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India-UK Free Trade Agreement (FTA)

GS- II >> International Relations >> Regional Grouping

Context: External Affairs Minister S Jaishankar engaged in discussions regarding the India-UK Free Trade Agreement (FTA) with Britain’s Prime Minister Rishi Sunak and Foreign Secretary David Cameron.

About Free Trade Agreement (FTA):

• Definition: An agreement between two or more nations aiming to reduce barriers to imports and exports.
• Objective:
  • Facilitate the exchange of goods and services across borders by minimizing government interventions like tariffs, quotas, subsidies, and prohibitions.
  • Stands in contrast to trade protectionism or economic isolationism, promoting open markets and international collaboration.
• Key characteristics:
  • Tariff reduction: Involves lowering or eliminating tariffs on traded goods.
  • Quota elimination: Removes restrictions on the quantity of goods that can be traded.
  • Subsidy restrictions: Addresses government financial support to domestic industries.
  • Prohibition reduction: Lessens or eliminates bans on certain products or services.
• Categories of FTAs:
  • Preferential Trade Agreement (PTA): Grants preferential access to specific products or services between member nations.
  • Comprehensive Economic Cooperation Agreement (CECA): Encompasses a broader scope of economic cooperation than PTAs.
  • Comprehensive Economic Partnership Agreement (CEPA): Represents a comprehensive and extensive form of economic collaboration.

Overview of India-UK FTA:

• Initiation: Launched in early 2022, aiming for conclusion by the end of the same year.
• Objective: Striving for a ‘fair and balanced’ FTA covering over 90% of tariff lines, targeting $100 billion bilateral commerce by 2030.
• Comprehensive Scope: Envisions a ‘new-age FTA’ encompassing -corruption, besides products, services, and investments.
• Innovation Focus: Discussions span transitions from fintech to green-tech, and automation to Artificial Intelligence.
• Economic Impact: Expected to stimulate growth, enhance employment, and diversify supply chains for businesses operating across borders.
• Bilateral Trade Target: Aims to double bilateral trade by 2030, fostering a partnership rooted in shared history and cultural ties.

Significance between India-UK FTA:

• FTA as a template: Once signed, the India-UK FTA is expected to serve as a template for a subsequent agreement with the European Union (EU), India’s second-largest trade partner.
• Divergence from Look East Policy: The government has shifted its focus from the earlier “look east” policy for trade deals and is now emphasizing economic integration with Western and African nations to boost export growth.
• Boosting exports of goods: FTA with the UK can significantly enhance exports in job-intensive sectors such as textiles, leather, and footwear.
  • Recognition of 56 marine units is expected to lead to a substantial increase in Marine Products exports.
• China factor: Disruption in supply chains during the pandemic prompted Western companies to reassess their dependence on China.
  • The UK, along with Australia, seeks a trade deal with India as part of a broader strategy, especially given Australia’s tensions with China.
• Brexit Implications: For the UK, a trade deal with India holds significant importance as the country grapples with the aftermath of Brexit.
  • While there is hesitation to offer work permits to Indian service sector workers, the potential of the Indian market becomes a compensatory factor for the loss of access to the European Single Market.
• Potential gains for India: India’s labour-intensive sectors, including apparel and gems and jewellery, have witnessed a decline in market share.
  • A trade deal could rejuvenate textile exports, potentially putting India on par with competitors like Bangladesh.

About India -UK bilateral relations:

Political relations:

• India-UK Strategic Partnership since 2004.
• Key agreements in civil nuclear energy, space, defense, counter-terrorism, and economic ties.
• UK supports India’s bid for UNSC permanent membership.
• Regular Prime Ministerial and Ministerial visits enhance cooperation.

Educational and cultural ties:

• India-UK Education and Research Initiative (UKIERI) focuses on higher education and research.
• India-UK Education Forum promotes bilateral cooperation in education.
• Nehru Centre in London organizes cultural events; celebrated Tagore’s 150th Birth Anniversary.

Defense cooperation:

• Institutionalized defence dialogue at Defence Secretary level.
• Regular exchanges between services, joint exercises, and procurement of defense equipment.
• Civil Nuclear Cooperation Declaration signed in 2010 for collaboration in the nuclear field.

Economic relations:

• Joint Economic and Trade Committee (JETCO) established in 2005.
• Bilateral trade growing despite global economic slowdown.
• Merchandise trade in 2011-12 reached USD 16.19 billion, with a 29% growth.
• UK is India’s 3rd largest FDI investor; around 700 Indian companies in the UK.

Indian community in the UK:

• Indian-origin population estimated at 1.8 – 2 million, the largest ethnic segment.
• Indians excel in various fields, with significant representation in Parliament and local councils.
• Strong educational and professional presence, contributing to the UK’s diversity.

Tourism and people-to-people contacts:

• UK ranks second globally in tourists visiting India.
• Approximately 500,000 Indians visit the UK annually.
• Over 100 weekly flights between India and the UK by various airlines.

Parliamentary relations:

• Close relations between Indian and UK Parliaments.
• Friends of India Groups in major UK political parties.
• All-Party Parliamentary Group on India and Trade and Industry linkages established.

Science and Technology cooperation:

• Science and Innovation Council facilitates India-UK S&T collaboration.
• Joint initiatives in Nano Science, Biotechnology, telecom, solar energy, and weather forecasting.
• Continued cooperation with the 2nd phase of UKIERI launched in 2011.

Challenges faced between India-UK FTA:

• Concerns raised: A report warns the British Parliament that providing zero-duty access to Indian textiles could negatively impact Least Developed Countries like Bangladesh.
• Challenges for the UK: Past deals with Japan and ASEAN countries indicate that eliminating duties does not automatically result in export growth. British exports to India face considerable tariffs, and tariff reductions will be crucial for deeper access to Indian markets.
• Non-Tariff Barriers (NTBs): India could use negotiations to address non-tariff barriers, a historical concern for exporters. These barriers include regulations, standards, testing, certification, and pre-shipment inspection, impacting various sectors, including agriculture.
• Carbon Tax Issue: The UK, similar to the EU, is considering a carbon border adjustment mechanism (CBAM) that may affect India’s exports, even with tariff removal. The UK’s carbon tax, aimed at reducing dependence on Russian energy imports, could be stringent, impacting sectors like cement, chemicals, and metals.

Way forward:

• Clarity on services trade: The FTA is anticipated to bring certainty and transparency, fostering a more liberal and competitive services regime.
  • Opportunities for growth in service sectors like IT/ITES, nursing, education, healthcare, AYUSH, and audio-visual services.
• Trade diversification and exit from RCEP: India’s withdrawal from RCEP underscores the importance of seeking trade deals with key markets like the US, the EU, and the UK. Diversification of sourcing becomes crucial, especially with partners keen on robust economic ties.
• Leveraging strategic advantage: The UK’s status as a permanent UN Security Council member position it strategically.
  • Strengthening trade bonds enhances diplomatic leverage, seeking UK support on global issues, including the Ladakh standoff with China and India’s claim for a permanent UNSC seat.

Source: indianexpress.com