As FTAs loom, India must push sector-specific efficiencies in value chains

India's trade negotiations must be accompanied by sector-specific strategies to upgrade and align industries with global standards

The India-United States negotiations are reported to be “very close” to a trade deal (Business Standard, October 25, 2025). However, given that a trade deal with the US, when accomplished, will not be a World Trade Organization-compliant, legally-binding free trade agreement (FTA), the bilateral trade environment will continue to be ridden with uncertainty. The objective of export market diversification, therefore, remains paramount for India and FTAs can help achieve this objective.

 

So, it is encouraging to note that after having signed a comprehensive FTA with the United Kingdom (UK) earlier this year, India’s FTA negotiations with the European Union (EU) are moving towards finalisation by the end of the year. However, it may be noted that benefits of an FTA can be realised only after they are ratified by respective partner countries and preferential market access provisions are fully implemented. It is, therefore, important that the interim period between the signing and implementation of an FTA be used to prepare well to maximise potential trade creation possibilities.  This is particularly relevant in the textiles and clothing (T&C) sector, which, after agriculture, is the second-largest source of employment in India, and has been among the hardest hit by the imposition of “reciprocal tariffs” by the US. Furthermore, it is the sector where India’s export performance has been disappointing in the recent past, both globally and in the target FTA markets of the EU and UK.

 

India’s share of global textile exports increased marginally from 5.2 per cent to 5.8 per cent between 2010 and 2024. However, in clothing, which is the dominant category of global T&C exports, India’s share at around 3 per cent has remained stagnant since the turn of the century. This is particularly concerning as developing countries as a whole, accounting for 70 per cent of global T&C exports, have registered an increase in their share over the last few years.

 

China has been the top T&C exporter in the world for over a decade. Developing countries like Bangladesh and Vietnam have also posted positive gains in this period. Vietnam’s share of world clothing exports increased from less than 1 per cent in 2000 to 3 per cent in 2010, and then doubled to over 6 per cent in 2024. In fact, among the top 10 T&C exporters in the world, Vietnam has seen the highest annual percentage change in its export share in both categories of textiles and clothing.

 

In the EU, which, as a unified market, is almost twice the size of the US market, India has seen a fall in its share since 2010 in the two leading T&C importing nations, Germany and France. In comparison, China has retained its top spot in both these countries, while Bangladesh, having increased its share by more than three times since 2010, is now the second-largest source of T&C imports for the two economies. Over the last decade, Vietnam has also emerged among the top 10 source countries of T&C imports for Germany.

 

Similarly, in the UK, which is a relatively small market with less than 4 per cent share of global T&C imports, India’s share as a source country declined from 7.8 per cent to 6.3 per cent over 2010-2022, while that of Bangladesh more than doubled from 5.8 per cent to 14.3 per cent over the same period. As a result, India has been displaced by Bangladesh as the second-largest source of T&C imports for the UK. Vietnam has also, over the same period, entered the top 10 partner countries in UK’s T&C imports.

 

It needs to be understood, therefore, that even though FTAs will provide India preferential market access, Vietnam has a first-mover advantage as its FTAs with the EU and UK have been in force since 2020 and 2021, respectively. In fact, competition from Vietnam will only increase as the tariff reduction schedule to zero duty on all its T&C exports to the EU and UK will be fully effective by 2027 and 2028,  respectively. In addition, even though the strict value-addition rules of origin (RoOs) in the UK FTA place Vietnam at some disadvantage, given the high import content of its T&C exports, this should not be a reason for India to be complacent. The more flexible RoOs under the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), of which both Vietnam and the UK are members, allow imports with a certain percentage of non-originating material to continue to have preferential market access in member economies. Furthermore, participation in these high-standard, deep FTAs has given Vietnam a head start in aligning its domestic manufacturing standards with international regulatory norms. This is particularly useful in making Vietnamese exports relatively more competitive in the sustainability-driven EU market.

 

The other important aspect that needs attention is the changing nature of the T&C global value chain. In comparison with other manufacturing sectors such as electronics and precision instruments, the T&C value chain has relatively more domestic value added (DVA) content. While India has a high DVA (83.2 per cent) in the T&C sector, which is comparable with that of the leading exporter, China (89.1 per cent), this does not imply comparable competitiveness. China is at the forefront of technology-assisted and well-coordinated domestic integration of the complex fabric-to-garment supply chain. In fact, the highly integrated, efficient-to-scale production system has slowed the process of relocation of T&C firms away from China. Major retail marketing platforms like Shein and Temu in China with their vast databases on consumer preferences are using artificial intelligence (AI) for demand projections. This helps shorten their response time in a fast-changing world of fashion that is characteristic of developed economies. Further, having established back-end integration with the vast network of Chinese production units, they are able to match raw materials and manufacturing capability with demand. Combining efficient logistics and management systems with this demand-supply match, these ecommerce platforms have been able to reduce lead time while ensuring quality at competitive prices in their T&C exports to the EU and UK.

 

In comparison, India’s T&C sector has one of the longest supply chains in the world, with a large number of intermediaries between the farmer and the final consumer. The consequent lengthening of lead time and logistical delays imply higher costs and inefficiencies in the T&C value chain production in India. Added to this are longstanding policy constraints and labour market rigidities that have prevented the sector from achieving the necessary scale for technological upgradation and alignment with global demand shifts towards man-made fibres and technical textiles.

 

It is critical, therefore, that India’s accelerated pace of FTA negotiations be accompanied by sector-specific production strategies for technological upgradation and alignment with global standards.    

The author is professor, School of International Studies, JNU. Her book India’s Trade Policy in the 21st Century was published by Routledge, London, in 2022. The views are personal.

 

Data from World Trade Statistics, 2024, WTO and World Integrated Trade Solution, World Bank