Return of the Commonwealth?
Admittedly, this title overstates. Still, for those with a memory, the trade deal recently signed by the United Kingdom (UK) and India is reminiscent of the open trade practiced within the British Commonwealth before the UK joined what became the European Union (EU).
Media has rightly made much of the UK-India deal. It stands as a landmark of sorts, not the least because it constitutes a remarkable departure from India’s reputation as one of the world’s most highly tariffed nations. The deal is also noteworthy coming, as it does, on the heels of the trade agreement recently reached between the UK and the United States. Perhaps most noteworthy of all, these new arrangements almost certainly will serve as a model for coming negotiations between London and the EU as well as London and the Gulf states and Saudi Arabia. Both Britain and India predictably have touted the benefits of the new arrangement, and there are many, but make no mistake, this deal, as with all trade deals, will create losers as well as winners.
Modest Economic Boost, Long-Term Opportunity
Signed on May 6, the UK-India arrangements promise only a small initial economic boost. According to calculations made by the government in London, Britain as a result of the agreement will see a £4.8 billion boost over last year’s £42 billion in trade with India. That is less than 0.2 percent of the UK’s £2.8 trillion economy. The government in New Delhi has yet to offer a comparable calculation on the impact in India, but it is not likely to be much larger. The greatest benefit, all parties agree, will come over the longer term, as the new arrangements open opportunities for much greater trade between the two countries. London estimates that by 2030, British exports to India will have grown to £750 billion. Numbers aside, these new arrangements stand out especially as a basis for further liberalization, with Britain’s other trading partners and with India’s.
Focused Reductions in Tariffs and Trade Barriers
The agreement between London and New Delhi ranges over a wide array of issues. On trade alone, India will within a decade reduce tariffs on 90 percent of UK exports, with 85 percent facing no tariff at all. London has agreed to reducing or eliminating tariffs on 99 percent of Indian exports. As is to be expected, each country has focused on products with the greatest significance to their respective economies. London has emphasized Scotch whisky, gin, automotive products, medical devices, cosmetics, aerospace components, food, and drink (beyond gin and whisky). New Delhi has emphasized clothing, shoes, processed foods, jewelry, and a long list of other manufactured products.
Issues surrounding services, investment, and regulation are more significant. UK-based financial and professional service firms will enjoy greater access to India on a fully non-discriminatory basis. Critically, UK products and services will have full access to India’s vast government procurement market through, if the promises are to be believed, a single on-line portal available to both Indian and British contractors. Both sides have promised to coordinate and streamline customs procedures, complete protections for cross-border data movements, and enhance copyright and patent protections. Significantly, the deal also protects firms from having to disclose proprietary technologies.
The deal also reduces barriers to digital trade and makes provisions to better recognize and enforce contracts, especially in electronics. It commits both parties to greater cooperation on fintech, financial stability (read: regulation), and market integration. It also makes provisions to simplify tax arrangements for expatriates and assure people that they will get credit in both places for contributions to state pensions. This deal also lifts ownership restrictions. In the past, India put a limit of 74 percent on foreign ownership of insurance providers, for instance, but in the near future, no such restrictions will exist. In all this, legal services remain protected, both in India from British competition and vice versa. Nor were there any new provisions on immigration.
Strategic Positioning for Future Global Trade
It is clear that when London and New Delhi negotiated this deal, each had an eye to other competitors and future trade deals with other nations and blocs. Trump’s tariffs no doubt played a crucial role from the Indian side. By making the American market less reliable, they prompted India to look for other trading partners more actively and accordingly abandon its long preference for high tariffs. Washington and European complaints against China also seem to have colored New Delhi’s position. In this regard, it is striking that India has so prominently offered protections in areas where Beijing has drawn the greatest complaints from the West and Japan: patents and copyrights, contract enforcement, and the practice of compelled technology transfers. The UK is less focused on substituting for China than is India, but as London negotiated, it clearly had in mind expanding its new arrangements with the United States and its upcoming trade negotiations with the EU and the Gulf states as well as Saudi Arabia.
Both sides have touted the advantages of the deal. London, for instance, has trumpeted that the British people will now pay less for shoes, food, clothing, and other household items. No doubt that is true. Westminster, not unreasonably, has also talked up opportunities for British business in India, as that economy is growing at about 6 percent a year and will soon be the third largest economy in the world. British finance, both legacy and fintech, as well as consulting, stand to gain greatly. Indian consumers of Scottish salmon, whisky, gin, autos, and the like will also gain as these new arrangements reduce prices and increase access. So will many Indian manufacturers, who will find it cheaper and easier to procure equipment and inputs.
Tradeoffs and the Broader Impact on Global Markets
But as in all trade deals, there will be losers. British producers of ready-made clothing, shoes, and processed foods will face much stiffer competition than in the past, as will British subjects that earn their livelihoods in these trades. Many Indian producers and their employees will also inevitably face stiffer competition from British producers. This new free trade area (FTA) will also disadvantage producers in third countries, especially emerging economies. Keep in mind that every FTA by nature excludes all but the signatories. An emerging economy, Malaysia, for instance, might have been able to outcompete both the British and Indian producers of shoes or clothing in the UK market. But with the tariffs now removed on the Indians but not the Malaysians, those Indian producers might now be able to take the UK market in these products from both domestic British and Malaysian producers.
Pointing out these potential harms from an otherwise ground-breaking agreement in no way aims to criticize the deal. On the contrary, this agreement constitutes a major stride for both India and the UK. But in the face of all the upside emphasis coming out of London and New Delhi, it helps to note that this agreement does not deliver only wine and roses. For all the clear positives, there are losers, especially perhaps in the developing world. All trade and every trade deal has losers as well as winners. Nothing is ever a win-win. There are always tradeoffs.
