Trade priorities: Govt must help exporters maximise gains from UK, EU FTAs

In this period of external sector stress, owing to both the continued blockade of the Strait of Hormuz and Trump tariffs, it is important that India make the best of its market diversification efforts through free-trade agreements (FTAs), particularly those it has signed with the United Kingdom and the European Union. The trade deal with the United States also needs to be taken to its logical conclusion. There are, however, some challenges in both cases.

 

With the US, while negotiations have restarted, there are several factors that will continue to cast a shadow of uncertainty on outcomes. Foremost, the basis of the framework of an interim trade agreement announced on February 7, that is, a 25 per cent reciprocal tariff, has been invalidated by the US Supreme Court overturning the International Emergency Economic Powers Act (IEEPA) tariffs. The uniform 10 per cent tariff imposed since on all trade partners under Section 122 of the US Trade Act is set to expire on July 24. Interestingly, it is also facing legal scrutiny, as the US does not currently face any “balance-of-payments” crisis, the necessary condition for the imposition of tariffs under Section 122.

 

To replace the reciprocal tariffs, the US has initiated investigations on an expedited basis under Section 301 of the US Trade Act for “unfair trade practices” targeting several trade partners. India, which is included in these investigations for “industrial excess capacity” and “forced labour”, has submitted a strong rebuttal in its written comments to the US earlier this month. This will need to be effectively carried forward by India in the ongoing trade deal negotiations. This is important as under Section 301, if investigations confirm trade partner’s discriminatory trade practices, the US can impose a very broad range of remedial actions, including import restrictions and withdrawal or suspension of trade agreement concessions.

 

Tariffs imposed under this section do not have a tariff limitation as in Section 122, and the period of action by the US under this Act, while specified as four years, can be extended without congressional approval. In this context, it may be useful to recall that tariffs imposed on China during the first term of the Trump presidency under Section 301 were not only retained by President Joe Biden, but also extended to cover other strategic US imports like semiconductors and solar panels.

 

Finally, Section 232, under which the US has already imposed higher tariffs on steel and aluminium, has been extended to include derivatives of these metals as well. New investigations have also been launched for semiconductors and pharmaceuticals. In its ongoing negotiations with the US, India will need to ensure concessions against future possibilities of higher tariffs on these items, which are significant for their existing and potential export possibilities. South Korea, for example, in its trade deal with the US last year, was able to secure prior concessions on Section 232 items, including on their derivatives as well as semiconductors and pharmaceuticals.

 

With the UK and EU, while the FTAs are deep and potentially beneficial, exporters will face the challenge of overcoming the adverse impact of the Carbon Border Adjustment Mechanism (CBAM).

 

The UK will implement the CBAM from January 1, 2027, on six commodities: Aluminium, cement, fertiliser, hydrogen, and iron and steel. While the text of the India-UK FTA, to be implemented next month, does not include any provision on the CBAM, a “rebalancing mechanism” is reported to have been negotiated by India, details of which are not known. However, as UK importers will have the choice to use actual verified data or government default values for carbon emissions, the government needs to help increase the number of internationally accredited verifiers to ease and enhance India’s exports. This is particularly relevant for micro, small and medium enterprises (MSMEs), which, unlike large producers, may not be able to afford global verifiers. This is also important from the perspective of the EU’s CBAM, which is already effective. In fact, India has not been granted any exemptions or concessions from the CBAM in its FTA with the EU.

 

More importantly, having implemented the CBAM on six items in January this year, the EU Parliament is now considering a proposal to increase coverage to 180 items. The expanded list is designed with the objective of including products across the value chain as well as indirect emissions. For example, downstream items of steel and aluminium such as vehicles and auto components —chassis, engines, suspension systems, and gearboxes — are among the items included in the expanded list under CBAM. These are among the significant exports where India is hoping to see further expansion, having negotiated significant tariff concessions under the bilateral FTA.

 

Inclusion of items like electricity and transport in the expanded list implies bringing embedded emissions also under CBAM.  This will mean added complexity and costs for both producers and regulatory authorities. Therefore, alongside more energy-efficient methods of production, the MSME sector would need handholding and the necessary infrastructure to map the embedded carbon emissions across the value chain. There is, therefore, a need to undertake prior estimates of additional costs for producers to prepare and enable them to exploit potential trade gains from the FTA with the EU.

 

In the textiles and apparel (T&A) sector, where again India is banking on tariff concessions under the bilateral FTA to make major gains in the EU market, the introduction of the Digital Product Passport (DPP) will take effect in July 2027 and hence possibly coincide with the implementation of the India-EU FTA. As part of the EU’s Ecodesign for Sustainable Product Regulation, the DPP is a unique digital product identifier, aimed at enhancing sustainability, traceability and transparency across the value chain to reduce the environmental impact of the apparel sector. It will be incumbent on the producer, wherever located, to provide comprehensive data on origin and composition of the material used, production processes, carbon footprint, chemical usage and labour conditions. The T&A sector in India requires awareness of these regulations and intensive preparation in terms of aligning its products with the emerging DPP standards. Creating necessary digital infrastructure for data collection and documentation should therefore begin immediately to better enable producers to realise the expected gains from tariff concessions under the FTA, especially for labour-intensive sectors.

 

To sum up, India’s immediate priorities for trade policy should be defined by the imperatives of enabling Indian exporters to maximise potential trade gains from the FTAs with the UK and EU and minimise losses on account of uncertainties resulting from unfair tariff impositions by the US.   

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The writer is professor, School of International Studies, JNU. Her book India’s Trade Policy in the 21st Century was published by Routledge, London.

 

The views are personal