Yahoo Finance UK trade deal with India could be bigger than US agreement
The UK’s trade deal with India could provide the UK with a bigger deal than its defunct agreement with the US, new research has shown — although it carries more uncertainty and risk.
According to the Resolution Foundation, Britain’s pivot towards closer trade ties with the Indo-Pacific region could deliver big economic benefits after the UK’s exit from the European Union.
Its latest report for The Economy2030 Inquiry with the London Stock Exchange (LSEG.L), funded by the Nuffield Foundation, said that much of the focus around the UK’s pivot towards Asia is around its ambition to become the first European nation to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
This agreement could cover 8% of current UK trade.
However, as the UK already has Free Trade Agreements (FTAs) with 95% of CPTPP members, a trade agreement with India could have a far bigger impact.
The Foundation said that India is a faster growing economy than the CPTPP bloc, whose imports are expected to grow at below the world average in the years ahead.
Read more: UK aims to get slice of India's £2tn market as it launches free trade talks
The agreement will create significant benefits for both countries and could almost double UK exports to India, boosting UK total trade by up to £28bn ($37.7bn) a year by 2035, and increasing wages by up to £3bn.
The short-term benefits for UK supply chains are, however, limited by the two countries’ trade being less complementary, meaning Indian exports are less well matched to UK import demand.
UK firms exporting to India currently face far higher tariffs — 19% on average — than they do to the US at 2%, “so there is far more scope for trade liberalisation”, the report said.
Securing an FTA with India could also give UK firms a "first mover" competitive advantage over exporting firms in the US and EU, which don’t have preferential access to the Indian economy.
India is forecast to become the world’s third largest import market by 2050, while its demand for business, telecommunications and computer services — sectors where UK export firms already perform well — is expected to treble over the course of the 2020s.
UK business services exports currently under-perform in India relative to other Indo-Pacific regions — accounting for just 1.8% of imports to India, compared to 3% in China, and 4.2% in Malaysia.
Read more: UK agrees first post-Brexit trade deal with Australia
It came with warnings that UK firms will also be exposed, however, to far more uncertainty about competition from Indian exporters, with eight sectors emerging as new comparative advantages for India — including pharmaceuticals and research and development (R&D) — compared to just one in the US in the past 10 years.
“While much of the focus has concentrated on becoming the first European country to join the huge CPTPP region, the far bigger potential economic gains and risks lie in more trade with the huge, rapidly growing, but still relatively closed Indian economy,” Sophie Hale, principal economist at the Resolution Foundation, said.
“Trade liberalisation with India is expected to boost UK manufacturing in the short term, but could also benefit business services, where UK firms already enjoy a competitive advantage, and where demand is set to soar.
“But India is changing as well as growing, so any trade deal means accepting uncertainty about the competition that will face UK firms, as the price for access to a fast-expanding market.”
It comes as India is set to become the world’s third biggest economy by 2050, with a bigger population than the US and EU combined.
