The problem with India’s free trade agreement strategy
A data-based review of India's trade with its Free Trade Agreement (FTA) partners found that trade with several key partners, including the ASEAN bloc, has become increasingly import-driven, widening India's overall trade deficit with these partners.
Trade data shows India's imports from FTA countries growing faster than exports to them over recent years, meaning FTA partners have gained greater market access into India than Indian exporters have secured in partner markets.
The pattern has been observed across multiple major agreements, including the India-ASEAN FTA (in force since 2010), and the India-Japan and India-South Korea Comprehensive Economic Partnership Agreements (CEPAs).
The findings raise questions about whether existing negative-list tariff elimination structures and rules-of-origin enforcement in India's FTAs are calibrated correctly, and about India's approach to negotiating future trade agreements.
Types of Trade Agreements: PTA, FTA, CECA, CEPA
India's trade agreements are structured in an escalating hierarchy of scope. A Preferential Trade Agreement (PTA) reduces tariffs only on a mutually agreed "positive list" of tariff lines. A Free Trade Agreement (FTA) goes further, eliminating tariffs on substantially all bilateral trade using a "negative list" (items excluded from liberalization), while each country retains its own external tariff on non-members. A Comprehensive Economic Cooperation/Partnership Agreement (CECA/CEPA) is the most extensive form, bundling goods, services, investment, intellectual property, and other regulatory areas into a single integrated package.
Key Details
- India's PTAs in force include the Asia Pacific Trade Agreement (APTA) and agreements with Afghanistan, Mercosur, and Chile.
- India's FTAs/CEPAs in force include the India-ASEAN FTA (2010), India-South Korea CEPA (2010), India-Japan CEPA (2011), India-Malaysia CECA, India-Singapore CECA, and the India-UAE CEPA (implemented 2022).
- India has trade arrangements with roughly 50-plus countries through a mix of these instrument types.
The article's critique applies specifically to FTA/CEPA-type agreements — the India-ASEAN FTA and the Japan/Korea CEPAs — where near-total tariff elimination on goods has coincided with a widening trade deficit, distinct from the more limited exposure under narrower PTAs.
Rules of Origin and FTA Misuse
Rules of Origin (RoO) determine how much value addition or processing must occur within a partner country for a product to qualify for preferential tariff treatment under an FTA, preventing goods from non-member countries being routed through a partner nation merely to claim duty benefits (a practice called "trans-shipment" or "round-tripping"). India has recently tightened enforcement — for instance, shifting from a "Certificate of Origin" to a stricter "Proof of Origin" regime — specifically to curb suspected circumvention through ASEAN routes.
Key Details
- Under the India-ASEAN FTA, the domestic value-addition threshold for preferential access is generally 35%.
- Under the India-UAE CEPA (2022), the threshold is around 40% value addition/substantial transformation, alongside a Certificate of Origin from the UAE Ministry of Economy.
- India's shift toward requiring a "Proof of Origin" (rather than a mere certificate) allows customs officials to demand more rigorous documentary verification against circumvention.
Weak or exploitable rules-of-origin enforcement is one structural explanation offered for why imports from FTA partner countries have risen faster than exports — goods produced elsewhere may enter India via FTA partner countries to benefit from tariff concessions never fully offset by reciprocal Indian export gains.
Trade Deficit and Global Value Chain (GVC) Integration
A trade deficit with an FTA partner is not automatically a sign the agreement is failing (deficits can reflect reasonable specialization gains), but a widening deficit trend combined with declining Indian export growth, as seen with ASEAN, Japan, and South Korea, signals that Indian producers have not been integrating effectively into partner countries' global value chains, even as those countries gain deeper access to India's large consumer market.
Key Details
- India's goods trade deficit with FTA partners was reported at roughly 26.7 billion in Q2 of FY2024-25, up about 23% year-on-year, with exports to these partners falling around 4% even as imports rose.
- Since the India-ASEAN FTA's implementation, long-term data shows Indian imports from ASEAN growing faster than exports over the period.
- India's imports from Japan rose from about $12.8 billion to $17.7 billion between FY2018-19 and FY2023-24 (about 38.6% growth), while imports from South Korea rose from around $16.8 billion to $21.1 billion (about 26% growth) over the same period.
These figures substantiate the article's core claim: growth in trade under India's FTAs has skewed towards imports, reinforcing calls for India to negotiate future agreements (and review existing ones) with sharper attention to market-access reciprocity and non-tariff barriers facing Indian exporters abroad.
GATT Article XXIV and the WTO Legal Basis for FTAs
FTAs and customs unions are a recognized exception to the WTO's Most Favoured Nation (MFN) principle — which normally requires equal tariff treatment for all trading partners — under Article XXIV of the General Agreement on Tariffs and Trade (GATT). This provision permits regional/bilateral trade liberalization provided that internal barriers are eliminated on "substantially all trade" and that external tariffs are not raised on average against non-members.
Key Details
- Article XXIV requires FTA members to eliminate duties and restrictive regulations on "substantially all" trade between them.
- It also permits interim agreements with a reasonable phase-in period toward full FTA status.
- India's FTA negotiating strategy operates within this WTO-consistent legal framework while pursuing bilateral/regional deals given the stalled Doha Round of multilateral negotiations.
The Article XXIV framework explains why India continues to pursue bilateral/regional FTAs (rather than relying solely on WTO multilateral tariff cuts) even while grappling with the trade-deficit problems such agreements have produced.
- India's goods trade deficit with FTA partners: approximately $26.7 billion in Q2 FY2024-25, up around 23% year-on-year; exports fell about 4% while imports rose about 5% in the same quarter.
- India-ASEAN FTA in force since January 2010; India-Japan CEPA since 2011; India-South Korea CEPA since 2010; India-UAE CEPA implemented in 2022.
- Rules-of-origin value-addition thresholds: approximately 35% under the India-ASEAN FTA; approximately 40% under the India-UAE CEPA.
- Imports from Japan rose from about $12.8 billion (FY2018-19) to $17.7 billion (FY2023-24); imports from South Korea rose from about $16.8 billion to $21.1 billion over the same period.
- GATT Article XXIV is the WTO legal basis permitting FTAs/customs unions as an exception to the Most Favoured Nation principle.