The Hidden Costs of the India-UK Free Trade Agreement with Abhijit Das
How does the FTA with the UK benefit India actually?
In this episode, author and journalist Puja Mehra speaks to trade policy expert Abhijit Das about what’s at stake for India in its free trade agreement (FTA) with developed economies like the UK. Why do countries push for non-trade clauses such as labour, environment, and gender standards in trade deals? How do intellectual property (IPR) obligations affect India’s ability to innovate? Drawing on his deep experience in global trade negotiations, Professor Das explains how developed countries often mask protectionist aims behind values-based clauses, how stringent standards can become new barriers to exports, and why India must be cautious about TRIPS-plus commitments. They also discuss how much FTAs actually contribute to export growth, and why domestic reforms—like cutting red tape and improving logistics—matter more for India's trade ambitions. Tune in for insights on how the fine print of FTAs can shape India’s economic future.
NOTE: This transcript is done by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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TRANSCRIPT
Puja Mehra (Host): Hello, I'm Puja Mehra. Most government officials I speak with these days say that the government believes that bilateral trade agreements are going to be the way to do trade in the Trump era. News reports have been gung-ho about bilateral trade deals being negotiated.
A free trade agreement with the UK has been announced, although only sketchy details are available in the public domain on what exactly is being agreed. I asked Professor Abhijit Das to talk about this. Professor Das has been on the show earlier to discuss Trump's trade agenda and its fallout on India and the rest of the world.
Professor Das is a leading trade expert, was the head of the Centre of WTO Studies at the Indian Institute of Foreign Trade, and has had long years of experience of contributing to India's international trade negotiations, including in the anti-dumping and subsidy negotiations at the WTO.
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Puja Mehra: Professor Das, thank you so much for coming again on the show.
Abhijit Das: Puja, I'm grateful to you for inviting me. It's always a privilege to be on your podcast. Thank you.
Puja Mehra: We are speaking after India and the UK have been discussing and kind of closed negotiations on an FTA. I wanted to discuss with you, since this was long being negotiated, I wanted to discuss with you first just briefly what it entails and then various aspects of understanding it.
Abhijit Das: Right, Puja. What we should remember first and foremost is that sometime in 2022, was it July, August, we were hearing a deal by Diwan. It appeared that both sides were hurtling towards finalising the deal, but better sense prevailed, let me put it that way.
The two countries, instead of rushing into signing a deal, which both might have regretted later, decided to wait it out. Cool heads prevailed. And now a couple of years down the line, we do have a deal.
Now, this deal does multiple things. It sends out a very strong signal, it sends out a strong message that during times of global upheaval in trade and trade rules, countries can come together, countries can cooperate, countries can collaborate and finalise deals which are rules based. So, that is an important point which we must recognise.
The second point is that like any trade deal, this will have pros and cons. There will be some areas where India stands to gain, some areas where India may have granted concessions.
Puja Mehra: So, let's first understand where India stands to gain and then we can discuss what India is going to have to give.
Abhijit Das: Let's look at tariffs. But before I do that, it's important to recognise that at this juncture, the legal texts are not yet out in public domain. So, we will have to necessarily rely on media reports as well as some details that are available on the website of the UK government.
And based on both these sources, we can safely say that in terms of merchandise trade, one of the areas of big gains for India is likely to be access to the UK market at zero tariffs. Now, this should give a substantial boost to our textiles and clothing sector, to the leather sector, the labour intensive sector. So, we could see some additional employment be created.
We could also see an improved performance in our services exports to the UK on account of what I believe the number of avenues which the eventual FTA might contain. First and foremost, what we've heard is that a double contribution convention is being negotiated or has already been negotiated, whereby for three years, temporary residents in the UK who deliver services would not have to pay social security contributions in the UK if they are already making the contribution payment in India. This is likely to make Indian services more competitive, particularly IT services.
Then there is likely to be a commitment to facilitate movement of intra-corporate employees plus independent personnel. This might again help enhance the service delivery of IT professionals. There is likely to be a mutual recognition of educational and professional qualifications.
Of course, this mutual recognition might not happen by the time the agreement is signed and implemented, but there is likely to be a commitment to enter into mutual recognition a few years down the line. And finally, what we do here is the possibility of some additional visas for a very few limited categories such as yoga instructors, chefs, music teachers, etc. So yes, the UK-India FTA could give a boost to the services exports as well.
So these I would think are on the positive side.
