FTAs a good start, but can't fulfil India's export ambitions by themselves

Free trade agreements (FTAs) are commonly presented as instruments that will automatically and dramatically expand bilateral trade. The India-New Zealand agreement signed in April this year aims to double trade within five years. The India-UK deal that came into effect in July aims to double trade by 2030. And the “mother of all deals” with the European Union targets bilateral trade of $200 billion by 2030, an increase of about 50 per cent from $136 billion in 2024-25. 

There is, of course, nothing wrong with ambitious targets. At the very least they signal a desired direction of travel and provide a useful benchmark for measuring success. But they cannot substitute for the spadework needed to turn aspirations into achievements. In the case of trade, the signing of an FTA should be treated as only the beginning of a marathon. The hard yards of regulatory alignment, investment protection and investment facilitation lie ahead if the trade expansion potential of an FTA is to be fully realised. 

Tariff reduction is certainly important. Lower duties make trade commercially viable, especially in sectors with thin margins and high tariff barriers. In India, tariff preferences should immediately boost exports in textiles, clothing, leather, fisheries and agricultural products, which are labour-intensive industries where competitiveness hinges on relative tariff margins. But by itself, this is a limited outcome, improving price competitiveness without altering the underlying structure of production. The larger opportunity lies in using FTAs to attract investment into new, higher-value segments of the supply chain. 

This investment pull is strongest when tariffs are reduced on intermediate goods, such as components, machinery, specialised materials, and semi-finished products that circulate within regional and global value chains. When these tariffs fall, FTAs become magnets for firms seeking to optimise location. Companies can import high-quality components from an FTA partner, undertake assembly, processing, design or testing domestically, and then export the finished or further-processed goods back to the partner market or to third countries. In this way, tariff concessions shape not only trade flows but also firms’ decisions about where to situate different stages of their value chains. 

For India, this is particularly salient. The types of modern industries in which the country desires a larger footprint — electronics, automobiles, medical devices, renewable energy equipment, aerospace components and pharmaceuticals — do not operate through fully domestic production chains. They depend intrinsically on the cross-border movement of inputs and technology. Reducing tariffs on intermediate products lowers production costs, improves access to quality inputs, and encourages firms to invest in India as a manufacturing and export base. 

The next step is regulatory alignment. Often, the chief barriers to trade today are not tariffs but standards, certification requirements, and sector-specific regulatory approvals. Regulatory alignment converts legal market access into usable market access. Mutual recognition arrangements, common technical standards, and quicker conformity assessments reduce friction for firms, especially in technology-intensive sectors, where compliance with technical standards is central to market entry. 

The third step is investment protection. Firms will more readily commit capital to expanding capacity, upgrading technology, training workers and building supplier networks when they have confidence in the governance framework covering their investment. They should be secure in the knowledge that rules will not change unpredictably, that contracts will be meticulously honoured, and that disputes will be resolved by impartial adjudicators. 

This is more important the greater the technical complexity of the industry. It is, therefore, eminently in India’s self-interest to embed investment-protection clauses within FTAs — transforming them into comprehensive free-trade and investment agreements — or to conclude investment protection agreements immediately after signing an FTA. European Commission President Ursula von der Leyen is not wrong in describing this as “unfinished business” between India and the EU. 

The fourth step is investment facilitation, which is distinct from protection. Protection reassures investors that their capital will be treated fairly; facilitation helps them to deploy that capital efficiently. Effective facilitation requires single-window clearances, short and transparent approval timelines, predictable taxation, smoother Customs procedures and strong coordination between the Centre and states. Joining the World Trade Organization’s Investment Facilitation initiative would further signal India’s seriousness about domestic reforms to both external partners and internal implementing agencies. 

By themselves, FTAs are neither necessary nor sufficient for expanding trade and investment. They are better regarded as a vital link in a chain of reforms to spur such expansion. Tariff cuts spark interest; eliminating duties on intermediate goods pulls investment into the value chain; regulatory alignment clears the path; investment protection builds the confidence to commit capital; and investment facilitation turns that commitment into factories, jobs, and exports. India’s recent flurry of FTAs is an excellent start. But it is only a start. 

The writers are, respectively, director and visiting professor, Indian Council for Research on International Economic Relations