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