Puja Mehra: I read some reports where the British press was protesting this concession that is being discussed for Indians especially IT professionals but perhaps in other services also on social security. Is this sort of casting stone or could there be pressure in the UK for a pushback?
Abhijit Das: Very difficult to say at this juncture. We don't know whether the agreement has been finalised or it is still in the process of being finalised. If it has not yet been finalized, there could be some pushback.
But given the reality that this is an area where India stands to make important gains, I am sure our negotiators will negotiate very hard to get an outcome which is to our benefit. So even if there is opposition within the UK, eventually we should get an agreement which promotes our interest on this issue. And this double contribution convention is not something new.
The UK has such agreements I believe with a few other countries as well.
Puja Mehra: Yes, I read that as well. What are we giving to the UK in return for these gains?
Abhijit Das: Let me look at just a few specific examples of concessions which we might have made. I am not saying that concessions are bad. Any trade agreement necessarily involves making gains, making concessions.
So one area where we would have made concession going by the UK government appears to be lowering of tariffs on whisky, where we seem to have made a commitment that on the day of implementation of the agreement, the custom duties will drop from 150 percent to 75 percent, which will further get reduced to 40 percent over a span of about 10 years. This certainly will bring cheer to those who enjoy their glass of whisky and also might make some difference to the experience of tourists in India. We also have made some concessions in the area of government procurement.
I want to take our listeners back to our agreement with the UAE, in which for the first time we opened our government procurement market to UAE suppliers. But there was a very big carve-out and that carve-out was that procurement made pursuant to Make in India preferences were kept outside the government procurement sector in India UAE FTA. Again, going by the media reports as well as what the UK government is claiming, we seem to have given concessions which go beyond what we have given to UAE, what we promised, at least that's what the media reports suggest, what we promised is that UK suppliers which have more than 20 percent UK content of goods or services would be treated as class 2 suppliers in Indian government procurement.
Now, this is definitely an important concession we have given. We have to bear in mind that under the rules of the WTO, the government has very few policy instruments left in its hand to give a boost, to give a flip to domestic producers of both goods and services. Government procurement is one of those very few remaining policy instruments whereby the government can discriminate in favour of domestic suppliers by opening the government procurement market through FTAs.
We are willingly, voluntarily ceding away this policy space and the implications are very clear. The concession that we've granted to the UK in government procurement sets the bar for our other two negotiations, namely that with the European Union as well as with the US. Both these trading partners will definitely be requesting concessions which go beyond what we have granted to the UK.
A question could be raised that, well, won't India also benefit from reciprocal market access in the procurements made by the UK? Now, here what we need to grapple with is that although the size of annual procurement by the UK government has been estimated to be about 120 to 125 billion pounds, a very small percentage of it is actually sourced from outside the UK. Certain estimates suggest that less than 8 to 10 billion pounds per year gets sourced from outside the UK.
And let's bear in mind that India would have to compete with the European Union, with the United States, with Japan for this very small value of procurement by the UK. So the reciprocal market access gains which our exporters are likely to enjoy in the government procurement market of the UK may not be very high. The size of the market really may be 8 to 10 billion pounds each year, certainly not something very significant.
Then another concession which we've made is in the auto sector where the tariffs are likely to come down from 100% to 10% over a transition period. Now, we have read newspaper reports which say that the opening is for a very limited category of automobiles. It will of course depend on the size of automobiles for which the opening has been done.
And also we hear that another way through which the government has tried to protect the interest of the auto sector is by giving a quota whereby let's say up to about 10,000 cars will enjoy lower tariffs. So these are a couple of ways through which the government is trying to take liberalisation forward but at the same time also trying to protect the domestic interest of the automobile manufacturing sector. A third area where we have conceded ground is on non-trade issues.
While the actual implications of the concessions that we might have made will become clear once the legal text is available based on the existing free trade agreement texts of the European Union and which is also likely to be the template for the UK as well, a few points can be made. First and foremost, there is likely to be some language in the non-trade aspects of the agreement which could provide a legal basis for imposing non-tariff barriers against our exports. Second could be that there would be stronger domestic enforcement, rather pressure for stronger domestic enforcement of labour and environment commitments which we may have taken at ILO or through the Multilateral Environment Agreements, MEAs as they are called.
And the enforcement, even if it is not to be done through a dispute settlement mechanism, there could be other channels of enforcement. For example, the EU's FTAs have a system of monitoring and enforcement of the commitments on labour, environment and even gender at times through a system of committees. So, these non-trade issues could get enforced if not through the dispute settlement, then through the system of committees.
