Navigating the Fractured World, India’s FTA Strategy and the Imperative of Trade Openness

Navigating the Fractured World, India’s FTA Strategy and the Imperative of Trade Openness

The recent announcement of a trade agreement with the United States—India’s ninth since 2014—marks a significant milestone in the nation’s evolving trade policy. This development is particularly notable against a backdrop of adverse global headwinds, including geopolitical fragmentation, supply chain reconfiguration, and protectionist tendencies. More than half of India’s goods exports and a third of its imports now flow through these nine preferential trade agreements, underscoring their growing centrality to the Indian economy. Yet, as the article posits, this is merely the foundation. To truly navigate a world increasingly fractured into US- and Sino-centric blocs, India must embrace a bold agenda of greater trade openness and outward orientation. The current affair, therefore, centers on a critical juncture: will India use its nascent FTA momentum to become a pivotal, agile trading nation integrated into global value chains, or will it remain constrained by high tariffs and a defensive posture that limits its strategic autonomy and economic potential?

The Geopolitical Calculus: Between Two Blocs

India’s trade strategy is inextricably linked to its geopolitical positioning. The two most significant negotiations underway are with the European Union and the United States—the world’s most powerful economic blocs. The US deal, however, is shrouded in uncertainty. The absence of a public text and the volatile rhetoric of figures like former President Donald Trump, who has made sweeping demands about Indian concessions on Russian oil, tariff elimination, and massive purchase commitments, offer “relatively limited comfort.” This highlights a fundamental tension: aligning too closely with a US-centric bloc could demand concessions that undermine India’s strategic autonomy, particularly in energy (ties with Russia) and economic policy.

Conversely, aligning with a Sino-centric bloc is “equally problematical.” Despite some de-escalation, the unresolved border situation and China’s history of using coercive economic measures—such as blocking shipments of critical materials—render a genuine partnership untenable. The massive trade deficit with China, accounting for 35% of India’s global trade deficit, is both an economic vulnerability and a symbol of imbalanced interdependence. China’s actions demonstrate it views India not as a prospective ally but as a weaker neighbor to be managed. As the article astutely notes, resolving bilateral tensions requires “narrowing their relative economic power differential.” This cannot be achieved through economic isolation but through accelerated, strategic integration with the rest of the world to build complementary strengths and reduce over-dependence.

Thus, India finds itself in a classic hedging position. Full membership in either hegemon’s bloc comes with unacceptable political and economic costs. This reality makes a diversified, multi-vector FTA strategy not just an economic preference but a geopolitical necessity.

The Core Constraint: The High-Tariff Wall

The principal obstacle to a more ambitious and beneficial FTA agenda is India’s tariff regime. As noted, India’s average Most Favored Nation (MFN) applied tariff is approximately 16%, one of the highest among major economies. These high walls, while intended to protect domestic industry, create a cascade of negative effects:

1. Hurts Export Competitiveness: High tariffs on imported inputs and intermediates increase production costs for Indian manufacturers, making their final goods less competitive in global markets. This undermines the very goal of integration into global value chains (GVCs), where components cross borders multiple times.

2. Invites Retaliation and Demands in Negotiations: Trading partners, especially developed economies, consistently point to India’s high tariffs as a key barrier. In every FTA negotiation, India is pressured to make steep concessions. A piecemeal, product-by-product reduction in each FTA is a complex and politically painful process. An overarching rationalization would provide a stronger, more coherent baseline.

3. Signals Defensiveness Over Openness: The high tariff structure signals a primarily defensive, domestic market-focused trade policy. To be seen as a confident, deal-making partner eager for integration, a strategic reduction in average tariffs is a powerful signal.

The article references a compelling historical and contemporary argument: aligning India’s average tariffs with those of the Association of Southeast Asian Nations (ASEAN). This was recommended in the 1997 “Dream Budget” and more recently by a member of the Economic Advisory Council to the Prime Minister. ASEAN, with its lower average tariffs, has successfully used FTAs as a tool for deep economic integration. For India, such an alignment would be transformative. It would immediately improve the terms of its existing ASEAN FTA (where some disparities have been challenging), provide a coherent platform for future deals, and strategically position India for potential entry into mega-groupings like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

The Strategic Pivot: FTAs with Middle Powers and the Global South

Given the complexities with the two superpowers, the most fertile ground for India’s FTA strategy lies with middle powers and the Global South. The recently concluded deals with Australia and the United Arab Emirates (UAE) are exemplars of this approach. They are deep, comprehensive, and mutually beneficial, covering goods, services, investment, and new-age issues.

The Australia deal is particularly strategic. Australia is not only a key partner in the Indo-Pacific but also a member of the CPTPP. This agreement serves as a bridge, allowing India to familiarize itself with high-standard trade rules and build a track record of compliance. Similarly, the UAE deal taps into a crucial logistics and financial hub, facilitating broader access to African and Middle Eastern markets.

The next logical steps in this “middle power” strategy involve:

• Conclusion of the ongoing UK FTA: A deal with another major, services-oriented economy.

