, an FTA with the UK would help India to improve trade and investment climate in India, secure access for its businesses in the complementary UK market and make Indian businesses more innovative and competitive. India would be happy if an FTA is able to replicate the model of collaboration between Indian and UK institutions for the COVID-19 vaccine (Covishield – the Oxford-AstraZeneca-Serum Institute of India vaccine) in other areas as well, i.e. developed in the UK, manufactured in India and distributed to the world. A comprehensive FTA is expected to achieve not just this, but much more!

The second part of this blog will be out soon.

[1] The existing Foreign Trade Policy (2015-2020), which was to expire on 30 March 2021, has been extended until September 2021 due to COVID-19.

[2] After eight years of negotiations, 10 members of the ASEAN and 5 of their free trade partners (China, Japan, South Korea, Australia, and New Zealand) signed the RCEP on 15 November 2020.

[3] India was a party to the negotiation process of the RCEP since 2012, but it withdrew from the final negotiation round in November 2019 due to several concerns including potential circumvention of ‘rules of origin’, significant reduction in custom duties and requests for carve out from MFN obligations re investments, an auto trigger safeguard mechanism and carve out of ‘sensitive sectors’ from the ratchet obligations re investments not being accepted. As India is the only remaining ASEAN-plus member countries besides Hong Kong that has not joined the RCEP, the members of RCEP continue to encourage India to return to the agreement. A special fast-track accession provision has been allowed for India if it wishes to sign the agreement in the future. Please feel free to reach out to us for further details on the reasons of India’s withdrawal from the RCEP.   

[4] The respective press releases of the UK government and the Indian government can be accessed here (UK) and here (India).

[5] These cover requirements as to standards, certification and registration processes etc. 

[6] India-UK Roadmap to 2030 can be accessed here.

[7] Source: Information note for the consultation relating to a free trade agreement between the UK and India, can be accessed here.

[8] Information note for the consultation relating to a free trade agreement between the UK and India, can be accessed here.

[9] For example, India recently ordered that from 1 March 2021, import consignments of 24 specified food commodities should be accompanied by a non-genetically modified (non-GM) and GM-free certificate issued by competent authority of the exporting country.

[10] The new model of BIT is intended to reduce the exposure of the Indian government to international arbitrations (inter alia, by removing or qualifying the interpretation of fair and equitable treatment, MFN, excluding taxation measures from its ambit and instituting Investor-State Dispute Settlement as the first option for dispute resolution).