Why India should not rush into a free trade deal with UK or EU

Brexit mess to weigh heavy on UK & EU for years to come

Business

September 15, 2020

/ By / New Delhi

Why India should not rush into a free trade deal with UK or EU

For any trade deal India needs to ensure that it exports will have greater market access

December 31 deadline for a deal between the European Union and the United Kingdom for an agreement to govern future trade ties is looming large. But a deal in time looks increasingly dicey, reason enough for India to rebuff any attempt by either UK or EU to sign a fast-track free trade pact.

Last week the UK and Japan announced that they had reached a bilateral free trade agreement that would govern their trade ties from the year 2020 when the UK completed its exit from the European Union and hence also exited the ambit of the EU-Japan trade pact. Both the countries were jovial at reaching this milestone.

For very obvious reasons the UK leaders have been trying for a substantial post-Brexit trade deal with any nation since almost early 2017, but it is only now that they have actually signed their first one. For Japan’s economy, which had been listless for decades, before its crash this year due to the coronavirus pandemic, the deal may offer some sops to boost Japanese exports to the UK market.

Indeed, the UK has been hungry to stitch up its own deals with most countries for many years now, ever since the infamous referendum of June 2016 that has since hurtled the UK and the EU into a blind zone, hurting both the economies seriously. India, with its large and rapidly growing market, has for long been low-hanging fruit for the UK, with the former Prime Minister Theresa May rushing to India soon after her election in 2016 with the hope of winning a rapid free trade agreement in her discussions with Indian Prime Minister Narendra Modi.

Fortunately, the Indian government was not even half as enthusiastic as May for a deal and the visit ended on a whimper. Ever since then, however, successive ministers and even May’s successor at 10 Downing Street, Boris Johnson, have been eagerly cajoling India for launching fast-track negotiations for their trade deal. Of late, India seems to have been warmer to the UK’s suggestions and the two nations have indeed begun to negotiate at least broad contours of a bilateral FTA.

However, India has recently signalled a significant shift in its approach to the issue. In July 2020 Indian commerce and industry minister Piyush Goyal said that India could begin trade talks with the UK, covering a limited number of items in order to expedite the negotiations. At the same time, Goyal said that India was also negotiating with the European Union and that India would sign a deal depending upon which of the two negotiations reached a conclusion earlier.

Though India may have started to talk with both the protagonists in the nightmarish Brexit trade, it would be foolish or even suicidal for India to rush into a deal with either until the dust settles on Brexit and there is adequate clarity on the shape of EU-UK relationship from 2021 onwards, notably on the most controversial part of these divorce proceedings – the trade relations.

Currently, even the EU and UK governments have little clue how the UK would be able to trade with non-EU nations post-Brexit. Though the UK has been boasting that it would rapidly reach trade pacts with its key trading partners, to overcome the shock of Brexit, it is easier said than done. According to two leading European Union law specialists, the UK will be unable to have frictionless, tariff-free trade under WTO rules for up to seven years in the event of a no-deal Brexit. The British government’s own statistics have estimated that under the worst-case no-deal scenario, GDP would be 10.7 pc lower than if the UK stays in the EU, in 15 years. Earlier this month, the UK put the cost of Brexit at GBP 5 trillion, a huge price to pay indeed.

Though India has a good reason to hold off the discussions of a trade deal with both the EU as well as the UK, until a clear and firm picture about Brexit emerges, the absence of a trade deal with its largest trading bloc is unsettling for India as well as the EU and eventually the UK, which is the largest G20 investor in India and the largest trading partner for India, within the EU.

For the EU also, it is crucial to finalise its FTA with India, else it risks losing share in what could be the world’s biggest economy, at least on the basis of purchasing power parity and the 1.5 billion consumers as India’s population is expected to reach this level in the next two decades. In the last two decades, already have been huge changes in the ranking of India’s trading partners and China has emerged as the single largest exporter to India, its exports have risen from a mere USD 1.5 billion in the year 2000 to over USD 76 billion last year. Taken individually, the EU members lag far behind China as well as the US. With the UK exiting the bloc, the EU would lose its cherished status of being the largest trading partner, including both imports and exports. Though the current tensions between the two Himalayan neighbours may have some impact on their bilateral trade as well, it is unlikely to last long as economics is bound to trump politics sooner than later.

Other nations and regions have indeed started profiting from their own FTAs with India as is the case with the ASEAN nations. Bilateral trade has grown to over USD 82 billion and the two sides hope to take it to USD 100 billion by next year. The EU-India trade growth looks rather sedate compared with these figures.

Despite these advantages, India would still do well to go for a comprehensive trade deal with both UK and EU but finalised only after EU and UK figure their own relationship first. If India jumps the gun on this and gets into bed with one or both the divorcing partners before the divorce is completed, it may indeed get caught in the cacophonous crossfire that is bound to result from an acrimonious Brexit. It is no easy task to live happily in a ménage a trio, after all.

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