How Brexit can change trade negotiations between India and UK
Brexit is approaching fast. The deadline of October 31, 2019, is less than a month away. Till now, there is no clarity on whether the UK will have a deal with the EU. Some sort of a deal appears likely, given the legal necessity, and recommencing of Parliament following the directives of the UK Supreme Court. At the same time, possibility of fresh elections can’t be ruled out too. Notwithstanding these multiple possibilities, the reality of the UK and EU parting ways is obvious. What does that mean for others, including India, in so far as trade relations with UK are concerned?
Brexit is a more vexing issue than most comprehend. Since 1973, when the UK economically integrated with the EU, the world hasn’t looked at EU and UK markets separately. This is in spite of the UK not giving up the British Pound and not joining the Schengen regulations for common visas. From a trade perspective, the most important characteristic of UK and EU being together was that of tariffs being same for both. The other important aspect is the preferential access that service suppliers from the UK and EU get in each other’s markets; while non-EU service suppliers face several and often disconnected regulatory barriers, including taxation laws, across Europe, such impediments don’t arise for UK suppliers. The situation would change post-Brexit as Europe and UK would need to be looked as discrete economic entities.
The first implication of Brexit for countries like India, is the need for recognising distinct trade and investment relations with another ‘new’ major economy. Based on nominal GDP, and as estimated by the IMF for 2019, India and UK are the world’s fifth and sixth largest economies. India has a nominal GDP of around $3 trillion, followed by the UK with a GDP of $2.8 trillion. Following Brexit, India would have to formalise trade and investment relations afresh with UK, distinct from those with the EU. While partly smaller than India in economic size, the UK, nonetheless, is a major economy. It is a part of the G7 group of world’s largest advanced economies. It is also a member of the G20 group of world’s most influential economies, comprising the largest of the advanced and emerging market economies. Trade and investment relations with the UK have significant implications for India and need to be crafted accordingly.
The UK is expected to follow a proactive external trade policy after Brexit. There are two parts to the policy. The first is the effort to retain trade relations, through ‘continuity agreements’ with countries with whom the EU has FTAs. The second is to explore trade agreements with new countries. Presumably, the first part is a more immediate priority. On the second, there are countries that might receive precedence in engaging and be treated ‘first tier’. Earlier this year, deposing before the India-UK Foreign Affairs Committee of the House of Commons, a senior UK Minister had indicated that India, while being important, was not ‘first-tier’ in UK’s post-Brexit FTA schemes. But more robust indications on the UK’s interest in working on trade engagement with India have come in the recommendations in the report of the Foreign Affairs Committee itself, emphasising priority to trade talks with India. These are followed by recent positive comments by prime minister Boris Johnson on a FTA with India following his meeting with prime minister Modi on the sidelines of the last G7 Summit at France in late August 2019.
Much hurdles and roadblocks would be encountered by India and the UK whenever they discuss a bilateral trade deal. These would not just involve tariffs on beverages, automobiles and auto-parts, but also non-tariff barriers like safety and quality standards for goods, conditions for movement of professionals and data security. There would be carry-forward of many issues that came up during India’s now-stalled FTA negotiations with the EU. These issues would be revisited by India and the UK in a post-Brexit context with the UK refocusing on comparative advantages after separating from EU, and India evaluating market access options solely on the basis of prospects in UK.
As mentioned earlier, the eventual character of Brexit would decide the course of future trade talks and engagement between India and the UK. A deciding factor in this regard would be whether the UK’s MFN tariffs, post-Brexit, remain the same as those now. The current UK MFN tariffs are those of the EU. A ‘hard’ separation might produce differences with the UK implementing tariffs distinct from EU. Similarly, there could be several other internal regulations influencing trade standards, investments and service supplies that would come up in the UK and influence trade talks. Nonetheless, for India, and several other countries, negotiating trade deals with UK—distinct from EU—might imply greater negotiating flexibility and better prospects of meaningful outcomes. A group of 28 heterogeneous economies is a far more difficult trade bloc to deal with than an individual economy. It would be good if India seizes the opportunity to get going on a deal with UK that corresponds to its interests.
(The author is Senior Research Fellow and Research Lead (trade and economic policy), Institute of South Asian Studies, NUS. Views are personal)