There could be an apprehension that over time the soft law which might exist today in the India-UK FTA, over time there could be attempts at converting it into hard law, converting it into firm commitments and that might really not work for India. These provisions could be aimed at raising the cost of manufacturing in India. These provisions could also provide a legal basis to our trading partner for imposing non-tariff barriers against our export.
But as I said, the exact implication would be known only after the legal text is available with us on these non-trade issues. So, let's awaken the legal texts on these issues.
Puja Mehra: Professor, there are three follow-up questions. One on government procurement. How large is the and how competitive do you think suppliers from the UK would be?
So, what I'm asking is that should Indian suppliers that benefit currently from government procurement, do they have reason to worry? Are they less competitive relative to competition they may face from the UK? The second follow-up question is on the auto concessions that are being granted.
Does a company like Tata Motors benefit because they also manufacture if I'm not wrong in the UK? And third, on non-trade issues, why are developing countries pushing for inclusion of these non-trade issues like labour, environment, gender, etc. and trade agreements?
What's the thinking behind this?
Abhijit Das: Right. Now, let me start with your question on government procurement. We do not have any firm estimates of the size of the Indian government procurement market.
But the size of the procurement market normally is taken to be anywhere between 10 to 15 percent of the GDP. Of course, not the entire government procurement will be subject to the rules of the India-UK FTA. Again, going by what the UK government says, only procurement at the level of central government and some central PSUs have been included as part of the market access commitment.
So, that is what we need to look out for. So, the size of the procurement market may not be very relevant. Coming to the question of would UK suppliers be competitive?
Here what we have to bear in mind is that the UK content has to be anywhere between 20 to 50 percent. Let's assume that the UK content is 25 percent. The remaining 75 percent content can be Chinese.
They will then get treated at par with class 2 suppliers. So, that is what I worry about. That is ordinarily speaking, we would not expect the UK to be price competitive.
But the very fact that UK plus Chinese suppliers will be able to access the Indian procurement market by being treated as class 2 suppliers, can pose a risk. And when I say India and Chinese suppliers, what I really mean is that the 20-25 percent UK content and rest being the Chinese content, that can pose a competitive threat to our domestic suppliers.
Puja Mehra: Can we introduce a national security clause like the US has done with their UK deal just recently? They haven't named any countries but primarily to sort of remove Chinese content or ingredients from British supply chains for imports into the US.
Abhijit Das: I completely agree with you Puja. That should be the way forward and I hope our negotiators have been savvy enough to recognise the perils and have included in the agreement the possibility of having restrictions in government procurement based on security considerations. So, let's keep our fingers crossed and let's feel confident that our negotiators have been savvy enough on this aspect.
Turning to the question on automobiles, yes, Tata Motors does have a presence in the UK. They could stand to benefit, particularly in the segment of larger cars. So, that just shows how national interests, it becomes difficult to define what is national interest.
Is the interest of Tata Motors in India Indian interest? Is the interest of Tata Motors UK entity? Is that also the national interest of India?
So, in a globalised world, it becomes very difficult to untangle what is national interest and where is the commercial interest of one entity, how that gets split between national interest of let's say India and UK in this particular case.
Puja Mehra: That is so interesting, Professor Das. It also reminds me of something I read in your new book about how international trade relations are affected by domestic lobbies. I think shareholders of Tata Motors in India would certainly celebrate because it will reflect in their dividends.
Abhijit Das: Oh, absolutely. And thanks Puja for mentioning my book Strategies in GATT and WTO Negotiations and thanks for reading it.
Puja Mehra: It's a wonderful book and I want to recommend it to our listeners at this point. It's a wonderful book to understand how trade negotiations take place. We tend to have a very oversimplified view of trade negotiations, but your book is so insightful.
Abhijit Das: Thank you, Puja, for your very generous endorsement of my book. That's really very kind of you. Let me get back to your question on non-trade issues, non-tariff barriers.
Why are the developed countries pushing for them? Of course, the fundamental way in which this narrative is being pushed is that issues around environment or labour, welfare or gender, these enshrine, these embody core values of Western society. Now, whether those core values hide pure and simple mercantilist objectives becomes clear when we look at, when we analyse some of the provisions which are contained in the FTAs of the European Union.
