fta: India-UK FTA: not a zero-sum game, but “give and take”
India’s reluctance to engage in FTAs, on the whole, is due to the high trade deficit with its trading partners after the implementation of ASEAN, South Korea and Japan FTA / CECA. While the legitimacy of these concerns is questionable, the experience of Southeast Asian countries clearly shows the positive results of FTAs in developing manufacturing capacities and aligning with development / growth goals.
In the current context of the proposed FTA with the UK, India’s negotiating agenda should clearly focus on increasing India’s overall export capacity. Given the emerging challenges of increasing trade costs, the higher incidence of non-tariff barriers, the integration of technology into supply chains, digitization, sustainable and green technologies, the India-UK FTA offers opportunities to not only expand India’s trade engagement with the UK, but also with the rest of the world given the trade complementarity between the two nations.
Structurally, there are significant differences in the economic indicators of the United Kingdom and India, as detailed in Table 1. The trade orientation (trade openness) of the United Kingdom is significantly higher than that of India. . Second, the share of services in GDP is much higher in the UK compared to India, while the share of manufacturing and agriculture is relatively higher in India. However, ironically, UK goods exports accounted for 54% of total exports to India, while services accounted for 46% of total exports. And third, the large difference in GDP per capita indicates the prospects for higher GDP growth for India compared to the UK. With income growth, demand for premium goods and services is expected to grow faster in India. For India, the high income in the UK results in a structure of demand for value-added goods and services.
While there is potential for expanding trade in goods and services for India and the UK, its translation into actual trade flows will be determined by tariffs and non-tariff barriers (NTBs). DIT estimates show that the simple average tariff facing Indian exports to the UK is 4.2% while it is 14.6% for UK exports to India. At the level of disaggregated industry, the tariff peaks applied by the United Kingdom and India are significant. For example, in the UK peak tariffs are high at 242% for prepared foods, 124% for plant products, 103% for animal and plant products, 76% for chemicals, 10% for textiles , 12% for shoes and 13% for vehicles. On the other hand, tariff peaks in India are more prevalent in all industries ranging from 100% to 150% for food products, 70% for plastics, 100% for automobiles, 60% for various manufactured products in addition to tariffs ranging from 20 to 40% for all other manufactured products (DIT, 2021). This means that negotiations on tariff reductions would lead to an increase in UK exports relative to India. With low tariffs in the UK, reducing tariffs may not boost India’s export growth.
However, what is more important from India’s point of view is the high incidence of non-tariff barriers in the UK, especially for agricultural products. The quantitative assessment based on SMART simulations shows only a 2% change in all agricultural exports (export competitive) from India to the UK after the FTA. This would imply that India’s modest agricultural exports to the UK are constrained by NTBs. The implication drawn is that when strict technical standards (say MRLs) are introduced in the importing country, it results in higher compliance costs for Indian companies / exporters which in turn can make their products uncompetitive. This is evident in the decline and low share of agricultural exports to the UK. Between 2000-01 and 2019-20, the share of agricultural exports in total exports to the UK increased from 14.4% to 7.85%. Among agricultural exports, strong growth (value) is observed for fish, grains, coffee / tea, fruits and vegetables and products. For these products, India’s main competitor countries in the UK are mainly EU countries and developing countries like Vietnam and Kenya.
Exports of manufactures account for over 90% of India’s exports to the UK. High growth exports (value) are machinery, electrical appliances, textiles, precious stones and leather goods. India’s competitor countries in the UK are the EU countries, the US, China and Bangladesh. Therefore, the possibility of Indian exports expanding to the UK would depend on the tariff concessions granted to these countries vis-à-vis India.
A review of UK public consultations on FTAs with the EU, US, Australia and New Zealand indicates that EU countries have been offered zero tariffs on all products, 10 tariff rate quotas for agricultural products in the United States, a GSP for developing countries and LDCs. Vietnam is likely to benefit from tariff preferences under the GSP and CPTPP. EU countries benefiting from large subsidies under the Common Agricultural Policy (CAP) may have advantages for agricultural products. In addition, in all potential FTAs, the UK’s commitment is to implement food quality and other technical standards. Therefore, countries that can meet these standards are likely to gain better market access.
Projections of a zero tariff regime in India and the United Kingdom indicate higher growth in imports from the United Kingdom estimated at US $ 2.1 billion, as tariffs in India are higher than those in the United Kingdom. UK. Estimates show that British imports will replace wines and spirits from France and automobiles from Germany. As India is not a major exporter for the UK, the extent of trade gains will depend on how India develops new competitive products and concessions given to the EU, US, in Vietnam and Bangladesh by the United Kingdom. While there are opportunities to improve India’s service exports to the UK, investment opportunities also exist for chemicals, fertilizers, pharmaceuticals, food processing, telecommunications and oil.
In light of these trade dimensions, for India-UK FTA negotiations, the following issues may become important from India’s perspective. First, since UK tariff cuts may not result in a significant increase in exports for India, greater market access opportunities can only be realized if NTBs are addressed. India should work on developing mutual recognition agreements (MRAs). To alleviate the high cost of compliance, India can explore UK investment opportunities in food processing, machinery and pharmaceuticals with the aim of improving technology and implementing the right manufacturing practices (GMP). In addition, India would also require institutional interventions for qualifications. In this regard, global digital identity systems for supplier verification and certification, based on Blockchain, can be developed with the help of the UK. This is particularly beneficial for industries dominated by SMEs, as Canada’s experience shows. Second, UK investments should focus on improving the R&D capacity of Indian manufacturing. For this, UK industries can be encouraged to engage in the PLI program with a focus on electronics and textiles. Third, since India primarily exports manufacturing intermediates while the UK exports finished products, the FTA give-and-take may necessitate a reduction in tariffs on automobiles and spirits. In this regard, careful industry consultations can provide the feasibility of tariff reduction in exchange for technology partnerships. Fourth, the bilateral relationship in trade in services needs to be strengthened for both the UK and India. And finally, the FTA with the UK should be seen as a continuum for FTA negotiations with the EU.
(This article is written by Dr Sunitha Raju, Professor, Indian Institute of Foreign Trade, Delhi, on invitation to contribute to the ETRise Top MSMEs ’21 program. Illustrations by Sadhana Saxena)
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