How realistic are the prospects for a UK-India free trade agreement?
Last month, the UK government published its snappily titled Global Britain in a Competitive Age: the Integrated Review of Security, Defence, Development and Foreign Policy, outlining the UK’s post-Brexit foreign policy. One of the main announcements was to prioritise building alliances with Indo-Pacific countries including India, to balance China’s increasing assertiveness in the region.
India has also been shifting its foreign policy priorities. In 2019, Vijay Gokhale, its Foreign Secretary, announced that “India has moved on from its non-aligned past. India is today an aligned state—but based on issues.” More recently, India has also faced an increasingly hostile neighbour in the Chinese government. In June 2020, the Chinese army killed three Indian soldiers, the first military casualties along the disputed border for more than four decades. Despite subsequent diplomatic talks, there have been more clashes and, in the last few days, China has deployed a long-range rocket launcher “as a deterrent to India”.
These developments have pushed the Indian government to talk up its alliances with Western nations. In October 2020, the US and India signed the Basic Exchange and Cooperation Agreement on Geospatial Cooperation (BECA), allowing India access to US sensitive satellite data for military purposes. Earlier this year, Narendra Modi, India’s PM, joined the US President and the leaders of Japan and Australia for the first Quad summit (an informal strategic dialogue between these nations).
The UK has swiftly realised the time is right to boost relations with India. In February 2021, Liz Truss, Secretary of State for International Trade and Shri Piysuh Goyal, India’s Minister for Commerce and Industry, issued a joint agreement to deepen trade cooperation through an Enhanced Trade Partnership (ETP) and work towards a “potential comprehensive” Free Trade Agreement (FTA).
This will be no simple task. The EU started trade talks with India back in 2007, but suspended the talks in 2013, accusing India of a lack of ambition. However, in a briefing paper released last week by the Institute of Economic Affairs, Shanker Singham argues that outside the EU, the UK has the flexibility to sign a trade agreement with India that addresses both countries’ offensive interests (the markets or sectors they wish to gain access to) and defensive interests (markets they prefer to keep closed or minimise access to). He believes that the “contours” for a trade deal are already emerging.
The key UK demands will probably be better access for UK financial and legal services firms to the Indian market, as well as reductions to import tariffs on Scotch whisky. The key Indian demands will be on services movement of natural persons (so-called Mode 4, i.e. allowing skilled Indian workers into the UK) and the UK committing not to impose bans on Indian agriculture in violation of the World Trade Organization’s Sanitary and Phytosanitary (WTO SPS) agreement, as the EU has done in the past.
Singham argues that there are both important commercial and geopolitical reasons for a UK-India trade agreement, writing that India could be brought into an alignment of nations including the countries signed up to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPPTP) as a bulwark against the negative impact of China’s market distortions and security policies. The UK has also applied to join the CPTPP.
However, the author does acknowledge that a number of obstacles to a UK-India deal persist. The Indian government has recently taken actions against the property rights of foreign investors, including ignoring the results of arbitration, which may scare away foreign investors and risk undermining the country’s global reputation and potential.
While free traders in both India and the UK would welcome a deal, there are other pitfalls to avoid. As India’s former colonial ruler, the UK government will need to approach the negotiations delicately, making clear the nations at the table are equals. As an emerging power, India is set to overtake the UK economy by 2024.
There are also doubts over India’s commitment to trade agreements. The joint statement on the ETP spoke of “a roadmap that would lead to a potential comprehensive FTA,” not exactly a firm commitment. Just after Modi’s re-election, the head of an Indian think tank with links to the Indian government told me that trade agreements were not a priority for Modi’s second term but might be for a third term.
Another concern is what trade experts call “beyond the border issues”. While trade negotiators may agree to liberalise a sector, the relevant government department or local states may be slow to implement the necessary changes. Some trade experts, for instance, point to the Indian states ruled by Marxist politicians, such as Kerala. Elsewhere, government departments may have good relations with industries wishing to be protected from foreign competition.
Furthermore, Prime Minister Modi is still committed to his Make in India initiative, launched in 2014 to transform India into a global design and manufacturing hub. While this is open to inward foreign direct investment, it suggests an economy that will prioritise domestic manufacturers over imported products.
And the UK government may also face some resistance. As the UK trade bill went through parliament earlier this year, a significant number of MPs and Peers expressed concerns over trade with nations with poor human rights records. In recent years, human rights activists and members of the Pakistani and Kashmiri diasporas have accused India of human rights violations in the disputed region of Kashmir and against Christians in Orissa. These concerns could be expressed whenever a future UK-India agreement is debated in the Westminster parliament – though it may not necessarily prevent a trade deal.
These are probably all obstacles that could be overcome, so the main determinant remains the attitude of the Indian government. In the 19th and early 20th century the UK was seen as playing a pivotal role in the balance of power in Europe. The challenge for Johnson and his ministers will be to convince India that signing up to the India-UK and CPTPP trade agreements will allow the country to play its role as a balancer of power in the Indo-Pacific region.
This article was first published on Conservative Home.