India-UK FTA: The devil is in the details

PM Narendra Modi signed the trade deal with UK PM Keir Starmer on July 24.

India’s free trade agreement with the United Kingdom is historic for several reasons - the first major free trade agreement with a western country, the other two with Switzerland and Norway signed on March 10th 2024 and to be implemented in October this year, weren’t of the scale of the FTA between UK and India which promises to double trade to $120 bn by 2030. A historic milestone in bilateral economic ties between the two countries. It brings down tariffs to zero for a host of employment intensive sectors for India such as textiles, jewellery, leather, machinery, auto parts, pharmaceuticals, processed foods, marine products and so on. In return, India has given market access for UK companies in liquor and automobiles. But now the challenge lies in the implementation. The UK Parliament will have to approve the FTA before it takes effect which could take up to a year.

In India’s Free Trade Agreements journey, this is a big milestone – the journey which began with SAARC (South Asian Association for Regional Cooperation), followed by the Eastern Bloc countries and then Australia - India has completed trade agreements with all eastern bloc countries except China. The move towards the western part of the world was a natural progression in India’s growth trajectory. But as Ajay Shrivastava, Founder, GTRI – Global Trade Research Initiative focused on climate change, technology and trade explains that there is a fundamental difference between eastern bloc and western countries. India’s earlier FTAs were focused on market access; they were trade centric. Western FTAs include trade access but also include non-core subjects. “Western countries push us to deal with labour, environment, gender, digital trade, intellectual property issues… we have not dealt with such subjects,” he explains.

Full conversation with Ajay Shrivastava on the India-UK FTA here.

Western countries consider these as essential subjects and they want partner countries to harmonize their regulations with the western regulations. In fact, UK is the first trade agreement in which India had to negotiate gender. These are essential subjects for western countries, while India has been arguing that these are not core subjects. The ‘non-core subjects’ can have significant implications on goods and services a country is able to export or import. For instance, the United States-Mexico-Canada agreement which replaced NAFTA (North American Free Trade Agreement) on July 1, 2020 includes provisions for minimum wages, especially in the automotive industry. The agreement mandates a certain percentage of vehicle parts must originate from North America, with a portion requiring high wage labor (at least $16/hour) which was nearly double the minimum wage in Mexico.

“There are hundreds of such clauses which are hidden in gender, sustainability, labour… that’s why we need to be very careful,” warns Shrivastava.

Textile and apparel exports will get a boost with tariffs going down to zero from the current 4–16 per cent, but UK is also a high per capita income country which would mean that there will be greater emphasis on high-end quality products. For instance, India-Japan FTA signed in 2011, lowered tariffs on textiles to zero but India’s contribution to Japan’s textile imports is just one per cent at $234.5 million. This, despite tariffs being lowered from about ten per cent to zero -- in the last 14 years the growth in textile exports to Japan has been insignificant.

Evidently tariffs aren’t enough to boost exports – India will have to deliver high-end products for a discerning market. Opening up of the auto sector also sets the stage for future negotiations that India is in middle of with the United States and European Union. Japan and South Korea could also come ask India for greater access to the Indian market.

The FTA promises tremendous opportunity but there is a fine print which could be the trigger India needs to fulfil its ambition and potential as a manufacturing nation.