Brief Context
Context The India–UK Free Trade Agreement (FTA) negotiations have hit fresh hurdles, primarily due to the UK’s proposed Carbon Border Adjustment Mechanism (CBAM) or carbon tax. Background The India–UK FTA negotiations were formally launched in 2022, as part of efforts to deepen economic cooperation and boost bilateral trade. As per data from FY 2023–24, the trade volume between the two countries reached $21.34 billion, an increase from $20.36 billion in the previous fiscal year.
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Syllabus: GS2/ International Relations, GS3/ Economy
Context
- The India–UK Free Trade Agreement (FTA) negotiations have hit fresh hurdles, primarily due to the UK’s proposed Carbon Border Adjustment Mechanism (CBAM) or carbon tax.
Background
- The India–UK FTA negotiations were formally launched in 2022, as part of efforts to deepen economic cooperation and boost bilateral trade.
- As per data from FY 2023–24, the trade volume between the two countries reached $21.34 billion, an increase from $20.36 billion in the previous fiscal year.
- Presently, goods exported from India to the UK face an average import duty of 4.2%.
- The two sides are now aiming to conclude an FTA, a Bilateral Investment Treaty (BIT) and a social security agreement termed as the Double Contribution Convention Agreement (DCAA).
Key Demands of India
- India has been pushing for greater market access for its products, particularly in labour-intensive sectors such as textiles, garments, gems, and jewellery.
- India has called for liberalisation of the UK’s visa regime to allow movement of skilled professionals from Information Technology (IT), IT-enabled services (ITeS), and healthcare sectors.
- India has also demanded special provisions for Micro, Small and Medium Enterprises (MSMEs) and requested flexibility regarding carbon emission standards.
Key Demands of UK
- The United Kingdom is keen on reducing tariffs imposed by India on high-value items such as Scotch whisky, electric vehicles, chocolates, and lamb meat.
- It is also seeking market access in telecom, legal, insurance, financial services.
- The UK is pressing for a sunset clause in the proposed Bilateral Investment Treaty and greater flexibility on issues like data localisation and the recognition of its new carbon tax regulations.
| Carbon Border Adjustment Mechanism (CBAM) – It is a proposed environmental tax that aims to put a carbon price on certain goods imported into the United Kingdom, based on the carbon emissions generated during their production. – It is designed to level the playing field between domestic producers (who must comply with the UK’s strict climate regulations) and foreign exporters from countries with weaker or no carbon pricing mechanisms. |
CBAM and India’s Concerns
- The UK’s draft CBAM legislation, effective January 1, 2027, imposes levies on high-emission imports like cement, steel, aluminium, fertilisers, hydrogen.
- The emission calculation will follow the UK’s domestic Emissions Trading Scheme.
- Indian concern: CBAM undermines the principle of Common But Differentiated Responsibilities (CBDR) in climate negotiations.
India’s Response to CBAM
- India has proposed a “Rebalancing Mechanism,” which would require the UK to compensate Indian industries for losses incurred due to the carbon tax.
- India has emphasised that its Carbon Credit Trading Scheme (CCTS), which is based on emission intensity rather than absolute emission levels, is more suitable for a developing economy.
Way Ahead
- To ensure that the FTA benefits are not undermined by non-tariff barriers like CBAM, India must negotiate firmly and strategically.
- India must continue to advocate for the CBDR principle and push for differential treatment in climate-related trade measures.
- Institutional mechanisms like the proposed rebalancing clause and effective dispute resolution frameworks must be built into the final agreement to protect the interests of both the parties.
Source: IE