• Revitalizing talks with Canada and the European Free Trade Association (EFTA): Expanding ties with other advanced, non-EU economies.

• Pursuing deeper agreements with key ASEAN members and South Korea: Strengthening regional value chains in Asia.

• Aggressively engaging Africa and Latin America: Crafting innovative, development-focused trade and investment pacts that address the Global South’s needs.

These agreements are less about choosing a bloc and more about building a web of interdependencies that enhance India’s strategic autonomy and economic resilience.

The CPTPP Opportunity: A Long-Term Strategic Goal

The article identifies membership in the CPTPP as a potential strategic masterstroke. The CPTPP is one of the world’s most ambitious trade agreements, with high standards on goods, services, investment, e-commerce, state-owned enterprises, and labor and environmental provisions. Its members include key Indo-Pacific economies like Japan, Australia, Vietnam, Malaysia, and Singapore, and it is seen as a counterweight to Chinese economic influence in the region.

India’s historical reluctance to join such “mega-regionals” stems from a fear of being unable to meet stringent standards. However, the geopolitical and economic calculus has changed. Joining the CPTPP would:

• Anchor India Firmly in the Dynamic Indo-Pacific: It would be a concrete statement of India’s commitment to the region’s economic architecture, beyond security-focused groupings like the Quad.

• Drive Unprecedented Domestic Reform: The requirements of CPTPP accession would act as a powerful external catalyst for long-pending reforms in areas like intellectual property, digital trade, and competition policy, boosting productivity.

• Provide an Alternative to China-Centric Blocs: It would allow India to integrate deeply with a rules-based, high-standard trading bloc that is consciously not Sino-centric.

The pathway to CPTPP, as the article suggests, begins with aligning MFN tariffs with ASEAN levels. This would demonstrate serious intent and reduce the monumental adjustment required upon accession. The ongoing FTAs with Australia, the UK, and others serve as stepping stones, gradually acclimatizing Indian industry and policymakers to the demands of 21st-century trade governance.

The Domestic Imperative: Moving Beyond Piecemeal Tariff Reform

For this grand strategy to succeed, the government must move beyond a defensive, piecemeal approach to tariff reform. Each FTA negotiation currently involves a bruising battle over tariff lines, with domestic industries lobbying for protection. This slow, transaction-cost-heavy process limits the scale and speed of India’s trade integration.

A bold, overarching rationalization—an “Open Markets Initiative”—is required. This would involve:

1. A Medium-Term Tariff Reduction Roadmap: Announcing a phased reduction of average MFN tariffs to a level competitive with ASEAN, focusing first on inputs and intermediates to boost manufacturing exports (a strategy known as “tariff inversion correction”).

2. Complementary Domestic Support: Coupling tariff reductions with robust industry support—through the Production Linked Incentive (PLI) scheme, skills development, and easier access to credit—to help sectors adapt and compete.

3. Emphasizing “Deep” FTAs: Recognizing that modern trade is about rules, not just tariffs. India must build capacity to negotiate and implement chapters on services, digital trade, sustainability, and gender, which are key to future competitiveness.

The nine existing FTAs have laid a valuable foundation, demonstrating India’s capacity to negotiate complex deals. However, they represent a fragmented, reactive approach. The fractured global trading system presents not just a challenge, but a historic opportunity for India. By embracing a proactive, strategic, and open trade policy—centered on rationalized tariffs and ambitious agreements with middle powers and mega-groupings like the CPTPP—India can transcend the binary choice between US and Chinese blocs. It can instead position itself as a unique, independent node in a networked global economy, using trade as the primary tool to narrow the economic power differential with China and secure its place as a leading, resilient economic power of the 21st century.

The “good news” of the US trade deal must be the catalyst for this larger shift. The world is fracturing, and in that fracture lies the space for a confident, open India to build its own destiny.

Q&A: India’s FTA Strategy in a Fractured World

Q1: The article argues that high MFN tariffs hurt India’s export competitiveness despite FTAs. How does this happen?

A1: High MFN tariffs create a phenomenon known as “tariff inversion,” where the tariffs on imported raw materials and intermediate goods (inputs) are higher than those on the finished products. This has a direct, negative impact on export competitiveness:

• Increased Production Costs: Indian manufacturers, including exporters, must pay high duties to import essential components, machinery, or specialized materials not available domestically. This elevates their cost of production.

• Erosion of FTA Benefits: While an FTA may give Indian finished goods duty-free access to a partner country, the high cost of inputs at home diminishes the price advantage. A competitor from a country with lower input costs (e.g., Vietnam, part of CPTPP) can undercut the Indian exporter, even without an FTA advantage.

• Disincentive for GVC Integration: Global Value Chains rely on efficiency and seamless movement of components across borders. High tariffs at each Indian border make the country an expensive and unattractive node in these networks, causing firms to locate production elsewhere. Thus, FTAs alone cannot integrate India into GVCs if the domestic tariff wall makes production uncompetitive.

