Free Trade Agreements

A Free Trade Agreement (FTA) is a deal between two or more countries to remove or sharply cut import taxes (tariffs) on most of the goods they trade with each other. Each country still keeps its own tariffs for countries outside the deal. Many modern FTAs also cover services, investment, digital trade and rules like intellectual property. The goal is more trade, cheaper goods and bigger markets for businesses.

Why do countries sign FTAs?

Imagine an Indian garment maker selling shirts in Europe. If Europe charges a 12% tax on Indian shirts but zero tax on shirts from a country that has an FTA with Europe, the Indian shirt looks costlier on the shop shelf. An FTA removes this disadvantage. Countries sign FTAs to:

• get cheaper entry for their exports into large markets;
• attract foreign investment and join global supply chains;
• get cheaper raw materials and machines for their own industries;
• build strategic and political ties with friendly countries.

Where do FTAs fit in world trade rules?

After the Second World War, countries created the General Agreement on Tariffs and Trade (GATT) in 1947. It was replaced by the World Trade Organization (WTO) on 1 January 1995. India is a founding member of both. The central rule of the WTO is Most-Favoured-Nation (MFN) treatment, in Article I of GATT. It means that if a country gives a lower tariff to one WTO member, it must give the same lower tariff to all members. It is like a shop that must give the same discount to every customer.

An FTA gives a better deal only to its partners. So it is an exception to MFN. The WTO allows this only under certain rules:

• Article XXIV of GATT: allows FTAs and customs unions for goods, if they remove duties on "substantially all the trade" between the partners and do not raise barriers against outsiders. Tariffs must be removed within a reasonable time.
• Enabling Clause (1979): a decision from the Tokyo Round of trade talks. It lets developing countries give each other trade preferences on easier terms. Many Asian and South-South deals use this route.
• Article V of GATS (General Agreement on Trade in Services): allows similar agreements for services. The deal must have "substantial sectoral coverage": it must cover many service sectors, a large share of services trade and all the ways of supplying a service. It must also remove almost all unfair treatment of the partner's service firms. This test is looser than the "substantially all the trade" test for goods.

Levels of economic integration

Economists describe a ladder of trade deals, from shallow to deep:

1. Preferential Trade Agreement (PTA): partners cut tariffs on a limited list of goods, not most trade.
2. Free Trade Area (FTA): tariffs removed on most trade among members; each member keeps its own tariffs for outsiders.
3. Customs Union: an FTA plus a common external tariff (all members charge outsiders the same tax). Example: the Southern African Customs Union.
4. Common Market: a customs union plus free movement of labour and capital.
5. Economic Union: a common market plus common economic policies, sometimes a common currency. Example: the European Union, where many members use the euro.

What does an FTA contain?

A typical modern FTA has these key parts:

• Tariff schedules: lists of goods with how much the tariff will be cut and over how many years. Some goods go to zero at once; others are phased out over 5 to 10 years or more.
• Negative list or sensitive list: goods on which a country gives no tariff cut, to protect its farmers or weak industries.
• Tariff-rate quotas (TRQs): a middle path for goods where full opening is risky. A fixed quantity each year enters at a low tariff. Anything above that quantity pays the normal, higher tariff. Example: under the India-UK deal, India lets a fixed number of UK cars in each year at a lower duty.
• Rules of origin (RoO): rules that decide if a product really comes from a partner country. Without them, a third country could send goods through a partner to avoid tariffs. This is called trade deflection. A common test is a minimum share of local value addition.
• Safeguards: tools that let a country bring back tariffs for a while if a sudden rush of imports hurts local industry.
• Services and investment chapters: rules on professionals working abroad, banking, IT and protecting investments.
• Newer areas: intellectual property, government procurement, digital trade, labour and environment standards.
• Dispute settlement: a way to resolve fights over the deal.

Sometimes a full deal takes years to finish. Then partners may first sign a smaller interim agreement, also called an early harvest deal. It cuts tariffs on a short list of goods quickly, while talks on the full FTA go on. Under Article XXIV of GATT, an interim agreement is allowed only if it has a plan and a timetable to reach the full FTA within a reasonable time. A 1994 WTO understanding on Article XXIV says this time should go beyond 10 years only in exceptional cases.

