India and UK Negotiate to Overcome Hurdles in Free Trade Agreement

India and the United Kingdom are intensifying diplomatic efforts to resolve critical technical and regulatory disputes delaying the operationalisation of their landmark Free Trade Agreement (FTA). While the pact was signed in July 2025, new protectionist measures and environmental taxes from the UK side have emerged as significant roadblocks to its full implementation.

The Sticking Points: Steel Safeguards and Carbon Taxes

The primary friction points preventing the Comprehensive Economic and Trade Agreement (CETA) from taking effect involve the UK's shifting trade policies. According to Commerce Secretary Rajesh Agrawal, an Indian delegation is currently in London to resolve these "outstanding issues" following high-level discussions between UK Business Secretary Peter Kyle and India’s Commerce Minister Piyush Goyal.

A major concern is the UK's new steel safeguard regime, set to commence on July 1, 2026. Under this framework, the UK intends to slash tariff-free steel import quotas by 60% compared to previous levels. Any imports exceeding these tightened quotas will be hit with a heavy 50% tariff, specifically targeting products that are also manufactured within the UK.

The Impact of the UK’s Carbon Border Mechanism

Further complicating the trade relationship is the UK's plan to implement an import carbon pricing mechanism, similar to the European Union’s Carbon Border Adjustment Mechanism (CBAM), starting in 2027. This move aims to tax carbon-intensive imports to level the playing field for domestic industries.

The financial implications for Indian exporters are substantial. Economic think tank GTRI estimates that approximately $775 million worth of Indian exports could be impacted by this carbon tax. The mechanism will initially target critical sectors including:

Once free allowances under the UK’s Emission Trading System (ETS) are fully phased out, the carbon tax could demand between 14% and 24% of the total import value. Given that India’s exports of iron, steel, and related products to the UK reached $893.4 million in the 2025-26 period, this tax represents a major threat to bilateral trade volumes.

Beyond the UK-India bilateral issues, Indian commerce officials are also navigating complexities regarding the European Union's sanctions regime against Russia. There are reports that approximately 50 Indian companies could face fresh export-control restrictions under the EU's proposed 21st sanctions package.

Commerce Secretary Agrawal noted that India remains engaged in discussions with the EU regarding these sanctions, emphasizing that while India typically recognises UN-led sanctions, the government is working to protect the interests of Indian entities that have historically faced such regulatory pressures.

Key Takeaways