Q2: Why is the proposed alignment of India’s average tariffs with ASEAN seen as a strategic move, especially concerning the CPTPP?

A2: Aligning with ASEAN tariffs is strategic for two key reasons, both relating to the CPTPP:

1. Demonstrates Credibility and Readiness: The CPTPP has high standards and expects members to have generally low and open tariff regimes. India’s current high average tariff is a major barrier to entry. By proactively aligning with ASEAN—a group that includes several CPTPP members (Vietnam, Malaysia, Singapore, Brunei)—India would signal a serious, credible commitment to trade openness. It would show it is preparing its economy for the high level of market access the CPTPP requires, making a future membership bid more plausible and negotiations smoother.

2. Improves Existing and Future Deals with ASEAN Members: Several ASEAN members are crucial CPTPP parties. Harmonizing tariffs would resolve long-standing irritants in the existing India-ASEAN FTA, where ASEAN partners often complain that India’s high MFN duties negate the FTA’s benefits. It would also make future “ASEAN+” agreements (e.g., with ASEAN as a bloc or individually) easier to negotiate, creating a more cohesive Asian trade architecture centered on compatible rules and tariff levels.

Q3: The article states that resolving tensions with China requires “narrowing their relative economic power differential.” How can a more open trade policy with other partners achieve this?

A3: A more open trade policy with partners other than China is the primary tool to narrow the power differential, as it focuses on strengthening India’s own economy rather than directly confronting China.

• Diversifying Supply Chains & Reducing Dependence: Deep FTAs with countries like Australia, Japan, South Korea, and the EU help India source critical goods, technology, and investment from alternative partners. This reduces strategic vulnerability to Chinese economic coercion (like blocking rare earths or active pharmaceutical ingredients).

• Boosting India’s Export Capability: By integrating into non-China-centric value chains (e.g., through the Australia deal into agri-tech chains, or through potential CPTPP entry into advanced manufacturing chains), India can develop new export strengths. Increased exports to large, wealthy markets generate foreign exchange, jobs, and technological spillovers, accelerating India’s own economic growth.

• Enhancing Geoeconomic Weight: As India becomes a more significant production and market hub within alternative networks (like a potential “friend-shoring” network with democracies), its geopolitical influence grows. A larger, more advanced, and well-connected Indian economy commands greater respect and cannot be as easily pressured. Economic strength, derived from global integration, translates directly into strategic weight, altering the balance in the relationship with China.

Q4: What are the risks of the “piecemeal” approach to tariff reduction through individual FTAs, compared to an “overarching rationalisation”?

A4:

• Piecemeal (FTA-by-FTA) Approach:

  • Complexity & “Spaghetti Bowl” Effect: Creates a chaotic web of overlapping rules of origin and tariff schedules, increasing compliance costs for businesses and customs administration.

  • Political Pain without Strategic Gain: Each negotiation becomes a zero-sum battle with domestic lobbies, expending immense political capital for incremental market access. The focus remains on protecting specific sectors rather than enabling a holistic economic transformation.

  • Leaves High Input Tariffs Intact: Often, FTAs focus on final goods. The high MFN tariffs on inputs remain, continuing to hurt the cost structure of all industries, including those trying to export.

• Overarching Rationalisation (e.g., aligning with ASEAN):

  • Clarity and Predictability: Provides a clear, uniform direction for the entire economy, allowing businesses to plan long-term investments.

  • Maximizes Competitiveness: A broad-based reduction, especially on inputs, lowers costs across the manufacturing sector, boosting exports universally, not just to FTA partners.

  • Strengthens Negotiating Position: When entering FTA talks from a lower tariff baseline, India can more credibly demand reciprocal openness in areas where it is strong, like services and digital trade, rather than being constantly on the defensive about its goods tariffs.

Q5: How do “deep” FTAs, covering issues like labor, sustainability, and digital trade, benefit India in the long run, even if they are challenging to negotiate today?

A5: While challenging, embracing “deep” FTA chapters is an investment in India’s long-term economic modernization and global standing.

• Drives Domestic Reform and Competitiveness: Commitments on intellectual property rights (IPR) can spur domestic innovation. Labor and sustainability standards can push Indian industries toward higher productivity and environmental, social, and governance (ESG) compliance, making them more attractive to global investors and consumers.

• Shapes Global Rules: By actively negotiating digital trade and e-commerce rules, India can ensure future global standards accommodate its interests (e.g., data sovereignty, the success of its digital public infrastructure) rather than being a passive recipient of rules set by others.

• Access to Advanced Markets: Developed economies increasingly link market access to these non-tariff issues. To be a preferred supplier for the EU or CPTPP markets, demonstrating adherence to high standards is becoming mandatory. Early adoption through FTAs prepares Indian industry for this reality.

• Builds a Modern Economic Identity: Moving beyond a narrative of tariff protection to one of high-standard engagement positions India as a confident, 21st-century economy ready to lead, not just follow. This enhances its soft power and attractiveness as a trade and investment partner.