Priority pitfalls

Since January 2022, India and the United Kingdom (UK) have undergone 13 rounds of negotiations with a target to significantly enhance bilateral trading partnership between the two Commonwealth member nations. It is expected that a deal will be clinched ahead of the general elections in both countries scheduled for 2024, reports LiveMint. Estimates show that securing a free trade agreement with India could almost double UK exports to India. It will boost Britain’s total trade by as much as £28 billion a year by 2035 and increase wages across the UK regions by £3 billion. It is expected that under the proposed free trade agreement between the two countries, India’s high quality labour-intensive goods such as apparel, footwear, carpets and cars will benefit from the removal of import duties by the UK.

In 2022-23, India-UK trade exceeded USD 20,367 million, which was 1.75 per cent of India’s total trade of USD 11,65,001 million in that year. In FY 2022, India exported USD 11,406 million to the UK and imported USD 8,961 million worth of commodities from the UK, resulting in a positive trade balance of USD 2,446 million.

India and the UK want to sign the FTA and Bilateral Investment Treaty (BIT) together as both complement each other for a comprehensive economic partnership. Investment data show, in 2021, the outward stock of foreign direct investment (FDI) from the UK in India was £19.1 billion, accounting for 1.1 per cent of the total UK outward FDI stock, and the inward stock of foreign direct investment (FDI) in the UK from India was £9.3 billion, accounting for 0.5 per cent of the total UK inward FDI stock.

Major issues in the proposed UK - India FTA

A study by Global Trade Research Institute (GTRI) reveals that the India-UK free trade agreement (FTA) would not yield any substantial benefits for India, as many of its exports to the UK already enjoy low or zero tariffs. On the contrary, the UK is likely to gain more as the UK exports face stiff tariffs in India, particularly on items like cars, Scotch whisky and wines. The FTA could lead to tariff reductions on these goods, potentially opening new opportunities for the UK. The simple average tariff in India on goods imported from the UK is 14.6 per cent. Indian tariff on British cars is 100 per cent and on Scotch whisky and wines it is as much as 150 per cent. Wind turbine parts that currently attract a 15 per cent tariff will be benefited if tariff is reduced, reports Mint. It is reported that for electric vehicles (EVs) the UK has asked for tariff-rate quotas on its exports to India. This literally means a certain amount of EV imports into India from the UK would attract a lower rate of tariff, with a higher rate applying to imports over and above that threshold level, reports MoneyControl.

GTRI study has also flagged few other important issues and advised Indian negotiators to be wary of moves like proposed carbon tax, non-trade issues such as labour standard, environment, gender, and digital trade. The GTRI experts also advised not to agree to free cross-border data flows since ownership of national data is crucial for developing public services. “India should never agree to binding commitments as it will lock in the future. Much the same way, the Information Technology Agreement (ITA) 1 locked us out of electronic hardware manufacturing. Negotiating labour standards could be tricky,” they cautioned.

Another major contentious issue is carbon tax. Once the Carbon Border Adjustment Mechanism (CBAM) is launched in the UK, Indian products may have to pay a 20-35 per cent tariff equivalent to CBAM charges.

It is reported that there is a disagreement between the negotiators on India’s position that foreign investors have to exhaust domestic legal remedies before going for international arbitration. The UK’s concern was that Indian courts often take years to decide on cases, which could adversely impact investors. As per a report by Financial Express, currently, a possible option is being explored to address investors’ disputes in a time-bound manner through a domestic judicial mechanism in the proposed Bilateral Investment Treaty (BIT).

The Rules of Origin is another sticky issue. India fears that Chinese goods could be routed through the UK as Chinese companies were gradually increasing their presence in the UK industry. The ‘rules of origin’ provision prescribes minimal processing that should happen in the FTA country, so that the final manufactured product may be called originating goods in that country. According to experts, India should refrain from giving duty concessions, as the government here is promoting domestic manufacturing of these devices.

The proposed FTA may introduce non-tariff barriers aimed at promoting sustainability. Sustainability is a critical concern for India, and its impact on the garment sector must be thoroughly analysed. It is feared that this issue may lead to challenges in meeting stringent sustainability criteria, potentially affecting India’s market access under the FTA. The other non –tariff barriers which are being negotiated include: rules related to investor protection, intellectual property rights, and harmonisation of governance and standards.

IPR: a major issue

The most controversial issue in the current FTA negotiation is on protection of Intellectual Property Rights (IPR). Bloomberg has reported that leaked documents from negotiations showed the UK wants India to tighten its IP laws in the free trade agreement under negotiation. This would give patent protection to medications for longer than they currently get in the South Asian country, which has been welcomed by major pharmaceutical giants like AstraZeneca, GlaxoSmithKline etc. which expect higher demand for their more expensive products. But it is feared that the changes would damage India’s position as a leading provider of generic drugs — essentially “copycat” versions of those which fall out of patent. That would raise costs even for the UK’s National Health Service and for poorer countries and healthcare charities, reports Deccan Herald.

According to Médecins Sans Frontières (MSF), these “TRIPS-plus” (an informal term for protection of intellectual property rights, insisted by developed countries, that goes beyond the requirements in the TRIPS Agreement) provisions could undermine India’s robust pro-public health safeguards by requiring the country to amend its national IP and drug approval laws to introduce more monopolies on medicines. This, in turn, could have a detrimental effect on the sustainable production, registration, and supply of affordable, quality-assured generic medicines from India that millions of people worldwide rely on.