India's FTA names

India uses different names, but they are all types of trade agreements:

• CECA (Comprehensive Economic Cooperation Agreement): usually starts with goods and adds services and investment later. Examples: India-Singapore CECA (2005), India-Malaysia CECA (in force from 1 July 2011).
• CEPA (Comprehensive Economic Partnership Agreement): covers goods, services, investment and more from the start. Examples: India-South Korea CEPA (2010), India-Japan CEPA (2011), India-UAE CEPA (in force from 1 May 2022).
• CECPA (Comprehensive Economic Cooperation and Partnership Agreement): India-Mauritius CECPA, signed on 22 February 2021 and in force from 1 April 2021. It is India's first trade agreement with an African country.
• ECTA (Economic Cooperation and Trade Agreement): India-Australia ECTA (in force from 29 December 2022).
• TEPA (Trade and Economic Partnership Agreement): India-EFTA TEPA, signed on 10 March 2024 and in force from 1 October 2025. EFTA's members are Switzerland, Norway, Iceland and Liechtenstein. It is the first Indian trade deal with a commitment on investment: EFTA aims to bring $100 billion of investment into India over 15 years.

India's journey with FTAs

India's early deals were with neighbours and Asia:

• India-Sri Lanka FTA: signed in 1998, in force from 2000.
• SAFTA (South Asian Free Trade Area): signed in 2004 by SAARC countries, in force from 2006.
• ASEAN-India Trade in Goods Agreement: in force from 1 January 2010.

Many Indian industries later complained that these Asian deals increased imports more than exports, and India's trade deficit with partners like ASEAN grew. In November 2019, India decided not to join RCEP, a large Asia-Pacific deal that included China, mainly because of fears of cheap Chinese imports. After that, India shifted towards deals with rich economies that buy Indian goods: the UAE and Australia (2022), EFTA (2024), the UK (Comprehensive Economic and Trade Agreement, signed 24 July 2025, in force from 15 July 2026), Oman (signed 18 December 2025, in force from 1 June 2026), New Zealand (concluded December 2025, signed 27 April 2026) and the European Union (concluded January 2026).

The UK government's own study estimates that the India-UK deal will raise yearly two-way trade by about £25.5 billion (about 39%) in the long run, by 2040. Such numbers are only projections. The real gain depends on how many firms actually use the deal.

India is also starting fresh talks with more partners. Before formal talks begin, both sides sign Terms of Reference (ToR): the agreed agenda that says what the talks will cover. India signed ToR with Israel on 20 November 2025, with the Gulf Cooperation Council (GCC) on 5 February 2026 and with Canada on 2 March 2026 (for a CEPA).

Talks with all three had started years earlier and then stalled: with Israel from 2010, with the GCC in 2006 and 2008, and with Canada from 2010 until they were paused in 2023. With Canada, India first tried the early harvest route. From 2022, the two sides negotiated a small interim deal called the Early Progress Trade Agreement (EPTA). Those talks were paused in September 2023. The new talks aim straight at a full CEPA.

With the United States, India is negotiating a Bilateral Trade Agreement (BTA) in stages. A February 2026 India-US joint statement set out a framework for a first interim agreement, with the fuller BTA to follow. As of October 2026, both sides had finalised the text of this first stage (the first "tranche"). Lawyers were still drafting and checking the legal text, and it had not yet been signed.

The India-EU FTA is the largest trade deal either side has ever made. The EU will remove or cut tariffs on 99.5% of its tariff lines (product categories) for Indian goods, over up to seven years. India will remove or cut duties on 96.6% of EU goods exports, measured by trade value. As of September 2026, the European Commission had sent the deal to the Council of the EU for signature.

It also needs the European Parliament's consent, and India's own ratification (formal approval), before it can enter into force. As of October 2026, both sides planned to sign the deal in December 2026, and expected it to enter into force in 2027.

