Antithesis to Tariff Bravado?

The Comprehensive Economic and Trade Agreement (CETA), signed last month between India and the UK, is one of the major trade deals that can potentially be a game changer for India’s foreign trade in today’s global trade uncertainties. The agreement, as experts say, has the potential to strengthen the UK-India Strategic Partnership in trade, encompassing fields such as technology, defence, climate, innovation, etc., while equally guaranteeing protection to sensitive sectors—especially in today’s heightened global trade tensions and amid the unkind disposition of the US, if President Trump’s sudden unilateral clampdown of a 25 per cent tariff on India last week (not to mention the penalty for trade with Russia) is any indication. However, whether deals of this sort can be a way forward during trade wars is a question worth mulling.

Both governments have acclaimed the deal as “historic” and “ambitious.” It is heartening that the UK praised the deal as the “biggest and most economically significant bilateral trade deal since the EU,” reflecting the complementary strengths of the two economies—India’s rapid growth and large market, and the UK’s advanced services and manufacturing sectors. The deal is believed to ensure ‘most-favoured-nation’ treatment for India. Bilateral trade is expected to increase to USD 112 billion by 2030, thanks to mutual tariff reductions. While growth of exports in sectors like textiles, footwear, and agriculture is predicted for India, for the UK, its GDP is expected to increase by £4.8 billion annually and wages by £2.2 billion each year.

With regard to mutual benefits, while Indian services in IT, financial, legal, and digital trade will see opportunities, UK firms gain comfortable access to India's quality services sectors—including accounting and telecom—without requiring a local presence. India will make 64 per cent of tariff lines duty-free, increasing to 85 per cent after the first 10 years of the agreement. In response, the UK will lift tariffs on 99 per cent of product lines, benefiting Indian exports (approximately USD 6.5 billion) like textiles, footwear, seafood, gems and jewellery, engineering goods, and agriculture.

The agreement is indeed comprehensive. Businesses in the UK will gain access to approximately 40,000 high-value government procurement contracts in India in sectors like transport, green energy, and infrastructure. The clauses with regard to inclusivity for MSMEs, startups, farmers, women, youth entrepreneurs, and artisans, etc., help integrate them into global value chains. Moreover, specific issues such as the protection of geographical indications, consultations on GI review, term of protection of copyright, trade in services to UK Crown Dependencies, and the Double Contribution Convention (DCC)—which exempts Indian workers and employers from UK social security contributions for three years—were also addressed to the advantage of India. Fish farmers in Andhra Pradesh, Odisha, Kerala, Tamil Nadu, etc., can benefit as a surge in marine exports like shrimp and tuna is certain due to the lifting of 4.2–8.5 per cent of tariffs. The agreement, according to analysts, can position India as an attractive investment destination, since companies globally can leverage duty-free access to the UK via India.

However, the deal is not devoid of infirmities. The UK visa ceiling of 1,800 per year (only for niche professionals such as yoga instructors and classical musicians) is seen as falling short of demand, especially for IT professionals and business visitors. Reduction of duties on automobiles (large-engine luxury cars) from 100 per cent to 10 per cent over 15 years may lead to a surge in imports from the UK, challenging India’s domestic auto industry, which is already going through a slump. Some experts also opine that the deal sets a precedent of lavish concessions, and that larger economies like the US and EU may demand more concessions from India in their trade bargains in the future. There is also concern over whether the UK's Carbon Border Adjustment Mechanism (CBAM) could undo the benefits of tariff concessions under the deal. On this, the government has reassured that a ‘rebalancing mechanism’ article has been inserted into the 'general exceptions' chapter and asserted that “India is a sovereign country, and if our export interests are hurt, we will react and retaliate or rebalance.”

Broadly speaking, the agreement is a milestone in India’s trade policy, vouching for its resilient stand in global trade in times of crisis. A shift is visible in India’s trade policy towards developed economies, experts feel, driven by geopolitical considerations, which only signifies a mature vision and commitment. For example, the exclusion of agricultural products like dairy, apples, oats, and edible oils by India from duty-free access reflects India’s concern for protection of its agriculture sector and farmers. On the other hand, Indian farmers can gain access to the UK’s USD 63.4 billion agricultural market, while UK industries like automotive and whisky benefit from reduced Indian tariffs—perhaps to the delight of ‘spirited’ Indian patrons (pun intended). As a whole, both countries will benefit from the deal and better position themselves to withstand global trade disruptions in various sectors. Nevertheless, the agreement is not a direct answer to the ongoing tariff wars but will certainly serve as a proactive strategy to secure market access and reduce vulnerability.

India's bilateral trade agreements—such as FTAs, Comprehensive Economic Cooperation Agreements (CECAs), and Comprehensive Economic Partnership Agreements (CEPAs)—have been a cornerstone of its trade policy. FTAs with countries like the UK, UAE, and Australia have generally increased trade volumes in the past. For example, exports to South Korea grew by 52.2 per cent from 2011 to 2021, and to SAFTA countries by 143.1 per cent. India has signed 13 RTAs/FTAs with various countries and regions, including Japan, South Korea, ASEAN, SAARC countries, Mauritius, UAE, and Australia, with negotiations ongoing with the US, EU, Canada, and others. By the end of FY 2023–24, there are 19 agreements in force. India is actively negotiating FTAs with the US, EU, Canada, Oman, Peru, EFTA, Qatar, and Sri Lanka, targeting sectors like services, digital trade, and sustainable development.

However, there are many challenges, including trade deficits and surpluses. For example, with ASEAN, India’s trade deficit rose from USD 5 billion in 2010 to USD 26 billion in 2021–22, while with the UK it was a surplus of USD 1.6 billion. Such trade imbalances deny mutual benefits. Non-tariff barriers are another issue that limit Indian exporters' access to partner markets. Certain sectors like pharmaceuticals and services trade have, of course, benefited significantly. For example, the India-Australia FTA allowed 49 per cent foreign equity for Australian banking/insurance and 74 per cent for internet services. However, high-tech exports still continue to be a challenge, with India at 11 per cent of manufacturing exports compared to 41.7 per cent for Vietnam (WITS, World Bank). Addressing issues of competitiveness and sector-specific sensitivities is crucial in FTAs. Similarly, inclusion of sector-specific industries and stakeholders during negotiations is important to address domestic concerns. However, how best the arrangement works for both countries depends on continuous dialogue in addressing the issues—something India has faced in most of its FTAs in the past. Overall, the deal is a blessing for both, and as they say, “Well begun is half done.”

The writer is a former Addl. Chief Secretary of Chhattisgarh. Views expressed are personal