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Sign FTA With UK To Counter China’s Might

Trade deal with UK will bring substantial opportunities for India in services sector like IT and research & development and in merchandise trade for sectors like garments, gems & jewellery, pharmaceuticals, footwear and chemicals to name a few.

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British Prime Minister Boris Johnson and PM Modi in recently concluded virtual summit agreed to launch Enhanced Trade Partnership and also negotiate comprehensive Free Trade Agreement (FTA). Both countries have agreed double India-UK trade by 2030. To counter China’s plan of dominating South Asia and to remain part of global value chain, it is of paramount importance that India strike trade deal with UK.

The bilateral trade between India and UK for FY20 stood at around US$15.5 billion which was 11 percent higher than the previous year. Also according to the Britain Meets India report, by CII and Grant Thornton Bharat, UK’s FDI into India has increased by 58 percent in last five years and stood at USD 1,422 million in 2019-20. India has also emerged as the second largest investor in UK in 2019-20 with 120 new project.

Benefits for India and UK

Trade deal with UK will bring substantial opportunities for India in services sector like IT and research & development and in merchandise trade for sectors like garments, gems & jewellery, pharmaceuticals, footwear and chemicals to name a few. Indian garment sector for example currently faces severe competition due to tariff disadvantage, India’s competitors like Bangladesh gets preferential rate of duty in UK under Generalized System of Preference (GSP). With improvement in ease of doing business rankings, low labour cost, amendments in labour and tax laws in India, signing of agreement among both countries will help India in becoming an outsourcing hub for UK companies.

For UK, the trade agreement will open doors of big markets of India in fast moving consumer goods (FMCG), consumer durable and automotive sectors. UK is also looking to further expand the Indian market of scotch whiskey which is UK’s third largest market, through the trade deal. UK is looking for a trade agreement that includes data, digital, and services segments. This could help UK in realizing its ambition of becoming a services and data trade hub.

Counter China’s Might

After the skirmishes in Galwan last year, Indian government took several steps to reduce high dependence on China for supply of intermediate goods which includes policy initiatives under ‘Make in India’ and ‘Production Linked Incentives’ schemes. Similar steps have also been taken by many developed economies of the world like US, Japan and UK to move supply chains out of China. UK’s relations with China have also been stressed over issues such as Hong Kong, Covid, and denying Huawei an active role in Britain's 5G network. This trade agreement on one hand will help UK in diversifying supply chains in sectors like chemicals, pharmaceuticals, computer, electronics and automobile, which after the agreement are likely to shift to India and also reduce India’s dependence on China on the other.

At present, seven largest shipping hubs of the world are dominated by China. Through these hubs China is able to control supply chains of large number of countries of the world. China is also following aggressive strategy in South China Sea which has been a cause of concern for West as one-third of the maritime traffic passes through it.

In order to counter China’s might, India’s role in Indo-Pacific region becomes very important. It is believed that India’s strategic relationship with US will consolidate under Biden’s Administration. Quad, a strategic forum comprising of US, Japan, Australia and India, conceived for safeguarding joint security and other interests in the Indo-Pacific region, has been quite active in recent past. India along with partner countries are geared to counter China’s military and economic rise through Quad. Since 70 percent of global trade passes through Indian Ocean, the role of India is very crucial in securing global value chains. Trade deal with UK will further safeguard India’s economic interest and strengthen its position as an alternate for China to diversify their value chains.

Challenges in Trade Deal

India has declined to be member of two major regional trading blocs namely the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP), and Modi government has not signed a single trade deal except the India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement. Various industry lobbies because of their vested interests have been able to persuade the government against joining these trading blocs. It is however important for the government to realise that for effective negotiations in trade deals comprehensive picture needs to be considered which needs to backed by industry level data. It also needs to be understood that signing a trade deal is give and take mechanism, where some industries might not gain in short run. It is however of utmost importance to realize that India needs to integrate with global value chain and this cannot be achieved without partnering with world’s economically important countries/blocs.

India is keen on enhancing services trade, liberal access for skilled professionals and students in UK market, defence manufacturing, pharmaceuticals, food products, fin-tech and engineering goods. UK on the other hand is likely to bring non-trade barriers to the table for discussion which pertains to enhanced access to India’s legal, financial and professional business services market including insurance and technology. India’s tariff has steadily increased in last couple of years. To make the trade deal see light of the day, India will have to take steps to reduce them for partner countries. For example, the tariff on scotch whiskey in India is 150 percent. Although government reduced the basic custom duty (BCD) to 50 percent in the budget but it has been offset by the agricultural infrastructure cess of 100 percent.

The world’s political and economics focus is shifting towards east, with Asia projected to contribute up to 50 percent of the global GDP by 2050. It is therefore imperative for India to understand that mutual cooperation and deeper economic ties with partners having similar geopolitical orientation is essential. India’s signing free trade agreement with UK will be first outside Asia and will help its future needs of setting up resilient and secure supply chains. This will not only increase India’s weight geopolitically but also help in countering China’s economic and political might.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Dr. Anuj Sharma

The author is Chairperson - Centre for international Business & Policy, Associate Professor - IB Birla Institute of Management Technology

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