Number theory: Understanding India’s trade deal with the UK

The deal in the works, like India’s other regional and bilateral trade agreements is quite ambitious.
Prime Minister Narendra Modi and his British counterpart Boris Johnson, New Delhi, April 22, 2022 (REUTERS) PREMIUM
Prime Minister Narendra Modi and his British counterpart Boris Johnson, New Delhi, April 22, 2022 (REUTERS)
Updated on Apr 29, 2022 11:59 AM IST
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By, New Delhi

After inking back to back trade deals with UAE and Australia, India is now working on a trade deal with the UK. The trade deal featured prominently on the agenda when British Prime Minister Boris Johnson came on a two-day visit to India, with the two countries agreeing to conclude the third round of negotiations on new free trade agreement by the end of October. The deal in the works, like India’s other regional and bilateral trade agreements is quite ambitious. “India and the UK agreed to double trade in goods and services to about $100 billion by 2030 as (commerce minister) Goyal and UK trade secretary Anne-Marie Trevelyan launched formal negotiations for an FTA on January 13”, HT reported on April 13. (https://bit.ly/3k0ojNF).

What does historical data convey on the trade relations between the two countries? Where does Britain stand post-Brexit? Here are three charts that explain in detail.

Bilateral trade in goods lost momentum after the 2008 crisis

Data from the Ministry of Commerce and Industry shows that bilateral trade in goods between India and the UK lost momentum after the 2008 Global Financial Crisis. While the goods trade grew at CAGR (compound annual growth rate) of 8.5% during the 2000s decade, it slowed to 6% between 2010 to 2015 and 4.15% between 2015 to 2019. Because of the Covid-19 pandemic, the post-2020 values cannot be taken as part of a longer trend. India-UK bilateral trade in goods was $16 billion in 2021, $850 million lower than the 2019 figure.

Data from the United Nations Conference on Trade and Development (UNCTAD) shows a similar trend for bilateral trade in services between the two countries. This expanded rapidly in the second half of the 2000s – CAGR was 12% between 2005 to 2010 – but grew by a mere 0.7% between 2010 and 2015. However, there has been some recovery on this front since 2015, with services trade expanding at a CAGR of 8.56% between 2015 and 2019. In absolute terms, the bilateral trade in services was $11.5 billion in 2020.

Against this backdrop, the target of reaching $100 billion in total bilateral trade between the two countries by 2030 seems a tall task. A HT calculation shows that the bilateral total trade in goods and services should grow by 11.47%CAGR to reach $100 billion by 2030, from $30.3 billion in 2019. The CAGR for total trade in goods and services between 2010 and 2019 has been 4.7%.

Export and import items of UK trade

Data from World Integrated Trade Solutions (WITS) shows the UK to be a major exporter of consumer goods to the world; WITS classifies goods into four categories based on their stages in the production process. The share of consumer goods in total exports of UK to the world was 35.33% in 2019. Capital goods and intermediate goods accounted for 29.91% and 22.51% in the total exports of UK to the world in 2019.

At the same time, UK is also a major importer of consumer and capital goods from the world. The share of consumer and capital goods in total imports to UK was 37.81% and 26.96%, in 2019, respectively.

India is a less significant export market for goods from the UK than China. The share of total exports from UK to China was 6.44% of the former’s total exports while the share of total exports from the UK to India was only 1.26% in 2019. The United Kingdom is a major export market for goods from China (more so than India). The share of total imports of the UK from China was 9.46%, while the share of total imports of the UK from India was 1.42% in 2019.

Waiving duties on UK’s whisky exports into India and making it easier for Indian professionals to work in the UK are among the key demands on each country’s wish list in the ongoing negotiations which are likely to be controversial in both countries, the BBC reported recently (https://bbc.in/3OF2mC1).

Impact of Brexit on UK’s economy

The UK ended its 48 year-long membership with the European Union (EU) on January 2021. Economists agree that growth has been negatively hit but the exact costs of the Brexit are not known “because the effects have not been immediate, and are difficult to disentangle from the impact of the coronavirus crisis”, according to a Financial Times article on December 23. (https://on.ft.com/38rb5qW)

The October 2021 forecast from the UK’s Office for Budget Responsibility says that “the new trading relationship between the UK and EU will reduce the long-run productivity by 4 per cent relative to remaining in the EU”. (https://bit.ly/3Mxq8hj) This new deal with the EU has ensured the trade to be free of tariffs, but companies face higher administration costs stemming from tighter border controls. Researchers from the London School of Economics’ Centre for Economic Performance show that “the number of British export relationships with EU firms dropped by 30% after the UK left the single market and customs union in January 2021”, reported Bloomberg on 26 April, adding that the trade was largely unaffected in the four and half years directly following the vote to leave the EU in 2016. (https://bit.ly/3MBZRi7). If factors such as these have a long-term impact on UK’s economic growth, the trade potential is bound to suffer as well.

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Thursday, June 30, 2022