Most Favoured Nation: India

What's really going on?

Welcome to the 106th edition of Most Favoured Nation. The post is for paid subscribers only, but you can sign up for a free trial below.

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The UK is negotiating a free trade agreement with India, and there is some media speculation (largely generated by the Indian negotiators) that a deal could be announced during the G20, later this month.

Much of the UK media focus has been on whether the UK will need to further liberalise its visa regime for Indian workers and students to get a deal over the line. This is indeed a big issue — while the existing UK immigration regime is viewed fairly positively by India, it would like treaty-based assurances that access for Indian students, for example, will not be revoked in future, as well as new short-term access for its services workers.

However, visas are not the only issue!

Here are a few other things proving tricky:

Rules of origin. What use is a theoretical tariff reduction if none of your exporters can benefit from it? This is one of the challenges facing the UK negotiators. India may be willing to reduce tariffs for fixed quantities of UK exports of whisky and cars (under the guise of new tariff-rate quotas), but it is being difficult when it comes to the rules of origin.

The problem here is twofold. There is first the rule itself. For example, for whisky to qualify for the hypothetical UK-India free trade agreement and the tariff reduction, what conditions must be fulfilled? Must it be made from only UK barley, or can foreign barley be used? Must the barrel it was aged in be British? Can it be exported in bulk and put into bottles en route? All of these sorts of things matter.

The second is the question of **how** a company actually claims these preferences. All free trade agreements and countries place different obligations on companies trying to prove their product qualifies for a free trade agreement. Some are broadly happy to trust the importer, perhaps with some additional obligations to store relevant information and the occasional audit to keep the system honest. Others require importers to fill out a 600-page document and take it to an office in the middle of the country, surrounded by mountains, only accessible by air, and only open between the hours of 1545 and 1550 on the third Wednesday of every month to receive a wax stamp that must be hardened in a cooler for 37 days and then secondary stamped by a hermit who lives on third peak to the left, who may or may not still be alive.

Investment protection. Alongside the FTA negotiations, the UK and India are also discussing the tricky issues of investment protection. The history here is that in 2017, tired of being sued by foreign investors, India terminated its bilateral investment treaty with the UK. (Nothing specifically to do with the UK; India decided to terminate all of its bilateral investment treaties.)

India is now trying to get the UK and other countries to sign up to its new model investment treaty, which includes a clause requiring aggrieved foreign investors to exhaust local remedies (the local court processes) before resorting to international arbitration. The UK, along with pretty much everyone else, doesn’t really like this approach because cases can quite easily get stuck in the Indian court system for a long time.

UK firms that invested in India before the termination can also continue to bring claims for covered investment for 15 years from the date of termination. India does not like this sunset clause.

Rice! As long-term readers of this newsletter will know, the most powerful voice in UK trade policy is Big Rice, the collective voice of the UK rice milling industry.

As I wrote previously:

This creates two issues for UK trade negotiators.

The first-order issue is straightforward. A significant liberalisation of import tariffs for milled (mainly long-grained) rice, could call into question the viability of UK mills (quite a few of which are in Conservative constituencies).

The second-order issue is less straightforward, but also more interesting.

In most countries, imported rice is subject to quite stringent import controls. Scroll down on this webpage to see the US’s requirements, for example. But the UK’s regime is lighter touch, with relatively little control at the point of import.  Because much of the rice we eat in the UK is processed locally, the burden of ensuring that the imported rice is high quality and safe has fallen to businesses based here.  Control has effectively been outsourced to the UK private sector, which does the monitoring and due diligence throughout the supply chain, with occasional checks by regulators.

One risk is that if the tariffs on milled rice are significantly liberalised, the UK would then be required to tighten up its border controls to ensure nothing dangerous gets in. The cost savings of tariff reduction could lead to the government needing to spend a lot more money policing the border in order to ensure nothing bad ends up on UK shelves.

We saw this sensitivity recognised in the UK-Australia free trade agreement, where imported long-grained milled rice retained protection from full tariff liberalisation (unlike most other agrifood sectors) in the form of a small, 1000-tonne per year tariff-rate quota.

Related issues. While the UK-India FTA negotiations continue, we should not forget there is some residual friction relating to other, unrelated, UK trade policy measures. In particular, the steel safeguard tariffs, applied in response to Trump, mean that India steel faces a big tariff when exported to the UK. India has previously threatened to retaliate by applying its own rebalancing tariffs to UK products such as blended whisky.

So will there be a good deal? I hope so! All of the issues raised above are resolvable — and on the visas question, I am very much in the “immigration is good” camp, so I have no issues there — but will most certainly require high-level political intervention to get any deal over the line. And, in all probability, anything announced in the coming weeks will probably still be subject to further ironing out the technicalities …

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Farewell, Graham Zebedee

The UK’s chief CPTPP negotiator, Graham Zebedee, has announced he is stepping away from government to do a year-long master’s degree. Farewell! The streets will remember.

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