Signing free-trade deals is not enough

Free trade agreements (FTAs) are often presented as quick wins for trade and growth, promising lower prices for consumers and new markets for exporters. In practice, economic gains arise only under specific conditions. Success hinges not merely on tariff reductions, but on whether agreements induce sustained changes in production, investment, and competitiveness.

- C VEERAMANI & HIMANSHU JAISWAL

India is in one of its most active phases of trade diplomacy. It has concluded FTAs with the UAE, Australia, the European Free Trade Association (EFTA), the United Kingdom, New Zealand and Oman; negotiations with the United States are reportedly nearing completion, discussions with Canada have resumed, and region-wide talks with the European Union, the Gulf Cooperation Council and the Eurasian Economic Union continue.

This push reflects India’s effort to secure market access, attract investment and integrate more deeply into global value chains (GVCs) amid geopolitical uncertainty and supply-chain realignments.

Experience shows that not all FTAs are created equal. Their economic logic lies in trade creation — replacing high-cost domestic production with lower-cost imports from partner countries, which generates welfare gains. Trade diversion, by contrast, merely shifts imports from more efficient nonmembers to less efficient partners and reduces welfare. Judging FTAs by bilateral trade balances misses this distinction; the real test is whether they promote trade creation.