India-UK Free Trade Agreement (FTA) negotiations, primarily as a result of the UK's proposed Carbon Border Adjustment Mechanism (CBAM), or carbon tax

The negotiations for the India–UK FTA officially began in 2022, aimed at enhancing economic collaboration and increasing bilateral trade.

According to data from FY 2023–24, the trade volume between the two nations amounted to $21.34 billion, rising from $20.36 billion in the last fiscal year. Currently, products shipped from India to the UK incur an average import tax of 4.2%.

The two parties are currently working to finalize a Free Trade Agreement (FTA), a Bilateral Investment Treaty (BIT), and a social security pact known as the Double Contribution Convention Agreement (DCAA).

Core Requirements of India

India has been advocating for increased market access for its goods, especially in labor-intensive industries like textiles, clothing, gems, and jewellery.

India has requested the UK to liberalize its visa system to facilitate the movement of skilled workers in Information Technology (IT), IT-enabled services (ITeS), and healthcare fields.

India has additionally requested specific measures for Micro, Small, and Medium Enterprises (MSMEs) and sought leniency concerning carbon emission regulations.

Main Requirements of the UK

The United Kingdom is enthusiastic about lowering the tariffs that India has placed on premium products like Scotch whisky, electric cars, chocolates, and lamb meat. It is additionally pursuing entry into telecom, legal, insurance, and financial services markets.

The UK is advocating for a sunset clause in the suggested Bilateral Investment Treaty and more leeway on topics such as data localisation and acceptance of its recent carbon tax regulations.

Carbon Border Adjustment System (CBAS)

– It is an suggested ecological tax intended to impose a carbon cost on select products brought into the United Kingdom, reflecting the carbon emissions produced in their manufacturing.

– It aims to equalize conditions for local producers (who are required to adhere to the UK's stringent climate rules) and international exporters from nations with less stringent or absent carbon pricing systems.

CBAM and India's Issues

The UK's proposed CBAM law, set to take effect on January 1, 2027, enforces charges on high-emission imports such as cement, steel, aluminum, fertilizers, and hydrogen.

The calculation of emissions will adhere to the UK's internal Emissions Trading Scheme.

Indian worry: CBAM weakens the concept of Common But Differentiated Responsibilities (CBDR) in climate discussions.

India's Reaction to CBAM

India has suggested a “Rebalancing Mechanism,” which would necessitate the UK to reimburse Indian businesses for losses suffered as a result of the carbon tax.

India has stressed that its Carbon Credit Trading Scheme (CCTS), which focuses on emission intensity instead of total emission levels, is more appropriate for a developing economy.

Path Forward

To prevent the FTA advantages from being compromised by non-tariff barriers such as CBAM, India needs to negotiate decisively and strategically.

India should persist in supporting the CBDR principle and advocate for varied treatment in trade measures related to climate.

Institutional mechanisms such as the suggested rebalancing clause and efficient dispute resolution frameworks should be incorporated into the final agreement to safeguard the interests of both parties.