To say that there’s a lot happening in the world of international trade right now would be something of an understatement. Since Donald Trump’s ‘Liberation Day’ threatened to impose sweeping tariffs on all US trading partners, a flurry of deals have emerged.
The reason is that most deals we’ve seen in recent months have been stopgap formalisations of a new higher-tariff status quo. They have, without exception, allowed nations to bargain down to a moderately lower tariff level if they address Washington’s concerns; from rules of origin violations to domestic interference in their export industries; ideally with a promise to make large investments in the US economy. Integrative bargaining is out and distributive brinkmanship is in. The goal, alas, is no longer to specialise, trade and get rich together, but to buy as little as possible and to sell as much as possible. Mercantilist thinking is part of the new normal.
As Narendra Modi and Keir Starmer take to the stage today to sign the UK-India deal, they will, of course, exaggerate and embellish. Beyond the spin, however, we must ask: is this deal just a hollow negotiation, or is it the real deal? I’m happy to report that, with some major caveats, this is the genuine article.
The headline figures are that Indian average trade-weighted tariffs on British goods are falling from 15% to 3% over the coming years. The £11 billion of goods we buy from India will come cheaper. Bilateral trade is projected to increase by 39% in the long run – and these projections are made with largely static methods that underestimate the potential for whole new value-chains to become viable without such taxes. Particularly with Britain being the first among developed G7 nations to strike such a deal with what will soon be the third largest economy in the world, the growth in volumes will likely be stronger still. Key British exports (particularly financial and professional services), will be treated in most cases the same as they would if they were an Indian company.
The caveats are, firstly, that this deal, like any other, was signed under the political and electoral constraints inherent to any democratic government. India was always going to pick and choose some industries and voting constituencies to privilege. The second is that India’s economy is burdened with a patchwork of quasi-federal and state rules that restrict and control commerce domestically perhaps more than anywhere else on planet Earth. Barriers between Indian states are both qualitatively and quantitatively more problematic than most international barriers to trade. Trade with India is very difficult when, for instance, a British good imported via Mundra Port in Gujarat can’t pass across freely into neighbouring Rajasthan.
These both produce market distortions that make doing business in India exceedingly complex. Though they featured heavily in discussions, this deal does little to resolve them. An Investor-State Dispute Settlement (ISDS) mechanism has failed to materialise in time for the signing – meaning British businesses still won’t have the legal assurance that comes with being able to sue if domestic policy changes in such a way that harms their investments. But other more controversial provisions, for instance to allow British firms to bid for £38bn in Indian government contracts, as well as more than a few anecdotal reports, suggest that we will get a commitment to design a ISDS mechanism over the next few months.
As these agreements come in, and as India makes progress tearing down its internal barriers, Britain’s businesses will be better placed than competitors to buy from and sell into this enormous market. This is not the gold standard – like the deal we signed with Australia – but it’s a competent execution in the realistic landing zone for a deal with India, hamstrung as it is by its political and administrative challenges.
There is a genuinely optimistic global story to be told: an imperfect deal that opens the door for more Western democracies to trade with India, that may help to free India’s vast market and to nudge it closer to geostrategic alignment with the West. A deal, by the way, that exists because of Brexit. Our politicians deserve some credit, both the Tories who worked on it and Jonathan Reynolds who had the instinct to press on, finish it off and then own the success.
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