Free Trade Agreements (FTAs) and Economic Gains

FTAs promise benefits like lower consumer prices and new markets for exporters. However, real economic gains depend on sustained changes in production, investment, and competitiveness, not just tariff reductions.

Current State of Indian Trade Diplomacy

• India is actively engaging in trade negotiations and has concluded FTAs with several countries including the UAE, Australia, and the UK.
• Negotiations with the US are nearing completion, and discussions with Canada, the EU, and others are ongoing.
• This strategic push is aimed at securing market access, attracting investment, and integrating into global value chains amid geopolitical uncertainties.

FTAs: Trade Creation vs. Trade Diversion

• Trade Creation: Replaces high-cost domestic production with lower-cost imports from partner countries, generating welfare gains.
• Trade Diversion: Shifts imports from more efficient non-members to less efficient partners, reducing welfare.
• The real success of FTAs is determined by their ability to promote trade creation.

India's Mixed Experience with FTAs

• India withdrew from the RCEP due to concerns over trade deficits and import surges.
• Low utilisation rates and asymmetric outcomes under FTAs with ASEAN, Japan, and Korea are evident.
• Challenges include domestic supply-side constraints and limited adjustment capacity.

Issues with Rules of Origin (RoO)

• Stringent RoO can increase compliance costs, undermining the benefits of FTAs.
• Strict RoO in recent FTAs discourage participation in global value chains.

Utilisation and Awareness

• Low FTA utilisation also results from small preferential margins and limited awareness among firms.
• The absence of firm-level surveys in India hinders the assessment and design of targeted interventions.

Importance of Domestic Policy Environment

• Exploiting trade opportunities requires flexible labour and land markets.
• Rigidities in these areas constrain specialisation and resource allocation.

Complementary Role of Foreign Direct Investment (FDI)

• FDI is crucial as multinational firms can integrate domestic suppliers into global value chains.
• A supportive investment climate and domestic reforms are necessary for dynamic gains.

Strategies for Effective FTA Utilisation

• Shift focus from signing to effective implementation of FTAs.
• Suggestions include publishing utilisation data, simplifying RoO, and addressing non-tariff barriers.

Alignment with Foreign Trade Policy 2023

India's renewed push for FTAs aligns with its Foreign Trade Policy 2023, emphasizing competitiveness and global value chain integration. Real gains depend on domestic reforms that enhance firms' ability to compete, adapt, and grow.