Gains from the UK FTA: The glass is half-full, the glass is half-empty

The India-United Kingdom (India-UK) trade agreement came into force on July 15 this year, a year after signing. Some say India has embraced openness, signed its first comprehensive agreement with a G7 economy, and made a leap into free trade. Others worry that imports will surge, the bilateral deficit will widen, and domestic firms will suffer. Both reactions tell us more about Indian thinking on trade than about the agreement. 

Consider the deficit anxiety first. Bilateral trade deficits are accounting artefacts, not measures of economic success. India imports inputs where they are cheapest and exports where value is highest. Rough diamonds become polished exports, crude oil becomes refined petroleum products, and smartphones are assembled from imported components. Every successful trading nation participates in global value chains with a mix of bilateral surpluses and deficits. 

What matters is whether trade agreements make India a more open economy. The gains come not from exporting more than we import but from cheaper imports disciplining domestic firms, greater integration with global firms and standards, and the certainty that treaty commitments provide investors. These raise Indian firm productivity, which is the real source of Indian prosperity. The useful question is, therefore, not the bilateral balance but how deep this agreement is, and how much deeper it could have been. 

By Indian standards, the treaty is relatively deep. It has 30 chapters and reaches territory long treated as off-limits in India: Government procurement, labour, environment, digital trade, services across 137 subsectors. Like all advanced economies, the UK has few trade barriers to start with, and they have given duty-free access to 99 per cent of India’s tariff lines from day one. A social-security convention exempts Indian workers in the UK from dual contributions for five years. The agreement also creates institutional machinery: A joint committee of senior officials, or ministers when agreed, supported by working groups on rules of origin (ROOs), Customs, mobility and innovation. This is welcome, though binding commitments remain limited. An important step is the acceptance of self-certification by exporter or producer for claiming preference, instead of relying on government approvals for individual origin claims. This is a correction of the suspicion that has characterised India’s approach to imports in recent years, driven by concerns over Chinese imports. 

Having said this, a “deep” treaty by Indian standards is not too deep. This “Indian standard” is defined by narrow-minded agreements of the 2000s. Those had little interest in building India as an open economy. Measured against world standards, this deal significantly retains a suspicious approach to global engagement, thus limiting the gains for India.

Look at the asymmetry of timelines. The UK eliminated duties on 99 per cent of Indian goods immediately. India cut tariffs on 90 per cent of lines, but only about 30 per cent of imports from the UK go to a zero tariff immediately. The rest happens in phases over 10 years. 

Indian tariffs were outlandish at the outset by world standards: 64 per cent on average for agricultural products, 150 per cent on gin and whisky, and about 110 per cent on cars. When duties begin at such heights, even a partial retreat yields a spectacular fall in the average. Whisky drops from 150 per cent to 75 per cent now, and reaches 40 per cent only in the 10th year. Cars reach 10 per cent but there is a quota, and the mass-market electric-vehicle segment is walled off. The rates for dairy, which sits behind some of the highest tariffs of all, were not cut at all, directly harming the interests of better nutrition for India’s poor. India has moved from absurd protectionism to high protection. This can be counted as progress but not free trade. The gains to India are limited and accrue very slowly. 

On regulation, there are committees but not commitments. The annexe on professional services merely “encourages” regulators to enter negotiations on mutual recognition of qualifications; no deadline is attached. The innovation chapter creates a working group whose discussions “may cover” future regulatory approaches. For a contrast, in the European Union-Vietnam agreement, Vietnam bound itself to accept European Union vehicle certificates five years after entry into force, and ratified ILO (International Labour Organization) conventions on a dated road map before the first tariff was cut. Without such discipline, tariff concessions by trading partners are not a lever to improve the working of the Indian state. The House of Lords International Agreements Committee, reporting in January this year, said key UK interests were “disappointingly excluded”, including legal services and investment protection, and flagged the unfinished bilateral investment treaty, the absence of commitments on cross-border data flows, and the risk that Indian quality control orders could undermine the agreement. 

Government procurement should maximise value for Indian taxpayers through competition. Yet the agreement grants British firms only limited access. British firms get treaty-backed access to about 40,000 central-government tenders, a genuine first. But they enter only as Class-II suppliers under the “Make in India” order, with 20 per cent UK-origin content required, and Class-I domestic suppliers retain first preference. Subnational public finance gets no gains. 

The Carbon Border Adjustment Mechanism (CBAM) is correctly kept out of the treaty. It sits alongside goods and services tax as a fundamental pillar of domestic policy. European firms and Indian exporters are treated identically in the CBAM; it is not a part of trade policy. Investment commitments and provisions remain out of scope. There is a World Trade Organization-style state-to-state mechanism for dispute resolution with concrete timelines. However, the really valuable mechanisms for investor-state disputes are missing. 

The glass is half-full. India is gaining confidence, we are emerging from third worldism, and the UK free-trade agreement (FTA) is better than all Indian work prior to this. The glass is half-empty. This treaty continues to interfere with the Indian national interests of achieving an open economy, which would fuel economic growth. Our next steps should be to maximally translate the text of this treaty into trade openness, and then push to a next higher level with the next FTA.

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The author is a researcher at XKDR Forum