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Industrial Policy

UK business fears quick-win trade deal with India

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LONDON — Whoever replaces Boris Johnson as U.K. prime minister may find it hard to resist banking an early trade win with India — but firms fear the consequences of a rush job.

Conservative Party leadership contenders Liz Truss and Rishi Sunak look to be holding fast to the outgoing U.K. prime minister’s Diwali deadline for landing a free-trade agreement with New Delhi.

A deal would mark another post-Brexit prize for a U.K. eager to show its independent trading mettle, and a flag-waving quick win is likely to prove a tempting prospect as the new leader grapples with ongoing economic and political turmoil back home.

Yet several senior business figures, some of whom spoke on condition of anonymity to discuss the talks frankly, told POLITICO that — far from wrapping up negotiations in a hurry — the U.K. must now extend its deadline to get the best deal for British firms.

“The deadline of Diwali is really tight,” said a business person close to the talks — less than three months away. “To secure a deal that is not narrow and or shallow will require a great deal of political engagement.”

Diwali deadline

The U.K.-India talks, which began in January, are already in full flow.

The two sides finished the fifth round of negotiations last week, and are working towards the October 24 deadline that Johnson — recently ousted by his own party and preparing to exit the stage in September — set with Indian Prime Minister Narendra Modi earlier this year.

There are signs New Delhi sees the U.K.’s current political turmoil as an opportunity, and that Modi’s officials are attempting to bounce Britain into wrapping talks even before Johnson leaves No. 10 Downing Street.

The country’s Commerce Secretary B.V.R. Subrahmanyam told reporters in Delhi late last month that negotiations will wrap by August 31 — just days before a new U.K. prime minister is due to take over. But that’s something businesses back in London think is a non-starter.

India is “trying to put pressure on the U.K. to try to get Johnson to deal with it before he leaves,” said the same business person close to the talks, with the outgoing prime minister “seen as more likely to compromise to get a deal done and to claim the Brexit benefit,” a stance they dismissed as “naive.”

But even if Johnson doesn’t get the deal over the line, they expect Liz Truss — now the frontrunner in the battle to succeed him — to “want to do a quick deal” too, so she can “show how wonderful she is.” Truss, a former trade secretary, has already vowed on the campaign trail to sign “fast-track” trade deals with Commonwealth nations like India.

Her rival Rishi Sunak, the same person said, “may be more patient to extract a bigger, better deal” and strike prized provisions for Britain’s services sector. There’s little shortage of Indian business expertise in the Sunak household, either. His wife, fashion designer Akshata Narayan Murty, is the daughter of Narayana Murthy, who founded Indian IT giant Infosys.

Conservative Leadership Rishi Sunak with daughters Krisna, Anoushka and wife Akshata Murthy ahead of a speech while campaigning in Grantham, England | Christopher Furlong/Getty Images

For now, Team Sunak is sticking rigidly to the Johnson plan. A spokesperson for the former chancellor said: “He wants to agree a deal as quickly as possible, as long as it’s the right deal for Britain.” Truss’s campaign did not respond to a request for comment.

There is “optimism” amongst British businesses, the first business person quoted above said, “that the change in prime minister will see the Diwali deadline flex to allow time to negotiate a proper deal.”

Details, details

Business groups in London have good reason to fear a race to the finish line. Trade deals are highly complex, and the slightest oversight can have huge real-world ramifications.

“Quick deals don’t necessarily go into all the necessary detail that you need,” said Mike Hawes, chief executive of the SMMT, Britain’s leading automotive industry body.

There are, Hawes pointed out, plenty of crucial details still to be hammered out. Right now the talks are focused on tariffs, he said — “but hand-in-hand with tariff agreements go rules of origin requirements” for products like British-made electric cars, which face prohibitive barriers in India. These rules determine what portion of the components of a finished product must be made on British soil.

Securing a commitment from India to lower India’s 150 percent federal tariffs on Scotch whisky has also proven difficult in negotiations, said another person close to the talks. “The Indians know that it is one of the main offensive interests for the U.K.,” they said. “As a result, they are using it as leverage to secure a good outcome on their offensive interests.”

India has complex federal and state-level tax regimes for alcohol that pose barriers that aren’t easily overcome. Giving British negotiators more time would allow them to better balance what they’re giving up in return, some firms argue.

An “emerging approach” in talks, the second person quoted above said, is for the two sides to strike an interim deal in the first quarter of 2023 similar to the kind advocated by trade chiefs in both countries before Johnson and Modi went ahead and set their Diwali deadline.

They said they would rather the talks “creep past” that deadline and the two sides “get a deal which is more substantive, than it is pushed for Diwali, and actually that reduces the potential impact of the deal.”

British industry is “concerned” about the progress of talks, they added. “The point is that the government needs to retain focus on the areas which are of greatest benefit to our economy and really make sure they’re communicating well with business.”

Both business and civil society “have concerns” about the deal, David Henig, a trade expert and UK Director of the European Centre For International Political Economy, has observed, arguing an interim deal “is the only realistic model to meet political demands.”

‘Good progress’

The U.K.’s trade department says a landing zone for a comprehensive deal that respects the sensitivities and domestic processes of both sides is coming into sight.

Britain’s Prime Minister Boris Johnson (on the left) and his India’s Prime Minister Narendra Modi (on the right) at a meeting in Hyderabad House in New Delhi, India | Pool photo by Ben Stansall/AFP via Getty Images

“We are making good progress toward our shared target to conclude the majority of talks on a comprehensive deal by Diwali,” said a spokesperson for the Department for International Trade (DIT). “We remain clear that we won’t sacrifice quality for speed and will only sign a deal which delivers for the U.K.” 

Yet Johnson’s departure means it’s “much less certain” the Diwali deadline will hold, said Sam Lowe, director of trade at the consultancy Flint Global. Lots of companies will, he added, be “very happy” if the timeline slips.

Sticking to the deadline “would involve the U.K. giving up some of its [objectives] and conceding to the demands of the Indian government,” he warned.

Landing the best possible trade deal won’t be the only thing on the new prime minister’s mind, however, as the global storm clouds gather in the wake of the Ukraine war.

In the context of India, Lowe said “you can actually argue quite convincingly that the deal has very little to do with economics and it’s more to do with cementing the personal and political relationship in the context of greater geopolitical threats from Russia and China.”

Sebastian Whale contributed reporting.

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