INDIA-UK FTA AND THE MISALIGNMENT OF GOALS

ABSTRACT

A Free Trade Agreement (FTA) is a partnership between two or more countries wherein they agree to reduce or remove custom duties on the maximum number of goods traded and negotiate on non-trade barriers. This increases trade between the two countries, further strengthening international relations. Over the years India has signed as many as 14 FTAs however it is not the signing of the FTAs that is important but rather the negotiations that the FTA constitutes and how effectively the FTA has been utilized. There are various underlying issues such as lack of industry consultation, inefficient marketing, adherence to negotiated laws etc. which needs to be addressed while signing an FTA.

Moreover, the India-UK FTA which has been in talks since 2022 and is currently in its 14th round of negotiations holds huge opportunities and challenges. Proper address of the problems faced would make the FTA a success.

The low utilization of FTAs by India

The India-UK FTA which has been in talks since 2022 is currently in its 14th round of negotiations, is a big opportunity to fix past mistakes and get the most out of the agreements. India's utilization rate of FTAs is approximately 25%, significantly lower than the 70-80% utilization rate seen in developed countries. This low rate inflicts the lack of proper utilization of FTAs due to systemic failure by the government over the years. If we look at the FTA signed between Sri Lanka and India also known as ISFTA in 2005 almost 98%1 of the Sri Lankan exports availed the FTA route, this number has now declined to 50%, whereas only 13% of Indian exports were routed through FTA. This has been the result of many underlying reasons.Both current and previous governments have struggled to effectively negotiate FTAs and create an ecosystem conducive to their utilization.

Challenges in FTA implementation

A primary reason for the low effectiveness of previous FTAs has been the inadequate negotiation of non-tariff barriers. These include Rules of Origin, complex certification requirements, maximum residue levels, quality standards, and labelling and packaging requirements, which have negatively impacted Indian exports.

A Case Study of Sri-Lanka

For instance, fragile products like ceramic sanitary ware are usually packed in straw by Indian exporters to insulate them from shock and impact. Sri Lanka does not accept products packed in straw. Instead, it demands that such products be packed in five-ply corrugated boxes (Pohit & Pal, 2020). Since India does not manufacture enough of such boxes to meet the existing demand, they need to be imported. This increases the cost of packaging and affects competitiveness in the international market, yet the government failed to raise these issues. The reason behind this was the lack of consultation with the industry experts and exporters of those particular goods. It is only when these problems are discussed with people who actually face them and address them more specifically, would the FTAs are more effective. Moreover, certification of origin of the goods has been another issue as it has been misused. There was a dumping of Chinese electronics via the ASEAN FTA due to the relaxation of the Rules of Origin.

Moreover, if something is negotiated between two partners it should be adhered to and this needs to be emphasized while India is signing an FTA. Lastly, the government needs to build the proper infrastructure needed to truly support the implementation of the FTAs. There should be proper marketing and advocacy for the FTA so that the exporters can benefit from the FTA. The FTA should popularize the FTA among the industry stakeholders. ASEAN’s focus on research, innovation, government support and upgrading value chains has allowed ASEAN member states to produce goods at a lower cost, enhancing their global competitiveness (Choudhary, 2023).

The upcoming India-UK FTA: Opportunities and Challenges in the FTA

The India-UK FTA has been on talks since January 2022 but due to differences in the expectations from both the parties there have been continuous rounds of negotiations. The 14th round of negotiations closed before the election schedule. The negotiations aimed to enhance the GBP 38.1 billion bilateral partnership across different sectors. Through alignment of goals there is the possibility of availing huge opportunities but negotiating them has various challenges. However there is a possibilty to deliver an ambitious FTA.

The service sector is one that has been in debate for a really long time. The UK wants India to liberalise services in telecommunications, finance and legal services. Considering the U.K. is a very big player in providing services, complementarity between the services exports of both countries means the negative impact of liberalisation on homegrown businesses would be reduced. Moreover, for services there is also possibility to further expand our IT, education, healthcare and financial services sector through the FTA. India being a global leader in IT can expand operations in the UK. Moreover, there is a possibility of deeper integration of their financial markets, collaboartion for student exchange programs and cooperation in medical research. 

The UK has placed various stringent quality standards in the form of phytosanitary measures and Maximum Residue Level requirements. Although the UK considers these standards to be of importance it is important to question the scientific legitimacy behind these measures and whether they are at par with the international standards placed by the World Trade Organisation (WTO). This is important as our exports have been hit a lot in products like tea. Textiles is another sector that is impacted due to quality standards but another reason is the labelling requirements. These are just two sectors, all the sectors that play a crucial role in exports should be studied and then the problems faced by them should be addressed.

Another big problem is that the UK is looking to adopt the carbon tax on lines of EUs Carbon Border Adjustment Mechanism (CBAM). The tax would impact cement, iron and steel and glass sector.

Bringing these issues on the table is important if we want the FTA to be actually successful for the Indian exporters. It would allow Indian exporters to enjoy benefits of reduced tariffs, better market access, simplified customs procedure, allow investment opportunities and allow the Indian economy to prosper. It is only through proper addressal that FTAs could be made effective in the long run and India would be able to close the trade deficit by focusing on the export sector.

CITATIONS

Agarwal, P., & Wignaraja, G. (2024b, July 5). UK-india FTA negotiations: Contentious issues, potential solutions. ODI. https://odi.org/en/insights/uk-india-fta-negotiations-contentious-issues-potential-solutions/

Choudhary, R. N. (2023, December 7). What went wrong with India’s ftas? East Asia Forum. https://eastasiaforum.org/2023/09/19/what-went-wrong-with-indias-ftas/

UK-india FTA negotiations: Contentious issues, potential solutions. ODI. (2023, November 25). https://odi.org/en/insights/uk-india-fta-negotiations-contentious-issues-potential-solutions/

GOV.UK. (2022, June 27). Joint outcome statement: India-UK round four FTA negotiations. GOV.UK. https://www.gov.uk/government/news/joint-outcome-statement-india-uk-round-four-fta-negotiations