Negotiating free-trade agreements (FTAs) is tough; using them is tougher. Governments present them as diplomatic breakthroughs while businesses often expect them to deliver immediate export gains. In practice, trade growth depends less on the agreement itself than on how much firms are prepared to use it.
Negotiating free-trade agreements (FTAs) is tough; using them is tougher. Governments present them as diplomatic breakthroughs while businesses often expect them to deliver immediate export gains. In practice, trade growth depends less on the agreement itself than on how much firms are prepared to use it.
The India-UK FTA improves India’s market access. But assuming that lower tariffs will automatically translate to higher exports mistakes an opportunity for an outcome. For trade to grow significantly, small businesses must export much more. For many of them, tariffs are not the principal obstacle.
The India-UK FTA improves India’s market access. But assuming that lower tariffs will automatically translate to higher exports mistakes an opportunity for an outcome. For trade to grow significantly, small businesses must export much more. For many of them, tariffs are not the principal obstacle.
Import levies in the UK were already relatively low. The agreement will no doubt make Indian textiles, apparel and other labour-intensive products more competitive against suppliers from Vietnam, Bangladesh and Turkey that already enjoy duty-free access.
To that extent, the FTA narrows the price gap but does not create reputations. Indian firms must still wrest market share from competitors that possess what matters most in export markets: trusted brands, efficient supply chains, long-standing relationships with retailers and deep market knowledge. The competition may also enjoy lower logistics costs and easier access to trade finance.
Modern trade is governed as much by standards as by tariffs. British buyers care about certifications, traceability, sustainability, product consistency and reliable delivery. A manufacturer unable to satisfy these will gain little from a tariff concession.
Nor are preferential tariffs available merely for the asking. Exporters must demonstrate that their products satisfy Rules of Origin by proving that sufficient value has been added in India. Large firms generally have dedicated teams to manage such compliances. For small exporters, these requirements impose significant administrative costs. In some sectors, they may exceed the value of the tariff preference itself.
The government acknowledges this weakness. Earlier this year, commerce secretary Rajesh Agrawal observed that India’s record of utilizing FTAs is “not great” and urged industry to leverage new agreements instead of assuming that market access would generate exports on its own.
India’s FTA utilization rate is estimated at only 25-30%, compared with 70-80% in many developed economies and 40-50% in Vietnam and South Korea. Unlike several trading nations, India does not publish detailed utilization data or assessments of the obstacles firms face in overseas markets, such as trade-barrier reports from the US. Policymakers are trying to improve what they do not adequately measure.
Low FTA utilization by small firms is not just an Indian problem. Around the world, many firms entitled to preferential tariffs choose not to claim them because the administrative burden outweighs the expected savings.
Research submitted to the UK Parliament found that only 19% of smaller British firms exporting beyond the EU were using an FTA, while more than half were not using one at all. The reasons are not all that different from what Indian firms face: difficulty in understanding Rules of Origin, completing paperwork and getting trade finance.
In 2018, India’s commerce ministry launched an FTA Utilisation Mission to raise awareness, simplify compliance with Rules of Origin and increase the use of agreements. Yet, many of the practical bottlenecks—notably delays in goods and services tax refunds that tie up working capital—still undermine exporter competitiveness.
The India-UK deal’s phased implementation offers a clue to where attention should now shift. Many tariff reductions will be introduced over several years.
Exporters should treat this as preparation time to upgrade quality systems, obtain certifications, strengthen logistics and cultivate buyers. Those that do so are likely to capture the greatest gains once the agreement is fully operational. Those that wait for tariffs alone to generate orders may be disappointed. Joint training programmes with partner countries can also help exporters navigate testing, certification and conformity-assessment procedures.
Export promotion councils and industry associations have a role too. They should conduct regular surveys of exporters to identify recurring obstacles. Such information would help the government focus its support on firms that need it most.
Industry bodies should work with firms to identify products with high export potential and help adapt them to the standards of destination markets. Ayurveda products, for example, may require reformulation to comply with the UK’s limits on heavy metals and maximum residue levels before they are welcomed.
In sectors such as health and wellness, regulatory approval is often the gateway to trade. The ministry of Ayush should focus as much on securing product approvals and regulatory compliance as on promoting traditional medicine abroad. It should pursue mutual recognition of the qualifications of healthcare professionals and caregivers, so that services can accompany products in overseas markets.
Governments can open markets, but cannot create productivity, reliability or trust. Those are earned in the marketplace. The greatest trade gains from FTAs will come only once broader domestic reforms are matched by industry readiness. Neither is sufficient on its own.
The author are, respectively, senior fellow (consultant) and professor, Indian Council for Research on International Economic Relations.