On trade, India and UK in the same leaky boat
5 min read 14 Sep 2022, 10:08 PM ISTBoth seek to make gains from bilateral FTAs that can’t replace large regional groupings.
PremiumAt the end of August, in the final days of her campaign to be elected the UK Conservative Party’s choice of prime minister, Liz Truss cancelled a highly anticipated interview with the BBC. One theory was that she was ducking an explanation of how she might turn the British economy around, made harder still by her campaign pledge of tax relief even as the government must pay huge energy subsidies this winter.
As prime minister, Truss will have little chance of evading some of the toughest economic questions Britain has faced in decades. Inflation is projected to peak at about 13%, average energy household bills are expected to more than double to almost £4,500 by next April. And interest rates will steadily rise; most UK mortgages are on fixed-rate terms but about half will have to renew mortgages at higher rates before 2025, The Economist observed last month, citing Bank of England research. This drop in disposable incomes will play out against a political backdrop that may include rising calls for a referendum on Scotland’s independence as well as exacerbated problems in the UK’s relations with the EU. A bill making its way through parliament, which Truss supports, seeks to make unilateral arrangements on goods moving between Britain and Northern Ireland, instead of negotiating these disagreements with the EU. This summer, former PM Tony Blair called on 10 Downing Street and Brussels to display “maximum flexibility" on the issue.
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History does repeat itself, but thankfully imperfectly. While it would be extreme to compare Britain’s current economic doldrums to 1976, when it needed to borrow from the International Monetary Fund and inflation was about 25% after the 1970s’ oil shock, the denial of harsh economic realities injected Truss’s campaign with a fantastical, even farcical, element. It was almost as if she were in a time-travel machine, framing policies for another country at another time. She has committed to cancelling a corporate tax hike that Rishi Sunak, as chancellor, had said would take effect from April 2023. This is expected to reduce revenues by £17 billion a year. Along with another reversal, Truss is forgoing fiscal revenues amounting to 3.7% of government revenues in the financial year ended March 2022.
For the Conservative party faithful, objecting to any hint of additional taxation is as much an article of faith as repeatedly proclaiming one’s ‘independence’ from Europe. Long before Brexit took effect in February 2020, the UK had been steadily losing ground to its European peers in terms of both productivity increases and income growth. The Resolution Foundation, a think-tank, calculates that, when comparing households’ spending power, “the UK performed worse than most (European countries) from 2007 to 2018, with only households in Greece and Cyprus seeing less growth. Typical incomes rose by 34 percent in France and 27 percent in Germany… Compared to the UK, typical incomes are notably higher now in countries including Ireland (by 6 percent), France (10 percent) and Germany (19 percent)." In the UK, median household disposable income in real terms fell by 2% between 2007 and 2018, and is set to fall by 4% next year. Raising productivity and incomes is a complex, long-term goal. Brexit referendum voters, before they decided by a slim margin in 2016 to exit the EU, heard little about this. Since then, UK trade policies appear to be conceived in a parallel universe. Then PM Theresa May flying to New Delhi in November 2016 in the hope of signing a bilateral free trade agreement always seemed to me an act of desperation. Conservative party ministers extolling the virtues of “Global Britain" after Britain had exited the largest free trade union in the world has arguably been even more delusional than India opting out of trade groupings such as the Regional Comprehensive Economic Partnership and its decision last week to seek clarifications before it commits to the trade pillar of the Indo-Pacific Economic Framework. This will work to India’s detriment and enhance the relative position of Indonesia and Vietnam, which are IPEF members, in the assessment of many multinational firms as they seek to diversify manufacturing and reduce their dependence on China.
The old line that ‘Britain had lost an empire but not yet found a role’ has been all too apparent for years. This status anxiety will only rise with the passing of Queen Elizabeth II. In many ways, India remains temperamentally joined at the hip to its former colonial ruler. Just as London does, New Delhi consistently overestimates its global stature. As the UK has fallen behind most of Europe, India has long been passed in per capita income and human development metrics by East Asia. Yet, many of us trumpet that we are the fastest-growing economy in the world.
Both the UK and India are led by bureaucrats and politicians with a weak understanding of regional supply chains and how essential they are to boosting exports. Focusing on bilateral trade pacts with far-flung countries is the equivalent of using a leaky raft to cross oceans when your competition is loading its exports onto container ships next door. Communist-led Vietnam’s exports rose 17% in the first seven months of 2022; its bureaucrats credit its multiple trade alliances. I asked a veteran economics commentator why there was a perennial divergence in economic development metrics between India and much of Southeast Asia. “They are less fluent in English than our diplomats and don’t talk much, but they are practical and get the job done," was his pithy reply.
Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.
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