The road to this deal was long. India and the EU first launched talks in 2007, for a deal then called the Broad-based Trade and Investment Agreement (BTIA). The talks stalled in 2013 and were relaunched in June 2022. The final deal creates a free trade zone of about 2 billion people.

Both sides kept their most sensitive farm products out of the deal. India protected dairy, cereals, poultry, soymeal and some fruits and vegetables. The EU kept out beef, chicken meat, rice and sugar. In return, India will cut its tariff on European cars in stages, from 110% to as low as 10%.

Commonly confused concepts

• FTA vs Customs Union: In an FTA, each member keeps its own tax for outsiders. In a customs union, all members charge outsiders the same tax. That is why FTAs need rules of origin, and customs unions do not need them inside the union.
• FTA vs PTA: A PTA cuts tariffs on only some goods. An FTA removes tariffs on most trade.
• MFN tariff vs preferential tariff: MFN is the normal rate a country charges all WTO members. A preferential tariff is the lower rate given only to FTA partners.
• Trade agreement vs BIT: A trade agreement is mainly about goods and services crossing borders. A Bilateral Investment Treaty (BIT) is about protecting foreign investment.
• Article XXIV vs Enabling Clause: Article XXIV applies to all WTO members and needs "substantially all trade" covered. The Enabling Clause is only for deals among developing countries and has softer conditions.

Issues, criticism and the way forward

• Low use by exporters: Studies have found that Indian exporters often do not use FTA benefits, because rules of origin paperwork is complex. This is called low utilisation.
• Rising trade deficits: India's deficits grew with some FTA partners, such as ASEAN, Korea and Japan. Critics say India opened too much without getting enough back.
• Routing of goods: Goods from non-partner countries sometimes enter through FTA partners by faking origin. India brought in stricter origin checks under the CAROTAR 2020 rules (Customs Administration of Rules of Origin under Trade Agreements).
• Weakening of the WTO: Too many FTAs create a messy "spaghetti bowl" of overlapping rules. Some experts say they weaken the WTO's MFN system.
• Shrinking gains when a partner opens to everyone: An FTA tariff cut helps only if the partner's normal (MFN) tariff is high. Switzerland removed its import tariffs on all industrial goods, for every country, from 1 January 2024. So TEPA gives Indian industrial goods little extra edge there. This loss of advantage is called preference erosion.
• Protecting farmers and small firms: Sensitive sectors need careful protection through negative lists and safeguards.
• Way forward: Experts suggest reviewing old FTAs (India and ASEAN are reviewing theirs), simpler origin rules, better awareness among small exporters, and deals focused on partners that complement India's economy rather than compete with it.

Concepts to Know

• Most-Favoured-Nation (MFN): A WTO rule that a country must treat all WTO members equally on trade. Despite the name, it means "no favourites".
• Value addition: The value created inside a country when making a product, for example by processing raw materials into a finished item.
• Trade deflection: When goods from a non-partner country are sent through an FTA partner to unfairly get low tariffs.
• Utilisation rate: The share of eligible trade that actually uses the lower FTA tariff.
• Spaghetti bowl effect: A term by economist Jagdish Bhagwati for the tangled mess of overlapping trade deals, each with its own rules.
• Early harvest (interim agreement): A small first-stage trade deal. It cuts tariffs on a limited set of goods quickly, while the full FTA is still being negotiated. Think of it as a trailer before the full film.
• Tariff-rate quota (TRQ): A two-level tariff. Imports up to a fixed quantity pay a low tariff; imports above it pay the normal, higher tariff. Think of a shop sale where only the first 100 buyers get the discount price.
• Preference erosion: When a partner cuts its normal tariff for all countries, the special FTA discount gives less advantage than before. Think of a shop that gives everyone the member price: your membership card is suddenly worth less.
• SAARC: South Asian Association for Regional Cooperation, a group of eight South Asian countries.
• GCC (Gulf Cooperation Council): A group of six Gulf countries: Saudi Arabia, the UAE, Qatar, Kuwait, Oman and Bahrain. India already has separate deals with two of them, the UAE and Oman.