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Context: Indian exporters now have to follow the new rules set out by the Developing Countries Trading Scheme (DCTS) to receive lower import tariffs on their shipments to the United Kingdom (UK).

Detail

• The UK government introduced the Developing Countries Trading Scheme (DCTS) with the goal of fostering stronger trade and investment ties while easing the integration of developing nations into the global economy.
• A transition period existed until December 31, 2023, for Indian exporters to adapt to the new DCTS rules. Since January 1, 2024, complying with DCTS is mandatory to receive duty concessions. 

Key provisions of the Developing Countries Trading Scheme (DCTS)

Origin Declaration

• To claim concessional tax rates on exports to the United Kingdom, Indian exporters must now self-certify that their goods comply with the DCTS Rules of Origin (ROO). This replaces the process of declaring origin under the Generalised Scheme of Preferences (GSP).
• The RoO is a collection of criteria used to identify the country of origin of a product. To be eligible for preferential treatment under DCTS, a product must undergo a significant amount of transformation in a DCTS country. The DCTS manual has customised RoO for each product type.

The Generalised System of Preferences (GSP) is a preferential tariff system aimed at reducing tariffs on a wide range of items, primarily benefiting developing countries. It works with the idea of Most Favoured Nation (MFN) status under the World Trade Organisation (WTO) but with substantial distinctions in application and goals.

Reduced Tariffs

• DCTS offers reduced tariffs on numerous Indian products than standard import levies. The tariff decrease varies by product and origin.
• DCTS can improve the price competitiveness of Indian exports in the UK market, potentially increasing sales and market share.

Simpler qualification

• In comparison to the GSP, the DCTS provides a more transparent and straightforward mechanism for qualifying for these lower rates. The GSP could be difficult to browse because different rules of origin apply to different product categories.
• DCTS intends to simplify the process by offering a more uniform set of RoO requirements.

Cumulating

• Exporters can use materials from other DCTS countries (for example, Indian fabric in Bangladeshi garments) while still benefiting from duty-free access to the United Kingdom. This provision increases flexibility in material procurement and manufacturing processes, potentially lowering costs for exporters.

Tariff caps

• There are limits on how much a country can export to the UK while still receiving advantageous prices. India is under the "Standard Preferences" category, receiving advantages that are less extensive than those provided to the least developed nations under "Comprehensive Preferences." These limitations are intended to guarantee that the DCTS benefits developing countries without hurting UK markets.

Threshold Limits

• Products with a higher export value to the UK (about 6% of total imports for that good) are excluded from the plan and subject to standard tariffs. This approach serves to ensure that the DCTS supports economic growth in a targeted manner, focusing on products where developing nations have a significant competitive advantage.

Significance

• DCTS provides a cost advantage for Indian exporters by lowering import charges on items entering the UK market. This equates to lower arrival costs for UK enterprises importing from India, making Indian products more appealing.
• Increased pricing competitiveness can boost demand for Indian products in the UK, potentially leading to larger sales volumes and export revenues for Indian companies. This increase in exports can benefit India's economic development in a variety of ways.
  • It has the potential to generate new jobs in export-oriented companies, increasing employment possibilities and wages for Indian people.
  • It has the potential to stimulate manufacturing activity in India, hence encouraging investment in production capacity and technical innovation.
  • Higher export earnings can result in foreign currency inflows, which can be utilised to fund critical imports, stabilise the exchange rate, and lower the current account deficit.
• The DCTS has the ability to significantly contribute to India's economic growth and development.

Challenges

• Adapting to New Rules: Indian exporters must update their documentation and procedures to comply with the new DCTS origin declaration process. This may include getting familiar with the specific demands for self-certification and ensuring that all essential paperwork is in place.
• Export Caps: Certain items that exceed export limitations lose preferential status under DCTS. This might be problematic for exporters with established firms in the UK market. To stay within the caps, they may need to look for new markets for these items or lower their export volumes to the UK.
• Limited Benefits for Some Products: India's "Standard Preferences" category under DCTS may not provide as many duty concessions as the "Comprehensive Preferences" provided to least-developed countries. This can put Indian exporters at a modest disadvantage compared to competitors from such countries.

Way Forward

• Exporters should actively seek updates on DCTS regulations and future revisions. This may include subscribing to relevant government publications, attending industry seminars, or consulting with trade associations. Staying informed allows exporters to ensure they are meeting the most recent standards and taking advantage of any new opportunities that may develop under the DCTS.
• Utilise the regional cumulation benefit to optimise sourcing methods. This may include locating cost-effective material sources in other DCTS countries. For example, an Indian garment company could buy fabric in Bangladesh while qualifying for duty-free access to the UK market under DCTS. Exploring regional sourcing can help exporters save production costs and increase competitiveness.
• The ongoing India-UK FTA negotiations have the potential to result in even more favourable trade arrangements in the future. A successful FTA could result in additional tariff reductions, faster customs procedures, and increased market access for Indian exporters. Exporters can stay up to date on the status of the discussions and prepare to capitalise on any new trade benefits that may arise as a result of a prospective FTA.

Conclusion

• The DCTS provides chances for Indian exporters to access the UK market through lower tariffs and a simpler structure. However, exporters must adjust to the new DCTS regulations and be aware of product-specific export limits. Staying informed and examining sourcing strategies inside DCTS countries will help businesses make the most of this structure.

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INDIA-UK FTA: https://www.iasgyan.in/rstv/india-uk-fta-12

PRACTICE QUESTION Q. India wants more access to the UK market for manufactured goods and services, while the UK prefers freer movement of skilled labour. How can a future trade agreement effectively balance these competing interests, ensuring that both parties win?