Free Trade Agreements (FTAs): Why Signing Them Is Only the First Step

Key Developments

• India has recently concluded major Free Trade Agreements (FTAs) with:
  • European Union
  • United Kingdom
  • Australia
• These mark a reversal from a prolonged inward-looking trade policy phase.
• EU + UK together account for ~30% of global imports of low-skill manufacturing products (apparel, footwear, assembled electronics) — a $3.5 trillion market.
• FTAs provide Indian exporters zero-duty access to this massive market, eliminating previous tariff disadvantages (10–12% on apparel, up to 17% on footwear) faced against competitors like Bangladesh (zero-duty to EU) and Vietnam (EU FTA since 2020).

Why FTAs Matter: Signalling & Opportunity

• Signal policy stability→ make long-term investment viable for global firms pursuing China-plus-one, Vietnam-plus-one, or Bangladesh-plus-one strategies.
• Manufacturing in India for European markets now commercially attractive.
• India’s export headroom is substantial:
  • India exports ~18 percentage points below its potential in European low-skill manufacturing (relative to labour endowment share).
  • Equivalent to roughly $160 billion in annual export opportunity.

Success Metric

Not signing ceremonies, but measurable gains in global market share — especially in labour-intensive, low-skill manufacturing sectors.

Four Critical Domestic Challenges to Convert Market Access into Export Gains

• Standards & Non-Tariff Measures (NTMs)
  • NTMs now affect 90% of world trade (up from 15% in late 1990s) — product safety, environmental norms dominate barriers.
  • Compliance costs high for developing-country firms; one non-compliant shipment can trigger industry-wide bans/inspections (e.g., past pharma, shrimp, agri export disruptions).
  • Solution: Stronger industry self-regulation + government support (testing infrastructure, technical assistance). Better to reject shipments domestically than face foreign rejections.
• Trade Regime Complexity
  • India’s tariff schedule overly complex: >140 unique ad valorem rates, many specific tariffs, numerous exceptions/conditionalities.
  • Example: UK FTA has simple structure (zero-duty, excluded, quota); India’s has >20 categories.
  • Creates discretion, disputes, compliance burden (e.g., Volkswagen $1.4 billion dispute over auto parts classification).
  • EU FTA example: Wine tariff cut from 150% to 20% only above €2.5/litre → invites invoicing manipulation & future audits.
  • Lesson from GST: Rate rationalisation reduces friction → same needed for tariffs.
• Access to Competitive Inputs & Capital Goods
  • FTAs open export markets but do not guarantee low-cost inputs/machinery.
  • Many capital goods/process machines in UK FTA get zero duty only after long phase-outs.
  • Best equipment often from non-FTA countries → high MFN tariffs raise economy-wide costs, slow upgrading, weaken competitiveness.
  • FTAs cannot substitute for low, uniform tariffs overall; protection should shift to targeted subsidies instead of tariffs.
• Credibility & Sustained Commitments
  • India has history of undermining own FTAs post-signing via anti-dumping duties, Quality Control Orders (QCOs), etc.
  • Example: Man-made fibre QCOs restricted Indonesian imports despite FTA → raised input costs, hurt garment exports.
  • Protecting upstream producers harms downstream exporters.
  • Erratic regulatory orders damage credibility as reliable trade partner.
  • Phased commitments create windows for domestic lobbies to seek protection → mindset shift needed.

Positive Domestic Moves & Remaining Constraints

• Progress: Labour Codes simplification, GST rate rationalisation, solar infrastructure expansion, proposed deregulation commission.
• Ongoing US trade talks handled maturely via back channels.

Major constraint: High input costs (especially power and credit) — Economic Survey stresses that export discipline requires achievable and affordable competitiveness.

Sharing is caring!