Why services talks hold key to India-UK bilateral trade agreement

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December 28, 2020 6:00 AM

The crux of the negotiations would be reciprocal market access in services. Both India and the UK have ‘offensive’ interests in services, given their structural similarities

The UK has been proactively pursuing trade deals with various countries after Brexit.The UK has been proactively pursuing trade deals with various countries after Brexit.

India and the UK have begun discussing a bilateral trade agreement. These efforts are in line with prime minister Boris Johnson’s assertion on the sidelines of the G7 Summit at France last year on ‘a big free trade agreement with India’ that featured prominently in his talks with PM Modi.

From an Indian perspective too, a trade deal with the UK has various benefits. The UK and India are roughly of the same economic size with nominal GDPs of around $2.6 trillion, after the contractions post-Covid-19. They are the world’s fifth and sixth largest economies. The UK is the largest economy in Europe, after Germany, and a member of the G7. Among the G7, India has an FTA only with Japan. A trade pact with the UK would considerably brighten India’s Trans-Atlantic preferential market access prospects.

What are the main trade issues to be negotiated? There are obvious tariff issues to be sorted out. The UK is expected to demand tariff cuts in beverages, mainly wines and spirits, and automobiles and transport equipment. On the other hand, India would be less demanding on tariffs given the already low MFN applied rates in the UK. But, it is expected to discuss non-tariff barriers (NTBs) at length. Going by the experience with European markets, Indian products have encountered multiple hurdles arising from quality standards, both sanitary and phytosanitary (SPS) and technical barriers (TBT). The UK’s commitment to ‘green’ standards might raise the qualifying bar for TBTs for many manufacturing exports—a fact that India should discuss upfront in negotiations.

The crux of the negotiations would be on reciprocal market access in services. Both the UK and India have ‘offensive’ interests in services, given structural similarities in their services trade patterns. With more than 5% share in global commercial services trade, the UK was the world’s second-largest exporter of commercial services in 2018. While also being an overall net exporter of commercial services, India had a share of 3.4% in global services trade and was the eighth largest commercial service exporter in 2018. A closer look reveals a striking similarity in the dominance of ‘other commercial services’ in overall services trade. Within this category, ‘other business services’ are the most prominent for both. Among business services, financial services account for 30% of total commercial service exports for the UK, while just around 4% for India. In contrast, ICT exports are almost 40% of India’s total commercial service exports, compared with 10% for the UK. These are clearly the sectors which will dominate negotiations.

The UK’s active interest in financial services will encourage it to seek greater access through liberal Mode 3, or cross-border investment provisions. Apart from finance, these interests would extend to telecom, retail and energy. Except for sectoral specificities, the negotiations are not expected to be troublesome. The UK has liberal foreign investment policies, and foreign service suppliers can easily establish a commercial presence. Prominent Indian businesses, such as HCL, Infosys, TCS, Wipro, ICICI Bank, are already providing commercial services in the UK. India too, has significantly liberalised incoming foreign investment policies in critical sectors. The UK service providers would be particularly keen on exploring prospects in India’s insurance and banking sectors that now permit majority FDI. India’s retail sector already has the UK suppliers like Tesco and Marks & Spencer, who, over time, would enhance presence in the digital retail space.

What about Mode 4 talks involving the cross-border movement of people? India perceives greater comparative advantages in Mode 4. The UK is expected to have an overall pro-immigration policy towards foreign talent and skilled workers. But given that anti-immigration sentiments forced Brexit, the prospect of Mode 4 talks getting influenced by domestic politics cannot be overlooked. There are, however, encouraging developments like the influential Foreign Affairs Committee Report of the House of Commons of 2019 that emphasised enhancing access for Indian talent for maximising the UK’s outreach of ‘Global Britain’. The UK’s move to allow graduating students to stay longer is also a positive context for Mode 4 talks.

However, on Mode 4, India might face the unexpected demand of liberalising its professional services sectors, such as accountancy and legal services. Both sectors in India are tightly regulated with respect to the inflow of foreign professionals. The UK’s proficiency in other business services, and a large pool of qualified legal and accountancy professionals, would encourage it to seek access in India’s large domestic services market. In some respects, the outbreak of Covid-19 and shift to digital means of cross-border service supply can help in negating several tricky issues in Mode 4 talks. Several professional services are now easily provided cross-border through digital means. In this respect, however, both countries would need to agree on data standards and security. Moreover, the issue of mutual recognition of qualifications would remain significant, even in the digital space.

The UK has been proactively pursuing trade deals with various countries after Brexit. In Asia, it has finalised trade agreements with Japan and Singapore and is discussing one with Australia. It has also expressed keen interest in joining the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). A trade agreement with India will be an important achievement for the UK in building preferential trade links with the Indian Ocean region, South Asia and the greater Indo-Pacific. One hopes both countries would be able to make quick and substantial progress on the FTA making PM Johnson’s impending visit to India a worthy occasion for formalising trade ties.

The author is Senior Research Fellow and Research Lead (trade and economics) at the Institute of South Asian Studies, NUS. Views are personal

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