Beyond Tariff Cuts, Making India-UK CETA Deliver

The Comprehensive Economic and Trade Agreement between India and the United Kingdom has come into effect from July 15, with the notification giving effect to tariff concessions issued by the Department of Revenue on July 14. This followed the notification regarding rules of origin on July 3, the circular prescribing the framework for self-certification of origin on July 13, and the public notice regarding the tariff rate quota applicable to imports of passenger and commercial vehicles, which is to be phased in over 15 years.

This milestone, enabling greater integration of the Indian economy into global value chains, has received celebratory media coverage highlighting different aspects of the agreement. The immediate implementation, however, relates to merchandise trade, perhaps the most significant aspect of the agreement. Provisions relating to trade in services, digital trade, temporary movement of people, intellectual property and government procurement will follow.

The bilateral agreement, understandably premised on mutual give-and-take, is being called historic by both sides. In terms of potential gains and the time horizon, however, it is being viewed differently in India and the UK media.

While the Indian media and experts are talking about immediate, large-scale export gains and the prestige associated with economic diplomacy, the agreement is being viewed in the UK as a long-term strategic bet on India’s growth trajectory, filling a post-Brexit trade-deal gap and delivering concrete gains in sectors such as automobiles and alcoholic beverages, which India had kept out of its earlier free trade agreements or opened only through limited quotas.

The reason for this framing is obvious — the asymmetry in the tariff schedules. India is offering immediate tariff reductions on 99% of products, while the UK is offering immediate reductions on about 65%, with the remainder phased up to 85% over the years.

It may, however, be useful to remember that even before the agreement, only about half of Indian exports to the UK attracted tariffs, while many others faced single-digit tariffs. Therefore, a more pragmatic interpretation of the claim that nearly everything will face zero tariffs is perhaps to look at the sectors where the tariff cut actually changes competitiveness meaningfully.

These are the sectors where Indian exports previously faced double-digit UK tariffs, such as marine products, processed foods, textiles, leather, footwear, engineering goods and automobile components.

In the context of emerging world trade, this agreement with India’s fifth-largest export destination is also important because it eliminates the disadvantage India faced under the UK’s tariff preference system, now called the Developing Countries Trading Scheme, a successor to the Generalised System of Preferences.

Indian exporters faced a significant disadvantage, particularly in textiles, where India faced the full UK Global Tariff rate of around 7% — higher than the about 5.66% paid by non-graduated standard-tier countries and far worse than the zero tariffs enjoyed by exports from Bangladesh and Pakistan.

Similar disadvantages have been removed in sectors such as leather and footwear and marine products, where India’s competitors had preferential access. This is expected to boost Indian exports to the UK.

On the import side, the focus of tariff cuts has been on alcoholic beverages and automobiles. While the tariff cuts on alcoholic beverages take full effect over 10 years, and there is a minimum import price for some beverages, automobiles imported within a specified tariff rate quota enjoy sharply reduced concessional rates.

Imports exceeding the quota will carry the standard most-favoured-nation duties. India has, therefore, opened these vital sectors, but with a calibrated sense of caution.

To enjoy the benefits of tariff reductions or elimination, trade will need to comply with the rules of origin, as well as the operational procedures and documentation requirements, both of which can often be fairly complicated and cumbersome.

The rules-of-origin chapter follows product-specific rules under which the origin criteria are tailored for each product category. For the first time, India is accepting an entirely self-certification-based system. The exporter’s self-certification, supported by bilateral digital authentication, will serve as proof of origin — the critical document establishing that a particular shipment complies with the origin requirements and qualifies for tariff reductions.

This removes the requirement to obtain a certificate of origin from prescribed institutions or agencies, often government bodies, placing the responsibility on the trader.

Building Trust

The Indian government must be complimented for its proactive move to issue a clarificatory circular detailing the bilateral authentication mechanism between the two customs authorities to verify that each origin declaration is genuine and issued by a legitimate UK exporter or producer.

Industry must now shoulder its responsibility with diligence, claiming benefits on the strength of proper documentation and maintaining proper records. Equally, the authorities must honour the underlying trust reposed in trade by avoiding frequent or frivolous queries and unwarranted, belated scrutiny through investigations or post-clearance audits.

Many of the measures to enhance trust-based bilateral trade and provide greater regulatory certainty are included in Chapter 5 of the agreement, relating to trade facilitation. These are well aligned with the provisions of the World Trade Organization’s Trade Facilitation Agreement, which India has already implemented, and the rolling National Trade Facilitation Action Plan.

To reap the full benefits of the agreement, it is important that the government draws up a detailed plan to improve the quality of trade facilitation measures already implemented.

Three such measures may be prioritised. First, the customs advance-rulings mechanism should be strengthened to ensure certainty regarding classification, valuation principles and the determination of origin.

Second, the beneficial impact of the trust-based Authorised Economic Operator programme should be enhanced by negotiating a mutual recognition agreement with the UK.

Third, recognising that the impact of trade facilitation is best assessed through cargo-release times, the National Time Release Study should incorporate a chapter presenting the average import and export release times for trade between India and the UK.

In conclusion, as India marks the rollout of the India-UK agreement with fanfare, the focus must now shift to concerted action to operationalise its other provisions, strengthen outreach to Indian exporters to ensure optimal utilisation of its benefits, and establish a jointly agreed framework to assess its economic impact.