Free Trade Agreements (FTAs)

India is accelerating its pursuit of Free Trade Agreements (FTAs) with countries like New Zealand, Russia, and Oman, even though past FTAs have delivered only modest trade gains. This reflects a shift in focus—from using FTAs purely as trade tools to employing them as instruments of geopolitical strategy, supply-chain security, and strategic partnerships.

Understanding Free Trade Agreements (FTAs)

• Definition: An FTA is an arrangement between two or more countries or regional blocs to reduce or eliminate trade barriers through mutual negotiations, promoting trade.

• Key Coverage: Tariffs, Rules of Origin, Non-Tariff Measures (TBT), Sanitary and Phytosanitary (SPS) measures, trade remedies.

• Scope: FTAs can cover trade in goods, trade in services, intellectual property rights, investment, government procurement, and competition policy.

• Types:

  • Bilateral: Between two countries.

  • Plurilateral: Among multiple countries.

  • Multilateral: Under frameworks like the WTO.

India’s FTA Landscape:

• India has signed 20 regional or free trade agreements, including recent deals like India–UK CETA and India–EFTA TEPA.

• Negotiations are ongoing with the US, EU, Canada, and the Southern African Customs Union.

Reasons Behind India’s Renewed Emphasis on FTAs

1. Strategic Realignment in Global Geopolitics

   • The shift from a unipolar to multipolar world order (e.g., US-China rivalry, weakening WTO) makes FTAs tools for strategic engagement.

   • FTAs strengthen political and economic alignments in the Indo-Pacific, West Asia, and Africa.

   • Example: India-Australia ECTA, India-UAE CEPA serve as “political safety nets” ensuring closer bilateral ties.

2. Decline of Multilateralism

   • Stagnation of WTO negotiations and rising protectionism reduce the effectiveness of multilateral trade forums.

   • FTAs allow WTO-plus commitments, especially in services, digital trade, and investment.

   • Example: India-EFTA TEPA includes binding commitments of USD 100 billion in FDI over 15 years.

3. Diversification of Economic and Trade Partners

   • Reduces dependence on major markets like the US, EU, and China.

   • Accesses new markets, diversifies supply chains, and secures critical resources (energy, minerals).

   • Supports the “China Plus One” strategy to secure upstream supply chains.

4. Unlocking Untapped Potential in Services and Investment

   • India’s strength lies in services (IT, healthcare, education).

   • New FTAs, like UAE-India CEPA, focus on services, fintech, and investment flows.

5. Strengthening Domestic Capabilities and Value Chains

   • Aligns FTAs with Make in India and Production Linked Incentive (PLI) schemes.

   • Attracts FDI and technology transfers, integrating Indian manufacturing into global value chains.

6. Correcting Past Imbalances

   • Earlier FTAs (e.g., ASEAN) delivered asymmetric gains, widening trade deficits.

   • India now aims for better-balanced, services-focused agreements that protect domestic industries.

   • Example: Export share to ASEAN rose only marginally (10.2% → 10.8%), while exports to Japan and South Korea declined slightly.

Concerns with India’s Expanding FTA Network

1. Trade Deficits and Asymmetric Gains

   • Imports from partner countries often rise faster than exports, widening trade deficits.

   • Example: ASEAN imports grew 234.4% vs Indian exports 130.4% between FY 2009–2023.

2. Non-Tariff Barriers (NTBs)

   • Developed economies impose strict standards (IPR, sanitary measures) reducing FTA benefits.

   • India’s FTA utilization rate is only 25%, compared to 70–80% in developed countries.

3. Harm to Domestic Sectors

   • MSMEs, farmers, and labour-intensive sectors struggle against cheaper imports.

   • Tariff cuts on finished goods often exceed those on raw materials, creating an “Inverted Duty Structure” that discourages domestic manufacturing.

   • Example: ASEAN FTA affected Indian rubber farmers.

4. Risk of Import Surges via Third Countries

   • Goods from non-FTA nations can enter India through partner countries, exploiting rules of origin.

Policy Recommendations for Effective FTAs

1. Strengthen Domestic Competitiveness

   • Invest in R&D, infrastructure, skill development, and MSME support.

2. Focus on WTO-Plus Areas

   • Prioritize digital trade, green energy, and services in agreements with developed economies.

3. Incorporate Balanced Safeguards

   • Enforce strong Rules of Origin, safeguard duties, and anti-dumping measures.

4. Institutional Reforms and Coordination

   • Enhance inter-ministerial coordination between MEA, Commerce Ministry, and NITI Aayog.

5. Improve Dispute Resolution Mechanisms

   • Include binding timelines and independent panels for swift trade dispute resolution.

6. Monitor and Review Existing FTAs

   • Periodic impact assessment and public consultations to adjust agreements.

7. Promote Inclusive and Sustainable Trade

   • Integrate labour and environmental safeguards without undermining domestic flexibility.

Conclusion

India’s renewed emphasis on FTAs is less about boosting trade volumes and more about navigating a fragmented global order. With multilateralism weakening and geopolitics influencing economics, FTAs have evolved into tools for:

• Strategic alignment

• Diplomatic insurance

• Supply-chain security

In this emerging global order, strategic logic increasingly drives India’s trade policy, rather than pure economic efficiency.