India must adapt to evolving global trade norms for meaningful FTAs

News reports suggest that India and the United Kingdom (UK) will resume negotiations on the free-trade agreement (FTA) early next year. Both countries have been negotiating to arrive at a mutually beneficial agreement since 2022. The progress in recent months was halted owing to elections in both countries. Since India is not a member of major regional trade agreements, it is crucial to finalise ongoing trade negotiations to unlock opportunities for market access and global integration. However, as developments thus far show, all this will not be easy. Several issues will need to be addressed on both sides. India, for instance, expects increased mobility for its skilled labour force. The UK, which has a strong services sector, also wants better access to Indian markets besides lower tariffs on a range of goods.

 

However, the bigger impediments could be issues like environment and labour standards, which are said to be high on the UK’s agenda. Some of these need to be addressed also in other negotiations such as the FTA with the European Union (EU). The EU is in the process of implementing the Carbon Border Adjustment Mechanism (CBAM). The idea, according to the EU, is to check “carbon leakage” and would initially apply to products with high carbon intensity in production such as cement, iron and steel, fertilisers, and aluminium. By imposing higher tariffs and other costs, the mechanism will essentially affect the competitiveness of countries like India. The UK is also implementing similar environmental norms. Therefore, issues like environmental and labour standards could pose challenges to concluding meaningful FTAs.

 

Such standards are seen as discriminatory from a developing country’s standpoint. There are multiple layers to how the global trading systems are evolving and will create problems for developing countries. The imposition of such standards at various levels indicates developed countries’ inward-looking policies and restricting imports through non-tariff barriers. The CBAM, arguably, also goes against the established principle of common but differentiated responsibilities in addressing climate change. Developed countries, having historically contributed the most to carbon emissions, now expect developing countries to adhere to stringent standards, even at the expense of their developmental requirements.

 

There is also a debate about whether such mechanisms comply with World Trade Organization (WTO) rules. However, given the WTO’s dispute-resolution mechanism is dysfunctional, such concerns may remain unaddressed. From a policy perspective, given the evolving global environment, India’s options are worth debating. India should undoubtedly put forward its position in negotiations to protect its interests. However, this may not be enough. Also, putting retaliatory tariffs is not an appropriate response and is unlikely to benefit in the long run. Instead, to be able to get into trade agreements, India needs to start preparing. It was announced in the Budget that the government will do a comprehensive review of Customs duty rates. Not much is known about the progress and whether the government is consulting domain experts in the exercise. Lower tariffs will help India integrate into global value chains. According to estimates, about 70 per cent of global trade happens through value chains. Besides, India should aim to improve labour and environmental standards. Reducing carbon intensity, for instance, is also in India’s interests. Given that India’s share in global exports remains around 2 per cent, it is not in a position to dictate terms. Practically, it is in India’s interests to adapt to the evolving global conditions.