The UK's rush of post-Brexit trade deals reflect the country's intent in shifting away from reliance on trade with European nations and the US and towards more focus on Asia. The new UK–India trade deal appears to reinforce this shift significantly.
The New Deal Could See UK Exports to India Double
Governments of both the UK and India appear to be very excited about this new free trade agreement (FTA). It’s possible that it could allow the UK to nearly double their exports to India, increasing the UK’s total trade by up to £28 billion ($37.7 billion) a year by 2035, as well as boosting wages by up to £3 billion ($4.02 billion). Currently, UK enterprises must pay high tariffs of up to 19% when exporting to India. This is much higher than the average US tariffs of 2%.
This means there is significant room for growth if the UK can lower these tariffs, which this new agreement will do. The move could also strengthen the UK’s prospects of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). But even if it does not, the UK has free trade agreements with 95% of CPTPP countries, so a trade agreement with India could have a far greater impact.
This deal is one that will likely see long-term benefits as opposed to short-term ones. UK supply chains are unlikely to benefit immediately because India's trade is not particularly complementary with the UK's at the moment, meaning Indian exports are not very well suited to UK’s import demand.
The UK is also looking to receive a “first mover advantage.” India doesn’t currently have such a large FTA in place with other European nations or the US, so Britain could benefit as the Indian economy continues to grow. India is forecasted to become the world’s third-largest import market by 2050.
The Risks and Rewards
Partially because the Indian economy is still developing, it is more adaptable and malleable than advanced economies. This gives the Indian economy a comparative advantage in exporting some business services because it is changing far more rapidly than more mature economies. For example, India has eight sectors emerging as new comparative advantages, including pharmaceuticals and research and development, compared to just one such sector in the US in the past decade.
There are also inherent risks when signing such a large deal with a still-developing economy, though. The Indian economy is relatively closed, so there is uncertainty there for UK firms. It’s difficult to know how much demand there will be for foreign products and services that are currently unfamiliar to a majority of Indians. But this uncertainty appears to be a price the UK is willing to pay to access this fast-expanding market.
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