Beyond Bilateral Size, Why the India-New Zealand FTA Is a Strategic Milestone

Beyond Bilateral Size, Why the India-New Zealand FTA Is a Strategic Milestone

The India-New Zealand Free Trade Agreement (FTA) signed on Monday might look underwhelming when viewed in isolation, but is nevertheless significant when looking at what has been happening over the last five to six years. This impression is because New Zealand’s economy is one-sixteenth the size of India’s, and makes up less than 1 per cent of India’s total trade. Yet, this view ignores the fact that the FTA comes soon after the signing of, or closure of negotiations on, seven other trade agreements in the past three and a half years or so. It also ignores the larger policy goals that India is trying to achieve through such deals. The COVID-19 pandemic and the US tariff frictions have shown India that it needs to diversify supply chains on the import and export sides. Weaning off imports from China is a tough task. Yet, any chipping away of the 16 per cent of India’s imports that China accounts for would be welcome. Importantly, the strategic need to diversify export destinations, especially while the mercurial Donald Trump is in charge of India’s largest export market, is clear and urgent. The trade deals with Mauritius, the UAE, Australia, the EFTA nations, the UK, the EU, Oman, and now New Zealand all provide Indian exporters opportunities that they should take advantage of. Finally, dismissing this FTA on the basis of its size would be unfair to India’s negotiators who have done well to use India’s comparative advantage to push through key victories.

The Broader Context: A Flurry of Trade Deals

The India-New Zealand FTA is not an isolated event. It is the latest in a series of trade agreements that India has signed or concluded negotiations on over the past three and a half years. The list includes Mauritius, the UAE, Australia, the European Free Trade Association (EFTA) nations (Switzerland, Norway, Iceland, Liechtenstein), the United Kingdom, the European Union, and Oman. Taken together, these agreements represent a strategic shift in India’s trade policy. After decades of being a reluctant negotiator, India has become an active dealmaker.

The COVID-19 pandemic exposed the fragility of global supply chains. When China shut down, India’s factories could not get components. When shipping lanes were disrupted, Indian exporters could not reach customers. The lesson was clear: dependence on a single source is dangerous. Diversification is not a luxury; it is a necessity.

The US tariff frictions under President Donald Trump added another layer of urgency. Trump has threatened tariffs on Indian goods, called India’s tariffs “obnoxious,” and demanded that India “make him happy.” The US is India’s largest export market. A trade war with the US would be catastrophic. India needs alternative markets. It needs to reduce its dependence on the US, just as it needs to reduce its dependence on China.

The New Zealand FTA is part of this diversification strategy. New Zealand is a small economy, but it is a gateway. It is a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trade bloc that includes Japan, Australia, Canada, Mexico, Chile, Singapore, and other Asia-Pacific economies. Once India has an FTA with New Zealand, it can use that as a stepping stone to negotiate entry into the CPTPP. The strategic value is not in the bilateral trade volume; it is in the network.

The First Key Strength: 100 Per Cent Tariff Elimination

The first key strength of the FTA for India, and unprecedented, is that New Zealand will remove all goods tariffs immediately on execution of the agreement. This is not a phased reduction; it is an instant elimination. Indian exporters gain immediate, duty-free access to the New Zealand market.

What does this mean in practice? Consider the textile sector. New Zealand imports about $1.2 billion worth of garments annually, but India’s share is only around 4 per cent, largely because of higher tariffs than those faced by China, Bangladesh, and Vietnam. With duties now removed, India is better placed to compete. The same applies to leather, footwear, engineering goods, processed foods, gems and jewellery, and pharmaceuticals.

The agreement covers 100 per cent of Indian exports. There is no exclusion list for Indian goods. This is a significant achievement for India’s negotiators. They have managed to secure what they could not in other FTAs—for example, with the EU, where market access for Indian goods remains incomplete.

The Second Key Strength: Protecting India’s Sensitive Sectors

The second strength is that India managed to avoid providing any concessions on any of its sensitive sectors. Key among these exclusions is dairy, something New Zealand had been especially keen to include. New Zealand is a world leader in dairy exports. Its dairy products are cheap, high-quality, and abundant. Indian dairy farmers are vulnerable. They are small, marginal, and lack economies of scale. Opening the Indian dairy market to New Zealand would have been devastating.

