India-UK FTA could be a template for other deals

India’s understanding with the UK on the latter’s carbon tax on heavy-emission-footprint imports could become a template

The conclusion of negotiations for a free trade agreement (FTA) between India and the UK has been met with resounding optimism in both nations. This pivotal moment marks a significant leap forward in the bilateral relationship, representing a robust commitment to enhancing trade and economic integration. Furthermore, the finalisation of this FTA amidst the turmoil affecting the multilateral trading system — driven mainly by the erratic tariff policies of the US —underscores its importance. The India-UK FTA is a crucial countermeasure to the uncertainties in global trade. It also confirms the broader trend that other bilateral and regional sites are opening up rapidly as the World Trade Organization (WTO) struggles to live up to its reputation as the chief site for global rulemaking in international trade. At least for the foreseeable future, the bulk of rulemaking on international trade might occur through such FTAs.

Foreign investment protection remains absent from the FTA as the two parties negotiate a separate Bilateral Investment Treaty (BIT) (Shutterstock)

While a comprehensive analysis of the FTA will only be possible once the treaty text is published, several critical issues deserve attention. Primarily, it seems that both parties have made significant gains in terms of market access for goods. India is poised to reduce its tariff rates on whiskey and gin from 150% to 75%, eventually reaching 40% over the next decade. Tariff reductions are also on the horizon for automobiles. In return, Indian textiles, footwear, leather products, and gems and jewellery will enjoy preferential access to the UK market.

At a time when India’s exports to the US face substantial obstacles, this preferential access to the UK presents a valuable opportunity for Indian businesses. While the UK market may be smaller than the American one, this arrangement will bolster Indian exports and mitigate some of the setbacks caused by the Trumpian tariffs. Additionally, India stands to gain in the realm of services as the UK commits to liberalising its labour market, facilitating easier access for Indian professionals seeking opportunities in the UK.

As highlighted in the UK government’s press release, the inclusion of non-trade issues such as labour rights, gender, anti-corruption measures, and development is a pivotal aspect of the FTA. While the depth of India’s commitments on these fronts can be determined only when the text becomes available, the decision to incorporate these non-trade elements into the FTA is noteworthy.

Take labour, for instance. Historically, New Delhi has resisted the introduction of labour issues into economic treaties, holding the position that trade agreements should not serve as mechanisms for policing a nation’s adherence to labour laws. There has also been a valid concern that developed nations might exploit labour standards as a pretext for protectionism. However, India’s recent trend in FTA negotiations signals a significant shift in perspective regarding the linkage between trade and labour rights.

India’s acceptance of labour-related provisions in its FTA with the European Free Trade Association (EFTA) last year and its commitments under the Indo-Pacific Economic Framework (IPEF) supply chain agreement illustrate a departure from its longstanding opposition. The inclusion of labour standards in the FTA with the UK marks yet another decisive step for India, showcasing its evolution towards embracing a stance that integrates trade and labour rights.

Interestingly, the press releases issued by the two countries do not mention the elephant in the room — the UK’s Carbon Border Adjustment Mechanism, or CBAM, which would impose a tax on India’s carbon-intensive products such as steel, aluminium, and cement. This has been a sticky issue between the two sides because India believes it puts its products at a competitive disadvantage. It is unclear whether the two sides have resolved their differences or if this issue has been dropped from the FTA. The CBAM issue is equally pertinent in India’s FTA negotiations with the EU. What India has agreed with the UK on CBAM might become a template in its talks with the EU.

Foreign investment protection remains absent from the FTA as the two parties negotiate a separate Bilateral Investment Treaty (BIT), which was initially intended to be finalised alongside the FTA. In an era dominated by intricate global supply chains, trade and investment are inextricably linked. Thus, securing a BIT with the UK is equally important as it will safeguard British investments in India under international law and vice versa. Unfortunately, updates on the BIT have been sparse, and finalisation appears to be pending.

India’s unilateral termination of the 1994 BIT between the two sides in 2017 raised concerns among foreign investors. While the terminated BIT protects investments made before the termination for 15 years, that is till 2032, any investments made after the termination are excluded from international legal protections. This uncertainty has understandably caused anxiety among foreign investors.

The BIT negotiations must conclude quickly, especially considering India’s intention to revise its 2015 Model BIT, indicating a readiness to adopt more flexible terms. Finalising this agreement is vital for boosting investor confidence and fully realising the benefits of the India-UK FTA.

A key question is when the treaty is expected to come into force. That will take some time. Before ratifying the treaty, the UK, in accordance with its Constitutional Reform and Governance Act 2010, will place the treaty on the floor of its parliament for scrutiny. The UK followed this trend for its recent FTAs with Australia and New Zealand. There is no institutionalised mechanism in India for parliamentary scrutiny of a treaty before its ratification.

In sum, the India-UK FTA is a key milestone and one of the few trade agreements India has signed with a developed economy. It will provide a template for India’s future FTA engagements, especially on trade issues, and the EU and others will rely on it to strike a deal with India.

Prabhash Ranjan is professor and vice-dean (research), Jindal Global Law School, O P Jindal Global University. The views expressed are personal