The India-UK Trade Deal: Why Unresolved Issues Pose Strategic Challenges

The India-U.K. Comprehensive Economic and Trade Agreement (CETA), which came into force on July 15, 2026, marks a significant milestone in bilateral relations by cutting tariffs on 99% of Indian exports. However, while the deal eases professional mobility and lowers trade barriers, several "unfinished" pillars remain unaddressed, potentially limiting the depth of the economic partnership.

The Missing Investment Framework and Arbitration Deadlock

Despite its title, CETA lacks a dedicated section on investments—a standard feature in India's recent agreements with the European Free Trade Association (EFTA) and New Zealand. Unlike those deals, which include commitments for specific investment inflows into India, the U.K. pact remains silent on this front.

The primary roadblock is the dispute over arbitration. Following India's 2017 decision to unilaterally cancel most of its Bilateral Investment Treaties (BITs), a fundamental disagreement emerged regarding how investor-state disputes should be resolved. India insists that foreign investors must exhaust domestic legal processes before seeking international arbitration, whereas many foreign entities prefer third-country arbitration to ensure neutrality. Without a BIT, U.K. investors lack treaty-based protections, creating a layer of uncertainty that could dampen the very capital inflows the "economic" agreement seeks to encourage.

Protecting the 'Pharmacy of the World'

A major point of contention during negotiations was Intellectual Property (IP) standards. The U.K. pushed for enhanced patent protections, but India successfully defended its right to maintain Section 3(d) of the Patents Act, 1970. This specific provision prevents "evergreening"—the practice where pharmaceutical companies seek new patents for minor modifications to existing drugs without demonstrating significant therapeutic improvements.

By retaining this safeguard, India ensures that once original patents expire, domestic manufacturers can produce affordable generic versions. This protects India’s massive generic drug industry and keeps healthcare costs low. For the U.K., this is a missed opportunity; currently, only 0.5% (£127 million) of the U.K.'s £26 billion global medicine exports go to India. While U.K. pharma giants face stiff competition from Indian generics, the U.K.’s National Health Service (NHS) continues to benefit from the availability of low-cost Indian medicines.

The Carbon Tax Shadow: CBAM Concerns

A significant looming threat to Indian exporters is the U.K.’s Carbon Border Adjustment Mechanism (CBAM), scheduled for implementation on January 1, 2027. Critically, CBAM was excluded from the CETA negotiations. This mechanism will impose fees on carbon-intensive imports like steel, aluminium, and cement to match the costs faced by U.K. domestic producers.

For Indian exporters, this creates a "net-zero" benefit scenario. While CETA provides lower import duties, the subsequent CBAM charges could effectively offset these tariff savings. Although the U.K. has not yet granted exemptions to any trading bloc, the decoupling of climate-related trade taxes from the main trade agreement leaves Indian heavy industries in a precarious position.

What It Means for India

• Strategic Autonomy in IP: By defending Section 3(d), India has prioritized its domestic public health mandate and the viability of its generic pharmaceutical sector over the demands of high-income economies.
• Need for Investment Certainty: The absence of a BIT means India must work harder to build institutional trust to attract U.K. capital, proving that its domestic legal processes are robust and reliable for foreign investors.
• Green Transition Pressure: The looming CBAM necessitates an urgent acceleration of decarbonization in India's steel and aluminium sectors to ensure that trade benefits under CETA are not neutralized by climate-related levies.