India’s negotiators held firm. Dairy is not the only excluded sector. The list also includes other agricultural products where Indian farmers need protection: meat, certain vegetables, fruits, and oils. The FTA is balanced. India opens its market for industrial goods, where it is competitive, and protects its market for agricultural goods, where it is vulnerable. This is smart trade policy.

The Third Strength: Investment Commitments

The third positive is New Zealand’s commitment to facilitate investments in India worth $20billionover15years.ThisissimilartotheprovisionsintheEFTAtradepact,whereinthefourEFTAcountriescommittedtofacilitate$100 billion of investments in India over 15 years. To be sure, these are commitments to facilitate and not commitments to invest. The EFTA pact’s investment commitments have been criticised as “soft” because they are not legally binding. The New Zealand commitment faces the same critique.

But getting them included in the text of the deal is nevertheless significant. It signals intent. It creates a framework. It gives Indian states a basis to market themselves to New Zealand investors. It creates a pipeline of potential projects.

To help this along, India will create a dedicated desk to address any issues New Zealand investors might face. Such a targeted approach to foreign investment is necessary if India wants to achieve the multiple goals of weaning off China, increasing and diversifying exports, creating jobs, bolstering the capital account, and generally increasing incomes. A dedicated desk is not a guarantee of investment, but it is a signal that India is serious about attracting it.

The Strategic Dimension: Weaning Off China and Diversifying Exports

Weaning off imports from China is a tough task. China accounts for 16 per cent of India’s imports. It is the largest source of electronics, machinery, chemicals, and active pharmaceutical ingredients (APIs). Replacing China is not a matter of a few trade deals; it is a matter of building domestic manufacturing capacity. That will take years.

But any chipping away of that 16 per cent is welcome. The trade deals with New Zealand and others do not directly replace Chinese imports. They do, however, open new markets for Indian exports. A stronger export sector earns foreign exchange, which can be used to pay for necessary imports from China. A stronger export sector also creates jobs and incomes, which can be invested in domestic manufacturing.

The strategic need to diversify export destinations is clear and urgent. The US is India’s largest export market, accounting for about 18 per cent of India’s goods exports. Trump has threatened tariffs. He has called India’s tariffs “obnoxious.” He has demanded that India “make him happy.” A trade war with the US is not imminent, but it is possible. India cannot afford to be caught off guard. It needs alternative markets. The trade deals with the UAE, Australia, the UK, the EU, and New Zealand provide those alternatives.

The Other Long-Standing Need: Scaling Up Domestic Manufacturers

The other long-standing need of helping domestic manufacturers scale up remains a sticky problem. Indian manufacturers are small. The average Indian factory employs far fewer workers than its Chinese or Vietnamese counterpart. Small scale means high costs, low productivity, and inability to compete in global markets.

Trade deals alone cannot solve this problem. They can, however, provide incentives. When an Indian manufacturer knows that it can export duty-free to New Zealand, it has a reason to invest in new machinery, hire more workers, and improve quality. The FTA creates a pull factor. The government must complement it with push factors: easier access to credit, better infrastructure, simplified regulations, and stable policies.

Conclusion: A Strategic Milestone

The India-New Zealand FTA is not the largest trade deal India has signed. It will not dramatically alter India’s trade balance overnight. But it is a strategic milestone. It is part of a broader shift in India’s trade policy from reluctance to engagement. It is part of a strategy to diversify supply chains, wean off China, and find alternative markets for Indian exports. It protects India’s sensitive sectors while opening new opportunities for its competitive sectors. And it creates a framework for investment that, if realised, could have long-term benefits.

Dismissing this FTA on the basis of New Zealand’s size would be unfair to India’s negotiators who have done well to use India’s comparative advantage to push through key victories. The FTA is a win for India. It is a small win, but a win nonetheless. And in the long game of trade policy, small wins add up.