If we look at some of the provisions, what becomes very clear is that behind the veneer of sustainability, what is thought to be promoted are two things, promoting exports of the European Union as well as creating barriers for exports from the rest of the world. The EU C-Ban is a prime example and linked with that will be the UK C-Ban. And I should have mentioned earlier that when we talk of gains for India from the UK FTA, we have to recognise that some of these gains might really not materialise if the UK goes ahead and imposes its carbon border adjustment tax on Indian exports.
So that could reduce our export opportunities. So that is one of the objectives of the non-trade measures, to create barriers for exports of other countries to provide legal justification for imposing restrictions. The second objective is very clear, compliance with some of the environment requirements as well as labour requirements is likely to raise the cost of production in India, which would make its exports relatively less competitive in the international market and which could again have a dampening impact on our exports.
But the most interesting and to my mind, the most adverse long-term impact that some of these non-trade provisions can have on our domestic economy is initially a soft law which talks of harmonisation of standards, which talks of countries setting their environment and labour standards at a high level of stringency and gradually the possibility of harmonisation of standards at the level prevailing in the developed countries that could creep into the bilateral trade arrangements between India and nuclear India and European Union. What would be the implications? I'm not saying that this is happening in the present agreement.
No, I'm not saying that. But it will create a window for a future harmonisation of standards at a high level of stringency prevailing in the developed country. Most of the Indian producers, particularly in the SME sector, might find it very difficult to comply with highly stringent environment standards.
And if they are not able to comply with the stringent environment standards, they will not be able to sell even in the Indian market. In a nutshell, we have to be very cautious that the free trade agreements that we are negotiating or that we have finalised does not create a window for harmonisation of environment standards at a future date. So we have to be mindful of these likely adverse consequences of non-trade issues.
Puja Mehra: When we say at a future date, what is the time frame you think these countries are looking at for this harmonisation?
Abhijit Das: Very, very difficult to say. But the agreement will certainly have two or three things. There will be a mechanism of committees through which there will be a commitment to cooperate in different non-trade areas like labour, like environment, like gender.
So those committees could provide the pathway for setting standards at a high stringent level. That is one route. The second mechanism will be that once the agreement is up for review, which could be anywhere five years, seven years down the line, then we could come under pressure for harmonisation of standards.
So we have to be mindful, we have to be watchful, we have to be on our guard both in the committee deliberations pursuant to the FTA implementation as well as when the review of the FTA takes place a few years down the line.
Puja Mehra: The other agenda of developed countries comes into play in FTAs IPR and IPR protection and India's aspirations of becoming an innovation-based economy. How does that fit in with India's overall objective? Does it help us or does that also create problems?
Abhijit Das: Puja, a commonly heard narrative is that a strong system of intellectual property right protection is essential for an innovation-based economy. Now this is really a narrative. Dig deep into this narrative and the reality is quite stark.
Most of the developed countries have created an innovation-based ecosystem by actually not recognising for decades the IP of foreigners. This enabled their domestic players to actually legitimately imitate innovations made by foreigners. And after having secured a substantial edge in global innovation, then the countries who are developed today, they started pushing for standard IP protection.
This is actually aimed at preventing countries like India, which are not at the technology frontier, from following their strategy of growth through imitation. Now there is no harm in imitation. That is the ladder, that is the path which the developed countries took.
Puja Mehra: If I'm not wrong, France, UK, etc. imitated Indian manufacturers of fabric hundreds of years ago.
Abhijit Das: Yes, you're very right. In the 18th and 19th century, much of the practices prevalent in our domestic textile sector were very closely replicated in England. That's how some of the competitive edge was acquired by the textile sector in England.
So imitation has been at the background of the so-called innovation ecosystem. That is now sought to be perpetuated through, rather developing countries are now sought to be prevented from following that through a system of strong IP protection. Of course, there's also very little empirical evidence to support the contention that strong IP protection results in higher innovation.
Then of course, if we have provisions which go beyond the WTO's TRIPS agreement, if we have TRIPS plus provisions in our FTAs, then this could actually stymie our attempts at becoming an innovation-driven economy. So we have to be very, very careful in uncritically accepting the narrative that for India to become an innovation-based economy, we need to have strong IP protection. Let me give you one simple example.
One of the economies which is today at the technology frontier in many areas, which is based on innovation is Switzerland. Now, just a couple of centuries ago, Switzerland built a very strong manufacturing sector and it gave no IP protection, and still it emerged at the technology frontier. So the short point is, you don't necessarily need strong IP protection for becoming an innovation-driven economy.
