Free Trade Agreement (FTAs): UPSC Notes

Free Trade Agreements (FTAs) are formal trade pacts between countries to reduce tariffs, ease trade barriers, and promote economic integration. 

FTA is a high-value topic under GS Paper II (International Relations) and GS Paper III (Indian Economy), with frequent relevance in Prelims and Mains, especially in the context of India’s trade policy, recent FTAs, and global supply chains.

Let's study in detail about the free trade agreements!

A Free Trade Agreement (FTA) is a formal trade pact between two or more countries or economic blocs aimed at promoting cross-border trade by reducing or eliminating tariffs, quotas, and other trade barriers on goods and services. 

FTAs create a predictable trade environment, enhance market access, and strengthen economic cooperation while allowing member countries to retain their independent trade policies with non-members.

Example: India–UAE Comprehensive Economic Partnership Agreement (CEPA)

Key Features of a Free Trade Agreement (FTA)

• Tariff Reduction/Elimination on goods traded between member countries
• Liberalisation of Trade in Services such as IT, finance, and professional services
• Rules of Origin (RoO) to prevent misuse by non-member countries
• Trade Facilitation Measures to simplify customs procedures
• Investment Protection & Promotion provisions
• Dispute Settlement Mechanism for resolving trade-related conflicts
• Members maintain independent trade policies with non-FTA countries

Trade agreements vary in depth and economic integration, from limited partnerships on select goods to full economic harmonisation among nations. 

1. Partial Scope Agreements (PSA)

• Cover only a limited range of products or sectors, not the full spectrum of trade.
• Often serve as building blocks toward broader agreements.
• Useful where countries want to initiate cooperation without extensive commitments.

Example: Mexico–Cuba Partial Scope Agreement

2. Free Trade Agreement (FTA)

• Eliminates or reduces tariffs and trade barriers among member countries.
• Each member retains its own tariff regime for non-member partners.
• Focuses on creating preferential market access.

Example: India–European Union FTA (signed January 2026)

3. Customs Union

• Builds on FTAs by removing internal tariffs and adopting a common external tariff (CET) toward non-members.
• Aligns trade policies for imports from outside the bloc.

Example: MERCOSUR and the Eurasian Customs Union

4. Common Market

• Goes further than a customs union by allowing free movement of goods, services, capital, and labour among members.
• Promotes deeper integration through harmonised economic rules.

Example: European Economic Area (EEA)

5. Economic Union

• Represents the highest level of economic integration.
• Combines a common market with coordination of macroeconomic policies, and often features a common currency and unified monetary policy.

Example: European Union (EU)

Must cover this recent topic here: India-EU FTA: The Mother of All Deals | UPSC IR

India’s engagement with Free Trade Agreements (FTAs) reflects its evolving trade strategy. 

List of India’s FTAs (In Force)

As of now, India has 13 FTAs/CEPAs in force (including bilateral and regional agreements), while several others are under negotiation or review.

Note: CECA/CEPA are advanced forms of FTAs covering goods, services, investment, and regulatory cooperation.

Also read this current affairs topic here: Asia Manufacturing Index 2026: India at 6th Position (UPSC)

India’s FTA negotiations and outcomes are shaped by multiple economic, regulatory, and strategic factors. 

1. Tariffs and Customs Duties

• High tariffs remain a key concern for India’s FTA partners.
• India’s average Most Favoured Nation (MFN) tariff is among the highest globally and nearly double the world average.
• Under the MFN principle, WTO members must extend equal trade terms to all partners unless covered by an FTA.
• Tariffs are taxes imposed on imported goods, while customs duty is an indirect tax levied on imports and exports.

2. Technical Barriers to Trade (TBT)

• Stringent technical regulations, certification requirements, and conformity assessments can restrict market access.
• Lack of mutual recognition of standards raises compliance costs for exporters.

3. Sanitary and Phytosanitary (SPS) Measures

• SPS norms related to food safety, animal health, and plant protection often affect agricultural exports.
• Developing countries face challenges in meeting the advanced SPS benchmarks of developed partners.

4. Deviation from International Standards

• Non-alignment with globally accepted standards (ISO, Codex, etc.) can act as non-tariff barriers.
• Leads to disputes and delays in FTA implementation.

5. Regulatory and Administrative Discrimination

• Concerns over complex domestic regulations, licensing norms, and state-level compliance.
• Allegations of indirect discrimination through policy uncertainty.

6. Domestic Industry Protection

• India remains cautious in sensitive sectors such as agriculture, dairy, MSMEs, and manufacturing.
• Fear of import surges and trade deficits influences negotiation stance.

7. Services and Mobility Issues

• India seeks greater access for IT professionals and Mode-4 services, which many partners resist.
• Visa norms and recognition of qualifications remain sticking points.

8. Trade Deficit Concerns

• Experience of widening trade deficits with some FTA partners has led India to reassess and renegotiate older agreements.

Also read: World Bank UPSC Notes: History, Objectives, Functions & Reforms

To maximise gains from Free Trade Agreements and minimise associated risks, India needs a calibrated, future-ready FTA strategy that aligns trade liberalisation with domestic economic priorities and strategic autonomy.

1. Build Domestic Competitiveness First

Invest in R&D, logistics, infrastructure, skilling, and MSME upgradation so Indian firms can compete globally.

• Example: Production Linked Incentive (PLI) schemes to strengthen manufacturing before deeper tariff liberalisation.

2. Shift Focus to WTO-Plus and Next-Generation Issues

Prioritise digital trade, data flows, green technologies, climate goods, and services trade in FTAs with developed economies.

• Example: India–UK and India–EU negotiations increasingly focus on services, digital economy, and sustainability standards.

3. Ensure Robust Trade Safeguards

Incorporate strict Rules of Origin, safeguard duties, and anti-dumping clauses to prevent circumvention and import surges from third countries.

• Example: Renegotiation of ASEAN FTA rules to curb misuse by non-members.

4. Strengthen Institutional Coordination

Improve synergy among the Ministry of Commerce, MEA, sectoral ministries, and NITI Aayog to align trade objectives with foreign policy and industrial goals.

5. Upgrade Dispute Settlement Mechanisms

Include time-bound dispute resolution, independent panels, and enforceable rulings to enhance credibility and investor confidence.

6. Regular Review and Impact Assessment of FTAs

Institutionalise periodic reviews, data-driven assessments, and stakeholder consultations to identify gaps and recalibrate commitments.

• Example: India’s review of older FTAs with ASEAN, Japan, and South Korea.

7. Promote Inclusive and Sustainable Trade

Integrate labour standards, environmental safeguards, and MSME-friendly provisions without compromising domestic policy flexibility.

8. Incorporate FTAs for Global Value Chain (GVC) Integration

Use FTAs to attract foreign investment, technology transfer, and export-oriented manufacturing, especially in electronics, EVs, and renewables.

You might also like: List of International Organisations and Their Headquarters for UPSC