Q&A: The India-New Zealand Free Trade Agreement

Q1: Why might the India-New Zealand FTA appear “underwhelming” when viewed in isolation, and why is this view misleading?

A1: The FTA might appear underwhelming because New Zealand’s economy is “one-sixteenth the size of India’s” and makes up “less than 1 per cent of India’s total trade.” However, this view is misleading because it ignores that this FTA is part of a “flurry of trade deals” India has signed or concluded negotiations on over the past three and a half years (with Mauritius, UAE, Australia, EFTA nations, UK, EU, Oman). It also ignores the larger policy goals: diversifying supply chains away from China (which accounts for 16% of India’s imports) and diversifying export destinations away from the US (India’s largest export market, now under tariff threats from Trump). The article states: “The strategic value is not in the bilateral trade volume; it is in the network.”

Q2: What are the three key strengths of the FTA for India identified in the article?

A2: The three key strengths are:

1. 100 per cent tariff elimination by New Zealand: New Zealand will remove “all goods tariffs immediately on execution of the agreement” (not phased). Indian exporters gain “immediate, duty-free access” to the New Zealand market. The agreement covers “100 per cent of Indian exports.”

2. Protection of India’s sensitive sectors: India avoided providing “any concessions on any of its sensitive sectors,” with dairy being the key exclusion (despite New Zealand’s keen interest). The list also includes “meat, certain vegetables, fruits, and oils.” The FTA is “balanced” and “smart trade policy.”

3. Investment commitment: New Zealand committed to “facilitate investments in India worth 20billionover15years”(similartoEFTApact′s20billionover15years“(similartoEFTApact′s100 billion commitment). To help this, India will create a “dedicated desk” to address issues New Zealand investors might face.

Q3: Why is the investment commitment described as having “soft” language, and why is it still significant?

A3: The investment commitment is described as “soft” because these are “commitments to facilitate and not commitments to invest.” The EFTA pact’s investment commitments faced the same critique. However, the article argues that “getting them included in the text of the deal is nevertheless significant” because it “signals intent,” “creates a framework,” and “gives Indian states a basis to market themselves to New Zealand investors.” The dedicated desk is “a signal that India is serious about attracting” investment. Such a targeted approach is necessary for India to achieve multiple goals: “weaning off China, increasing and diversifying exports, creating jobs, bolstering the capital account, and generally increasing incomes.”

Q4: How does the FTA contribute to India’s strategy of “weaning off imports from China”?

A4: The article acknowledges that “weaning off imports from China is a tough task” (China accounts for 16% of India’s imports). The FTA does not directly replace Chinese imports. However, “any chipping away of that 16 per cent is welcome.” More importantly, the FTA “opens new markets for Indian exports.” A stronger export sector “earns foreign exchange, which can be used to pay for necessary imports from China.” It also “creates jobs and incomes, which can be invested in domestic manufacturing.” The article notes that India also needs to diversify export destinations because the US (India’s largest export market) is under tariff threats from Trump. The FTA provides “alternative markets” alongside deals with UAE, Australia, UK, and EU.

Q5: What “long-standing need” remains unresolved, and how can trade deals help address it?

A5: The “long-standing need of helping domestic manufacturers scale up remains a sticky problem.” Indian manufacturers are “small,” with “small scale means high costs, low productivity, and inability to compete in global markets.” The article argues that trade deals alone cannot solve this, but they can provide “incentives.” When an Indian manufacturer knows it can export duty-free to New Zealand, it has “a reason to invest in new machinery, hire more workers, and improve quality.” The FTA creates a “pull factor.” The government must complement it with “push factors: easier access to credit, better infrastructure, simplified regulations, and stable policies.” The article concludes that dismissing the FTA based on New Zealand’s size would be “unfair to India’s negotiators who have done well to use India’s comparative advantage to push through key victories.” The FTA is “a win for India. It is a small win, but a win nonetheless. And in the long game of trade policy, small wins add up.” The FTA is part of a “broader shift in India’s trade policy from reluctance to engagement.” It is a “strategic milestone.”