Global trade has witnessed a remarkable transformation in recent years, primarily driven by the growth of "Free Trade Agreements" (FTAs). In 2023-24, India's total exports soared to a record $778 billion compared to $466 billion in 2013-14—a growth of nearly 67%. This growth emphasises the fundamental role FTAs play in facilitating international trade, enabling economic development, and reshaping global supply chains. As countries increasingly engage in these agreements, businesses face numerous challenges and opportunities that demand well-planned navigation.
The Role of FTAs in Global Sourcing
These are strategic agreements between two or more nations to reduce or eliminate trade barriers such as tariffs, quotas, and non-tariff barriers. Beyond mere tariff reductions, they address behind-the-border issues like intellectual property rights, e-commerce, government procurement, and investment facilitation. For businesses, these agreements streamline regulatory frameworks, enhance market access, and reduce operational costs, creating a more conducive environment for global sourcing.
As an emerging superpower, India's Free Trade Agreements deserve special attention. Over 50% of the country's exports now target emerging and developing economies, surpassing the share directed towards developed nations. This shift highlights their role in helping Indian businesses tap into new markets, particularly in regions like ASEAN, South Korea, and the UAE. As a result, our share in global merchandise exports increased from 1.66% to 1.81%, advancing its ranking from 20th to 17th.
Opportunities for Businesses
- Expanded Market Access
FTAs offer businesses preferential access to partner markets, eliminating or reducing tariffs and simplifying customs procedures. For instance, the India-UAE Comprehensive Economic Partnership Agreement (CEPA) eliminated duties on 97% of the UAE's tariff lines, boosting Indian trade by over 16% within its first year. Sectors such as jewellery, textiles, healthcare, and financial services have benefited.
- Reduced Trade Barriers
Due to tariff reductions, key merchandise sectors like textiles, pharmaceuticals, and petrochemicals have gained competitive advantages. Under the India-South Korea Comprehensive Economic Partnership Agreement (CEPA), customs duties were slashed by up to 100% for various industrial goods, significantly enhancing market competitiveness.
- Strengthened Global Supply Chains
FTAs streamline shipping and logistics requirements, making supply chains more efficient. Reducing delivery times and costs is vital for industries relying on just-in-time manufacturing. For example, the ASEAN-India Free Trade Area (AIFTA) liberalised tariffs on over 90% of traded products, facilitating smoother trade in commodities like palm oil, tea, and petrochemicals.
- Encouraged Foreign Direct Investment (FDI)
FTAs create favourable investment climates by assuring stable and transparent business regulations. Countries like Japan and South Korea have significantly increased their FDI in India's electronics, automobile, and infrastructure sectors, contributing to an ecosystem supporting export growth.
- Job Creation and Economic Growth
Export-oriented industries, particularly labour-intensive sectors such as textiles and handicrafts, have seen a surge in employment. The India-Australia Economic Cooperation and Trade Agreement (ECTA) is projected to generate approximately one million jobs by stimulating growth in sectors like apparel, agricultural products, and engineering goods.
Challenges in Leveraging FTAs for Global Sourcing
Businesses must navigate stringent Rules of Origin (ROO) criteria to qualify for preferential tariffs, requiring accurate documentation and certification of product origin. This process can be administratively burdensome, and non-compliance may lead to denied tariff benefits or penalties. Additionally, while FTAs offer greater market access, they also introduce competition from international players, putting pressure on domestic industries that may not be globally competitive. Despite tariff reductions, businesses often encounter non-tariff barriers (NTBs), such as complex regulatory standards, environmental and labour compliance requirements, and quality certifications. These hurdles can significantly offset the advantages of these agreements, particularly for SMEs that may lack the resources to meet diverse standards.
The trade agreements can also disrupt local industries by enabling the invasion of cheaper imports, threatening domestic manufacturers. India's withdrawal from the Regional Comprehensive Economic Partnership (RCEP) in 2019 was driven by concerns over market flooding by Chinese goods, stressing the importance of strong Rules of Origin clauses. Intellectual property rights and regulatory challenges further complicate FTA benefits. For example, during negotiations with the European Free Trade Association (EFTA), India resisted data exclusivity clauses that could have led to higher prices for generic pharmaceuticals.
Balancing Opportunities and Challenges
Businesses must adopt strategic measures to fully harness the potential of trade agreements. Investing in compliance systems to efficiently manage documentation and certification for Rules of Origin can mitigate compliance risks. Focusing on sectors where businesses have a comparative advantage, such as textiles, pharmaceuticals, and engineering goods, will maximise the benefits derived from FTAs. Engaging with policymakers to advocate for fair trade practices is essential to ensure balanced market access with protections for vulnerable sectors. Diversifying supply chains by reducing dependency on single markets or suppliers can safeguard businesses against geopolitical risks and potential supply disruptions.
The Bottomline
FTAs are key to transforming global sourcing by unlocking new markets, reducing operational costs, and leading to cross-border investments. For India, they have driven export growth and integrated the country more deeply into global supply chains. However, the benefits come with challenges that require careful tactical management. To capitalise on these agreements, businesses must proactively adapt to compliance requirements, global competition, and evolving trade policies. As India continues to expand its FTA network, including ongoing negotiations with the UK, EU, and other international partners, businesses that align their policies with these dynamic trade landscapes will be best positioned to thrive in the global market.
About the Author
Pushkar Mukewar, CEO and Co-Founder at Drip Capital, a pioneering digital trade finance company with operations in Mumbai and Palo Alto. Under his leadership, Drip Capital is revolutionizing global trade for small businesses, making it simpler and more accessible. Pushkar brings over a decade of rich experience in finance and technology to the table. He holds an MBA from The Wharton School and an MS from Georgia Tech. His professional journey began at Capital One, specializing in risk management and new product development. He later joined Oliver Wyman as a consultant, working on data-driven strategies for retail and technology clients across North America, Europe, and the Middle East.
