UK trade agreement with India could be a bigger, but riskier, deal than the defunct US agreement

The UK’s pivot towards closer trade ties with the Indo-Pacific region, and particularly its trade agreement with India, could deliver big economic benefits eventually comparable in scale to the now defunct US trade deal, but it also carries far more uncertainty and risk, according to new Resolution Foundation research published today (Wednesday).

A presage to India?  – the latest report for The Economy2030 Inquiry with the LSE, funded by the Nuffield Foundation – examines the economic impact of the UK’s new trade pivot towards the Indo-Pacific region, following the deliberalising of trade with the EU, and the stalling of progress towards a US trade deal.

The report notes 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) – an agreement that could cover eight per cent of current UK trade.

However, as the UK already has Free Trade Agreements (FTAs) with the majority of CPTPP members, with 95 per cent of CPTPP trade already covered by FTAs, a trade agreement with India could have a far bigger impact. The report adds that India is a faster growing economy than the CPTPP bloc, whose imports are actually expected to grow at below the world average in the years ahead.

The Government’s own analysis points to the immediate consumer benefits of an India FTA via cheaper goods in areas where, with the exception of textiles, the UK does not have significant domestic production, and therefore jobs at risk. 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.

Taking a longer view however, the economic benefits of a trade deal with India could eventually be even bigger than the, now defunct, trade deal with the US, the report says.

UK firms exporting to India currently face far higher tariffs (19 per cent, on average) than they do to the US (2 per cent), so there is far more scope for trade liberalisation. 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 per cent of imports to India, compared to 3 per cent in China, and 4.2 per cent in Malaysia – so the potential for future growth is huge.

But while there are clear potential benefits of trade liberalisation with India, the report warns that UK firms will also be exposed to far more uncertainty about competition from Indian exporters.

The report notes that the Indian economy has already developed a comparative advantage in exporting some business services, and is changing far more rapidly than more advanced economies, with eight sectors emerging as new comparative advantages for India – including pharmaceuticals and R&D – compared to just one in the US in the past 10 years.

A successful pivot towards a closer trade relationship with India rests on the idea that the UK can, in services, emulate the German goods success in exporting high value manufacturing to China, while avoiding a new ‘India shock’ – similar to the ‘China shock’ that hit US manufacturing – in which business services firms in the UK are undercut by Indian imports with lower labour costs.

Should this shock materialise, high quality business services jobs in London and the South East – where Indian exporting firms are most likely to enjoy a competitive advantage over UK firms – are most at risk.

Sophie Hale, Principal Economist at the Resolution Foundation, said:

“Having raised trade barriers with Europe, and given up on a new US trade deal, the UK’s trade strategy has now pivoted towards the Indo-Pacific region.

“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.

“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.”

Notes to Editors

• The Economy 2030 Inquiry is a collaboration between the Resolution Foundation and the Centre for Economic Performance at the London School of Economics, funded by the Nuffield Foundation, which examines the impact of major economic change across the UK in the 2020s, and how best to navigate that change.
• The Nuffield Foundation is an independent charitable trust with a mission to advance social well-being. It funds research that informs social policy, primarily in Education, Welfare, and Justice. The Foundation has funded this project, but the views expressed are those of the authors and not necessarily the Foundation. Visit nuffieldfoundation.org