FTI Consulting International Trade Bulletin – 21st January

The UK might now have embarked on trade negotiations with India, but don’t expect a swift and smooth resolution anytime soon.

Britain’s post-Brexit trade ambitions towards India are hardly a secret. The world’s fifth-largest economy – projected to be the world’s third-largest by 2050 – and home to more than 1.4 billion consumers, India is a massive potential growth market for UK exporters and investors. With deep historical ties connecting the two countries –  combined trade is valued at some £19.8 billion annually, while 1.5 million British nationals are of Indian origin – the optimism that Trade Secretary Anne-Marie Trevelyan demonstrated when she kicked off negotiations last week might prove to be more than a little infectious.

However, Trevelyan’s plan to get a deal within a year is incredibly ambitious, to say the least. India has not signed an FTA since 2011 – and not for lack of opportunity. In 2019, New Delhi opted out of the Regional Comprehensive Economic Partnership (RCEP), the largest trade bloc on the planet. Whilst the UK has demonstrated over the past year that opting out of large trade blocs does not belie a lack of ambitions elsewhere Indian trade policy is increasingly protectionist. Average tariffs on imports in 2021 were 18.7%, up 5% over the last five years, and India retains significant capacity for even more punitive increases against its WTO baseline. The Modi Government is thus destined to find the UK’s push for trade liberalisation hard to align with its  long-term commitments to ‘Make in India’.

Indeed, India will already be asking what it stands to gain from responding to the UK’s overtures. The UK has already liberalised trade in goods and services in many areas where India has further to go. New Delhi simply has fewer like-for-like ‘asks’ of London. Instead, Modi’s principal demand will focus on the liberalisation of visa rules for business, leisure and study – which the UK will find very challenging to meet in the current political climate. With UK Home Secretary, Priti Patel’s reputation staked on her tough stance on immigration, she will not be inclined to cede any ground on this issue.

As such, DIT officials have seemingly not yet drunk Trevelyan’s political Kool-Aid, tempering optimism by acknowledging that “barriers to trade and investment on UK businesses in the Indian market are high and have been growing in recent years, with scope to grow further.” Targeted results will be the scope of their ambition. Little progress is likely in trying to liberalise the Indian agricultural sector. But tariffs on whisky (150%) or cars (125%) might find more support among India’s burgeoning middle class, as demand for luxury foreign goods grows.

Deregulation of India’s service industry would be another big win. UK-sourced legal, accounting and financial services face mind-bending administrative barriers to trade in areas such as recognition of qualifications and mobility, which weighs as heavily as any explicit financial barrier. The complication here, is that such rules in India are often devolved to the state level. Extending commitments to all 28 states and 8 Union territories will be incredibly challenging even if the UK can persuade the Modi Government to agree in principle.

Inevitably, there is already talk of an ‘interim deal’ – something that would allow Trevelyan to claim a victory of sorts. But being the more open economy in such a negotiation means the UK will have less to horse-trade with, risking the surrender of any ‘quick wins’ before key demands are made. How the UK would keep India at the negotiating table and interested in satisfying those more challenging requests is a conundrum that can’t be left for tomorrow.

These negotiations form a part of two broader strategies for the Government, neither of which will be unknown or unexploited by New Delhi. First, the much-lauded “tilt towards the Indo-Pacific”, as the UK aims to counter China’s influence in the region (and refocus its trade narrative away from Europe); and second, the ambition to cover 80% of the UK’s trade with free trade agreements by the arbitrary but politically significant date of the end of 2022. Global Britain has never been short on wild ambition. As such, while needs must, India is probably not the negotiating partner the UK Government would have chosen to be quite so reliant on.

More widely, the Government is continuing to engage with the long-term future of the UK’s trade arrangements. Last October, DIT held a consultation, a precursor to opening negotiations, on a trade deal with the Gulf Cooperation Council (GCC). Enhanced deals with Canada, Mexico and Israel are also in the pipeline. None of those deals will be as easy to conclude as the Australian and Kiwi ‘quick wins’. They do, however, demonstrate the UK’s increasingly serious approach to trade.

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Our specialists can analyse the potential opportunities and risks for your firm presented by new trade deals, such as the UK-India FTA. To learn more about this, please contact Josh Cameron at [email protected], Ollie Welch at [email protected] or James Manning at [email protected]