UK trade pact is forerunner to India-US deal

INDIA’S free trade agreement with the United Kingdom has grabbed headlines, but it is likely to be overshadowed soon by the forthcoming deals with the European Union and the United States. The UK occupies a disproportionately large share of public interest owing to the close cultural and societal ties between the two countries. But the economic and business relationship is considerably smaller than with the EU, the US or China, which remain this country’s major trading partners.

Bilateral trade with the UK is roughly $56 billion annually compared to more than double that with the others. Even in terms of investment, the UK ranks only sixth, while the US holds the third place.

Yet, the Comprehensive Economic and Trade Agreement (CETA) is remarkable for a variety of reasons and has deservedly been given considerable attention.

The first pathbreaking element is that tariff concessions have been granted on previously rigid product categories. This includes Scotch whisky, wines and automobiles. In the case of alcohol, high duties were meant to protect the domestic industry, but have had little effect on the market demand, which continues to grow for premium liquors. The reduction in tariffs may affect the competitiveness of indigenous alcohol producers, but it is also likely to spur them to improve product quality.

As far as automobiles are concerned, tariffs have been lowered largely in the luxury segment. Moreover, the domestic auto industry is thriving and will likely remain unaffected by the British imports at this stage of development. What is significant in these concessions is the dramatic reversal of the rising import duty trend initiated in 2014.

The process of rolling back tariffs had already been initiated in this year’s Budget. The peak rates of over 100 per cent had been eliminated, bringing the average tariff down to 10.6 per cent from 11.55 per cent earlier. But this trade agreement has carried the move forward relentlessly and it seems there is no looking back now.

The second highlight of CETA is the expanded market access being provided to Indian goods in the British market. Nearly 99 per cent of the tariff lines have been eliminated, granting Indian exports duty-free access. This will give a boost to sectors like leather, textiles, processed food, chemicals and jewellery. It will substantially remove disadvantages being faced from competitors of other emerging economies like Vietnam, Cambodia and Brazil.

And finally, the agreement underlines India’s firm stance in refusing to provide easy market access in areas like dairy, fruits and edible oils. This suggests these will remain red lines in the upcoming trade deals. The guardrails in this area are meant to protect the country’s subsistence farmers from having to face competition from the highly corporatised agriculture sector of advanced economies.

It is in this framework that one must view the two trade pacts which are now being tied up — one with the US and the other with the EU. Their outcomes will have a much greater economic impact than the UK trade deal since they are India’s largest trading partners. Bilateral trade was $136 billion with the EU and $118 billion with the US in 2024-25.

The contours of these deals have been reported on, but there can no longer be any doubt that New Delhi is prepared to reduce import tariffs in areas earlier considered sacrosanct in order to get the benefit of market access in major export destinations.

In the case of the EU, this augurs well as India was previously rigid about not reducing duties on alcohol and automobiles. The softened stance on wines and spirits is bound to be welcomed by EU trade negotiators, for whom this has been a critical element of any deal. Yet, on automobiles, there is likely to be more caution than in the UK case, given the wide variety of vehicles manufactured in this economic zone.

Similarly, regarding the US, there is a recognition that reducing duties on specifically American products like bourbon is not likely to impact domestic players. Tariffs have already been cut on the motorcycle segment, especially the iconic Harley Davidson, which has often been mentioned by US President Donald Trump.

The toughest talks must have been around dairy and agriculture as Commerce Secretary Howard Lutnick bluntly declared several times that India would have to open up these sectors to have a fair trade deal. While India’s negotiators are bound to stand firm to protect the farming community, the entry of genetically modified products is another issue. If this is allowed for purposes of animal feed, it would be a disappointing development as this could be the thin end of the wedge.

The issue of non-tariff barriers (NTBs) is equally important in ensuring greater market access. The India-UK pact should have dealt with the issue of the proposed carbon tax instead of sidestepping it till it is actually notified in 2027. The carbon border adjustment mechanism (CBAM) will take effect next year in the EU and needs to be tackled in the ongoing negotiations. The levy on all potentially carbon-emitting substances could end up making Indian exports much more expensive.

Similarly, the NTBs in the US are a concern, and wrinkles need to be ironed out, especially the imposition of stringent sanitary and phytosanitary measures on agriculture and marine exports.

There are, thus, many disparate elements that affect trade flows, but there is no doubt the India-UK trade pact has broken the ice in terms of lowering this country’s tariff barriers.

It is all to the good that old shibboleths have been dispensed with and a fresh vision has been brought to the issue. The earlier trend of raising import duties was protectionist and not in the industry’s long-term interests. It may be required to prevent dumping by countries like China which provide heavy subsidies to the manufacturer.

As a general policy, however, such an approach can only isolate the industry from global supply chains. The agreement has showcased a new outlook and is bound to lead to a brighter future in exports.

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