Meanwhile, the Indian government has introduced a few major changes to the Patent Rules 2003. The Draft Patents (Amendments) Rules, 2023, were published by the Commerce Ministry in August. The proposal to twist the Patent (Amendments) Rules 2003 has the potential to curtail the ability of patient groups to initiate a pre-grant opposition, a crucial mechanism for preventing the grant of undeserved patents for medications. This, in turn, could jeopardise the timely availability of high-quality, affordable generic drugs.

In a letter addressed to officials including UK Prime Minister Rishi Sunak, the UK Missing Medicines Coalition pulled together various groups expressing concerns about IP provisions. 50 signatories, including members of Parliament such as Labour’s Richard Burgon and Kim Johnson, charities including Oxfam and Médecins Sans Frontières, and academics at institutions from the UCL Institute for Global Health to the University of Strathclyde said they were “deeply concerned” by the impact which the FTA might have on the price of medications. “There are critical safeguards included in Indian patent laws which protect public health whilst complying with international IP rules…Health systems around the world, including in low- and middle-income countries, rely on the availability of quality-assured, affordable generic medicines from India,” the letter said.

The other contentious issue is the UK’s demand of a ‘higher level of protection’ for its GI (Geographical Indication) products. British GI products include Scotch whisky, Stilton cheese and Cheddar cheese. A GI name conveys an assurance of quality and distinctiveness, which is essentially attributable to the place of its origin. Once a product gets this tag, any person or company cannot sell a similar item under that name. India normally provides general protection for violation of GI rules, but the UK is seeking a ‘higher level of protection’, reports Economic Times.

Article 23 of the TRIPS Agreement provides a ‘higher or enhanced level of protection’ for geographical indications for wines and spirits. The enhanced protection prohibits the use of a GI if the product does not genuinely originate from the designated area. This ensures complete protection of a GI — safeguarding its reputation under all circumstances. It also prohibits the use of terms like ‘kind’, ‘style’, and ‘type’ for products that fall under this protection. Currently, this higher level of protection is exclusive to wines and spirits only. India has been advocating for extended protection to other products beyond wines and spirits to prevent misuse of its labels like Basmati rice and Darjeeling tea by other countries.

Plethora of trade agreements

Till October 2022, India had signed 13 free trade agreements (FTAs) and 6 preferential trade agreements (PTAs) [Refer to Table 1 for details]. Seven more FTAs and PTAs (including the India-UK and India-EU FTA) are in various stages of negotiations. The key differences between an FTA and a PTA are that the FTA is comprehensive across a number of areas and has deeper commitments while a PTA is confined to trade in goods and seeks only tariff elimination. Moreover, the coverage of a PTA on goods is also limited as compared to an FTA.

Apparently, India is following a hazy foreign trade policy which lacks any clear direction. The confused stands India has taken while negotiating the Regional Comprehensive Economic Partnership (RCEP), India-Australia Comprehensive Economic Cooperation Agreement (CECA), Indo-Pacific Economic Framework (IPEE), and India-EU Broad Based Trade and Investment Agreement (BTIA), are cases in point (D Dey, Madhyam Briefing Paper #56, November 23, 2022).

Non-tariff barriers are more effective than tariffs in regulating trade. Although the government is considering more free trade agreements that address tariff walls, the post-pandemic proliferation of non-tariff barriers (NTBs) are threatening to undo the liberalisation plans. NTBs are imposed in the form of quotas, embargoes or technical regulations, and standards and conformity assessment procedures that are used to ensure safety, quality and performance of goods. Reports suggest that the key Indian exports that routinely face high NTBs are chilies, tea, basmati rice, milk, poultry, bovine meat, fish, chemical products to the EU; sesame seed, shrimps, medicines, apparels to Japan; and food, meat, fish dairy and industrial products to China. According to an assessment, 80 per cent of India’s trade is subject to some or the other non-tariff barrier.

Experience of prevailing FTAs

Table 2 reveals, out of the fifteen countries mentioned in the table, India has trade surplus only with five countries, namely Brazil, the Philippines, Bangladesh, Nepal and Sri Lanka. With all other trading partners India has a trade deficit.

Thus, before entering into any new FTA negotiation, proper assessment of the prevailing FTAs should be done. Instead of focussing on FTAs with the developed countries/regions that are likely to insist on linking trade negotiations to binding labour and environmental standards, India may explore the possibility of strengthening the Global System of Trade Preferences (GSTP) among developing countries, and enter into mutually beneficial long-term trade relations with the member-countries of the G77 (D Dey, Madhyam Briefing Paper #56, November 23, 2022).

Observation

India must improve its productivity and address various non-tariff barriers imposed by the importing countries. Comparative advantage of products of a country depends on the strength of its innovation system. India ranks 40th out of 132 economies in the Global Innovation Index 2023 rankings published by the World Intellectual Property Organization (WIPO). This needs to be improved on an urgent basis. Investment in research infrastructure and human development should receive the top priority.

As non-trade issues like labour standards, environment protection, sustainability index, carbon tax, gender equality are increasingly included in trade negotiations, the Government of India should frame its own rules and regulations on these contentious matters before making any binding commitment with any trading partner.

 Views expressed are personal