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Tuesday, January 25, 2022

A trade deal with India in 2022 would be a big prize


Trade negotiations with India are not for the faint-hearted.

However, with no progress on a free trade agreement with the United States and none expected in the near future, the formal start of talks with India, which will be announced in New Delhi on Thursday, will be the largest negotiation the UK government will undertake this year.

India is on track to become the world’s third largest economy by 2050, and the government expects UK-India trade to more than double over the next decade.

The prospect of a free trade agreement with India is described as a “golden opportunity” by Trade Secretary Anne-Marie Trevelyan, and there are certainly large commercial stakes at stake.

George Riddell, EY’s director of trade strategy, says the move to open negotiations is a “welcome step” that is already generating “real enthusiasm” in the business community.

But, with so many vested and vulnerable interests to safeguard, India has always been hesitant to liberalise.

The EU has been attempting to reach a meaningful agreement with India for years, with little success. Australia, too, has been negotiating a deal for over a decade.

Particularly difficult areas include government procurement policy and trade in services.

“The current terms under which service providers trade between the UK and India date from 1995 and do not take into account any of the technological advances that have occurred over the last twenty-five years,” Mr Riddell notes.

And India always makes stringent visa requirements for Indian professionals and students seeking to work and study abroad.

According to British officials, both sides are now eager to complete a UK-India agreement as soon as possible, ideally by the end of the year. However, this is a lofty goal.

So, why try to reach an agreement with India if history suggests it will be difficult?

It is partly due to the country’s size and population, and partly due to: well, where else?

China is simply out of bounds. The United States has said no. Other large emerging economies, such as Brazil, are extremely difficult to negotiate with. And a deal has already been reached with the EU, albeit on less favourable terms than the UK had before leaving the union.

Smaller deals, such as those already agreed with Australia and, in principle, with New Zealand in 2021, are possible. The government sees those agreements as important steps toward membership in the CPTPP, the world’s most dynamic trade agreement, in the world’s most dynamic region.

However, the unsettling reality is that, following its exit from the EU, the UK is attempting to rebuild its trade policy almost from scratch at a time when, broadly speaking, many governments are focused on domestic economics.

“Some of the momentum has shifted away from reaching trade agreements in general,” says Emily Jones, associate professor of public policy at Oxford’s Blavatnik School of Government.

It doesn’t help that multilateral agreements are gaining little traction at the World Trade Organization. And, under both Donald Trump and Joe Biden, the United States has prioritised domestic worker protection.

So, with the Office for Budget Responsibility estimating that the UK economy will shrink by about 4% in the long run due to less trade outside the EU single market, officials are under pressure to make up ground elsewhere.

“The civil servants working on trade in the UK are really good,” Ms Jones says, “but I think politics drives the trade agenda.”

“The need to demonstrate success is being prioritised over the intrinsic economic merits.”

The government would argue otherwise. We know it is attempting to promote digital trade and service exports, both of which the UK economy excels at. The overall strategy, however, is less clear.

For example, when it comes to environmental issues, analysts argue that it is not immediately clear how UK trade policy fits in with UK climate goals.

The government wants to encourage a shift toward sustainability and biodiversity in agriculture. At the same time, it has agreed to liberalise agricultural trade with Australia, a country that farms on a much larger scale than the United Kingdom.

Minette Batters, president of the National Farmers Union, has been outspoken in her criticism of the Australia deal, calling it “one-sided” and with “extremely little benefit to British farmers.”

The government responds that it is attempting to enter into new types of trade agreements, with the implication that some people may not like it. And it intends to be different.

Last month, trade minister Penny Mordaunt delivered a speech in the United States in which she urged Washington to support the United Kingdom in what she described as a “global battle between two competing versions of capitalism.”

She argued that a free-trading UK is on one side, and the EU is on the other, as “a trading bloc pushing its regulatory system on the rest of the world.”

Ms Mordaunt continued, “Brexit is a major geopolitical event, and it necessitates a US response that recognises the moment, and the opportunity that it brings.”

Many critics were unimpressed, describing the speech as a beg for American support in trade matters.

Tony Blair Institute policy director Anton Spisak called it “a solid candidate for the most embarrassing speech delivered by a government minister in 2021.”

The government, on the other hand, insists that its critics are lacking in ambition, and that ministers are determined to give substance to the Global Britain slogan.

The state of trade policy in 2022, as well as the progress of negotiations, will be another major litmus test.

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