Puja Mehra: Prof. Das, many people would say that what you're saying is slightly controversial, isn't it? One of the things that the world holds against China is its lack of IP protection.
Abhijit Das: I'm not saying we violate IP laws. I'm not saying that at all, Puja. What I'm saying is that we must be cautious in accepting new obligations which go beyond the obligations which we have already committed to under the WTO's TRIPS agreement.
I'm not saying we violate IP laws, absolutely not. But we should not be conceding more ground on IP in our free trade agreements. Would you like to briefly say what the TRIPS commitments are?
Let me just focus on one area, which is patents, where we have given a commitment on product patents for 20 years. Of course, any person who claims to have invented a new product which meets the patentability criteria can file an application, and if that application is successful, if the patent examiner comes to the conclusion that the application meets the requirement of the patentability criteria, then that patent holder for 20 years gets an exclusive right on marketing of the product, of production of the product, etc., of all commercial activities around his product. Of course, he can licence it to anyone else. Now, in the pharmaceutical sector, this is very important because in the pharmaceutical sector, attempts are made by the patent holders to find ways whereby the 20-year period can be extended through various strategies, what is commonly called evergreening of products.
And what the developed world has been attempting through free trade agreements is to give a legal sanctity to attempts at evergreening of products. What would that do? That would delay entry of generics into the market.
If generics are delayed in the market, then the patented medicine will continue to have a longer life that will raise the cost of healthcare in the country, and that can really burn a hole in the pockets of families which are grappling with medical emergencies. So, while we have agreed to the patent regime, product patent regime at the WTO, what we have to ensure is that this regime is not made more stringent, which will have adverse implications for access to affordable medicine in the country.
Puja Mehra: Understood. So, when we are signing all these FTAs, when we are negotiating these FTAs, are they likely to sort of be a big driver of India's export story? And are they very important for India's export growth?
Abhijit Das: A very good question, Puja. FTAs certainly will result in an increase in our exports, absolutely no doubt about it, because for the very simple reason that our partner country will be lowering tariffs and we will be at a competitive advantage vis-a-vis other exporters into that market as well as the domestic producers in the UK, for example. But then the question which arises is, what is going to be the likely increase in exports?
And there we have a fairly revealing report by the UK government itself. What that report says is that by 2040, on account of India-UK FTA, India's exports of goods and services to the UK would increase by about £10 billion, which roughly translates into an increase of about $1 billion each year. Compare this $1 billion increase in our exports to the UK with our total exports of goods and services globally, which is about $828-$825 billion, which is really a very, very small amount compared to our total exports of goods and services.
And even this annual increase could get reduced on account of the UK imposing C-Ban. So no doubt the FTA will enhance our export prospects, but they cannot be the engine to drive our export ambitions of $1 trillion. This ambitious target can be achieved only by making our exports more price competitive, and that can be done through improvements in our infrastructure, through reduction in transaction costs, through cutting down the bureaucratic red tape, by reduction in logistics costs.
So that is the area where real gains will be derived. So certainly FTAs will lead to an increase in exports, but may not be to the extent that it will give us a bump which will help us cross the threshold of $1 trillion. That $1 trillion export target can be met mainly by domestic reforms.
Puja Mehra: It seems to me that the FTAs help create a level playing field for Indian exporters to the country with which the FTA is being signed. But isn't it also true that in a country like the UK, there are compelling reasons for them, especially when the economy is weak, to understate the extent to which Indian exports to their economy would increase over a period of time due to this FTA?
Abhijit Das: Okay, so let's double this figure, Puja, from $1 billion each year to $2 billion. It still remains low. And let's also not forget that while we will make export gains, we might be conceding considerable ground in areas of non-trade issues in the area of, let's say, a digital economy.
We might be tying our hands in those areas and those are the areas of real future economic prospects. So we have to balance our export ambitions, which in any case will not be very high with what we lose in terms of giving up our policy space for giving a boost to our domestic producers through commitments in the FTA. So that is another area, another aspect which we have to bear in mind.
Puja Mehra: Right. Understood. Thank you. Thank you so much.
Abhijit Das: Thank you, Puja, for having me on your podcast. It was a pleasure discussing a very interesting issue with you regarding our ongoing and recently concluded FTA negotiations with the UK. Thank you once again.
Puja Mehra: Thank you, Professor Das.
