As India and the United Kingdom (UK) work towards finalizing their Free Trade Agreement (FTA), a New Delhi-based think tank has raised a red flag regarding the UK’s proposed carbon tax. The report by the Global Trade Research Initiative (GTRI) suggests that India should be cautious and include provisions within the FTA to address the potential impact of the Carbon Border Adjustment Mechanism (CBAM) on Indian products.
The introduction of the CBAM in the UK poses a unique challenge for India. While UK products will continue to enter the Indian market with zero duties, Indian products could face tariffs equivalent to 20-35 percent of CBAM charges. This tariff discrepancy has the potential to significantly impact Indian exports, and thus, it becomes imperative for India to safeguard its interests in the FTA.
The UK, following in the footsteps of the European Union (EU), is taking steps to address carbon leakage risks. It plans to implement emissions reporting in 2025 and gradually introduce the measures in 2026. This development underscores the need for India to be proactive in addressing the potential repercussions of the UK’s carbon tax.
The FTA between India and the UK offers the promise of modest economic gains, but it also presents India with challenges related to ‘burdensome obligations’ on non-trade issues. These non-trade aspects encompass critical areas such as labor, environment, gender, and digital trade. Therefore, India must tread carefully to ensure that these obligations do not hinder its economic interests.
The sustainability aspect of the FTA, particularly its impact on India’s garment industry, is of particular significance. It has the potential to introduce non-tariff barriers aimed at promoting sustainability. Furthermore, India must anticipate the possible introduction of the UK’s CBAM and address this within the provisions of the FTA.
One crucial recommendation from the report is that India should establish domestic rules and standards before committing to non-trade issues in FTAs. This strategy ensures that India’s interests and policies are well-defined before entering into international agreements. Additionally, the report suggests that India should refrain from agreeing to free cross-border data flows, as the ownership of national data is essential for developing public services.
The report advises against binding commitments in areas such as labor standards, as they could have unintended consequences, including potential bans on labor-intensive exports. Negotiating labor standards requires a careful and considerate approach to protect India’s economic interests and labor-intensive industries.
In conclusion, the UK’s proposed carbon tax within the FTA adds a layer of complexity to the negotiations between India and the UK. India’s strategy should encompass safeguarding its economic interests while also carefully navigating the non-trade aspects of the agreement to ensure a balanced and mutually beneficial FTA.
