May 2, 2017    5 minute read

Will an India-UK Free Trade Agreement Come to Fruition After Brexit?

Rekindling Old Flames    May 2, 2017    5 minute read

Will an India-UK Free Trade Agreement Come to Fruition After Brexit?

The notorious difficulty of free trade with India has been a topic of discussion for many years now, with a proposed deal between India and EU proving inconclusive since the idea’s inception in 2007. However, the exit of the United Kingdom from the European Union has sparked a renewed possibility of a free trade agreement (FTA), though this time with Britain alone.

Currently, the lack of any substantial agreement has allowed trade tariffs between the UK (and other EU states) and India to be high. UK exports into India have an average tariff of 14.8%, and Indian imports to the UK have an average tariff of 8.4%.

What Would an India-UK Free Trade Deal Look Like?

A study from the Commonwealth predicted that an FTA in which tariffs are null would benefit India far more than the UK. Indian imports from the UK would increase from $5.2bn to $7.8bn with 80% of the increase coming from new imports. Conversely, UK imports from India would increase by 12% from 2015 as opposed to the 33% increase over the same period for India.

The majority of these imports are expected to be in clothing, which have proved popular in the UK through the low-cost high street boom of large stores such as Primark. All these signs seem to indicate a strong probability of an FTA, which was at one point enhanced by Theresa May’s decision to embark to India on her first international political foray.

The political willingness of both sides is something which was missing from the negotiations between India and EU. However, this seemingly flawless FTA is not all as rosy as it seems. Recently, India’s Ministry of External Affairs have expressed concern about a policy set by Theresa May during her time as Home Secretary. The policy restricted the rights of Indian students to continue living in the UK after graduation. Since the policy was introduced there has been a marked decrease in overseas Indian students studying at UK universities.

Mode 4

It is claimed that the UK’s inflexibility on this cause could spill over into inflexibilities in finance and services. Some cabinet ministers in the UK have also conveyed their worries about this issue, indicating that it will be a major hurdle to the negotiation of an India-UK free trade agreement. May’s stance on the issue ties into the fact that the Indians will want UK to be flexible on Mode 4 of the World Trade Organisation (WTO).

Mode 4 refers to covering persons who are service suppliers and who are supplying a service with another country also part of the World Trade Organisation. It seems quite unlikely that the UK will levy their stance on Mode 4. It is important to also consider that the UK isn’t outlined to formally leave the EU until 2019. As a result, no FTA can be established until the time has elapsed. This is mainly due to the fact that, should a ‘hard Brexit’ occur, Indian businesses in the UK may leave for other European countries if the UK were to lose access to the single market.

This wait period in itself is a hindrance to the probability of an India-UK free trade agreement, as it requires political harmony between the two countries to continue steadily. Though other British cabinet minsters, including Chancellor of the Exchequer Philip Hammond, are also establishing firm relationships with India, it will be particularly important to see how geopolitical events pan out over the next few years to see whether ties between India and the UK remain strong.

Too Soon to Call

Undeniably and expectedly, Brexit has created a flurry of uncertainty both within the UK and internationally, and it is hard to pinpoint the outcome that the UK will gain from the divorce. The EU believe that the UK’s exit will lay a foundation for themselves to broker trade links with India. They have suggested that more attractive market opportunities for India lie in countries such as Scotland, whose whisky could be imported at lower tariffs thus fuelling the world’s largest whisky market (India).

Moreover, the EU have stated that Germany is in fact the EU’s largest trade partner with India. Indeed in 2015, Germany ranked as India’s 6th-biggest trading partner (in terms of total trade as a sum of imports and exports), while the UK only ranked 18th. What’s more, the UK has the largest trade deficit of any EU state with India, while Germany posts a trade surplus with it.

It seems the elusive free-trade agreement between the UK and India will be an uphill struggle for May’s government. Though the political and cultural ties the UK has with India are significant, the remaining issues – ranging from May’s stance on mobility to the unknown terms of the impending Brexit deal – will require further negotiations and almost surely some compromise from either party in order to form any sort of a trade agreement.

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