Monday, December 4, 2023

India-UK trade talks demand self-confidence on both sides

Two Aprils ago, the UK’s prime minister promised he would deliver a free-trade agreement (FTA) with India “by Diwali.” That prime minister, Boris Johnson, left office a few months later and 2022’s iteration of the Indian Festival of Lights passed without anything being signed. Since then, another Diwali (and another British prime minister) has come and gone with no trade deal on the horizon.

There is enough blame to go around. Both sides, however, are displaying remarkable short-sightedness in their negotiating tactics.

For the UK, the simple fact is that, outside the European Union, it is no longer an economy of such size and potential that it can expect massive concessions from trade partners. Brexiteers might have promised that a liberated Britain could negotiate without one hand tied behind its back by Brussels, the EU headquarters. But that hand is still there: British regulations are largely harmonized with EU rules and its supply chains are closely integrated with the EU’s as well.

Indian negotiators are pushing for strict “rules of origin” checks for tradable goods, to make sure that any FTA benefits apply only to goods made predominantly in the UK. They want to keep EU-made goods out—after all, an EU-India FTA is the subject of another (and far more difficult) ongoing negotiation. Brexit realists might well conclude that Britain’s FTA is being held hostage to what Brussels and New Delhi decide.

And then there’s the issue of migration. India’s asks on work and student visas are not excessive. Besides, the UK already imports hundreds of thousands of Indian students and workers a year. In 2022, the country issued 2.8 million visas: A quarter of these went to Indians.

Migration, however, has become such a divisive subject within the UK’s ruling but embattled Conservative Party that even recognizing this plain fact in print might cause a political firestorm. One of the strengths of the British economy is its ability to attract talent. If it negotiates like that’s a disadvantage, it’s hardly going to get a good deal for itself.

India, meanwhile, simply seems unable to escape from its bureaucrats’ tendency to kowtow to every interest group, no matter how small or unimportant in the larger scheme of things. One major hold-up, for example, was apparently India’s unwillingness to open its market to British professional services, including in law and finance. India’s relatively small but powerful law firms have scuppered negotiations on services trade before. But, for the UK—which has seen goods exports stagnate even as its services exports have grown—freeing up trade in services is a must.

It is somewhat disheartening that the sectors under dispute are exactly the same ones as decades ago. Spirits, for example. Why on earth is India trying to keep decent Scotch out of the country anyway? Who in this whisky-loving country, the largest market for the spirit in the world, will complain if the outrageous prices we have to pay for a wee dram decline a bit? Indian whiskies are of two kinds: ones that are so good they do not need protection and those that are so awful they don’t deserve them.

Alongside alcohol and spirits, the intellectual property rights (IPR) chapter is also under dispute. And here, as usual, it seems that India is trying to prop up its world-famous manufacturers of generic pharmaceuticals.

Yet, chasing high-volume production with minimal domestic value-added through research—Indian pharma companies spend about 8% of revenue on R&D, compared to 25% or so globally— has led us into a dangerous dependence on Chinese-made active pharmaceutical ingredients. While the government’s stated pharma policy is to move India up the value chain in this sector, its trade negotiators are trying to protect an outdated business model at cross-purposes with that goal.

Trade negotiations are about the future, about economic confidence, and about what kind of economy you think you can be. An India confident in the skills of its lawyers, the choices of its consumers and the quality of its pharmaceuticals would seize an opportunity for freer trade with one of the few rich countries still keen on trade deals.

And a UK genuinely convinced of its ability to chart a path independent of Europe would make concessions on migration and rules of origin that fit with that self-image. I’m not sure how many more Diwalis will pass before both sides develop the self-confidence needed to close this deal. ©Bloomberg

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