The FTA Paradox: When Opening Markets Does Not Guarantee Export Gains

A free trade agreement is supposed to make trade easier for both sides. But easier trade does not necessarily produce balanced gains.

This creates a peculiar problem for countries like India. A government can negotiate lower tariffs and secure preferential access for its exporters while simultaneously discovering that imports are growing faster than exports. The agreement may be functioning exactly as negotiated while the economic outcomes remain uneven.

The puzzle, therefore, is not simply whether an FTA opens markets. It is which side is better positioned to turn the resulting access into actual commercial gains once the tariffs come down.

The starting point matters more than the word “reciprocal”

Imagine two countries entering an FTA.

Country A begins with a 12% tariff on a particular product. Country B begins with a 2% tariff.

If both countries agree to reduce their tariffs by half, Country A’s tariff falls from 12% to 6%, while Country B’s falls from 2% to 1%.

The agreement is reciprocal. The economic effect is not.

The exporter from Country B suddenly receives a 6-percentage-point improvement in access to Country A’s market. The exporter from Country A receives only a 1-percentage-point improvement in Country B’s market.

The legal concession is symmetrical. The economic preference is not.

This is the central asymmetry in India’s FTA experience. The Government of India’s own trade-policy analysis has previously noted that India had much higher applied tariffs than its FTA partners, meaning the tariff concessions India granted were deeper. It also found that imports under those FTAs increased faster than exports. (scribd.com)

The current WTO tariff profile illustrates the starting point: India’s simple-average MFN applied tariff was 15.8% in 2025, while its trade-weighted MFN average was 7.9% in 2024. Only 4% of tariff lines were MFN duty-free in 2025. (ttd.wto.org)

That creates a structural difference before an FTA even begins.

When India grants preferential access, foreign exporters may be receiving a large new price advantage in the Indian market. When Indian exporters receive preferential access abroad, they may be receiving only a small additional advantage if their destination markets were already relatively open.

The size of the preference depends on the tariff gap that existed before the agreement.

That is why the word “reciprocal” can conceal an important economic distinction.

The Numbers Reveal the Puzzle

India’s experience with several older Asian FTAs makes the distinction difficult to ignore.

Between the cited pre-FTA period of 2007–09 and 2024–25, India’s trade deficit with ASEAN is reported to have increased by 381%. The corresponding increases reported for Japan and South Korea were 318% and 268%, respectively, while India’s trade deficit with the rest of the world increased by 142%. Over the more recent three-year period cited, the average annual trade deficit with ASEAN, Japan and South Korea was about $62 billion.

Official Department of Commerce tables provide a separate pre- and post-FTA comparison: India’s trade balance with ASEAN moved from a deficit of $7.06 billion in 2008–09 to $25.75 billion in 2021–22. The deficit with South Korea moved from $5.16 billion to $9.39 billion, while the Japan deficit moved from $3.54 billion to $8.22 billion over the respective cited periods.

These numbers do not establish that the FTAs caused those deficits. Trade balances are shaped by much more than tariff policy: domestic production capacity, dependence on imported inputs, exchange rates, demand conditions and the broader structure of each economy also matter.

The more useful question is why reciprocal market opening did not translate into a comparable expansion of India’s export position in these markets. The answer begins with the difference between access and usable access.

This is where the trade numbers become revealing

The pattern becomes visible in India’s trade with several major Asian FTA partners.

India’s trade deficit with ASEAN rose from $10.4 billion in 2012 to $51.2 billion in 2025. Over the broader period examined, deficits with ASEAN, Japan and South Korea increased substantially faster than India’s trade deficit with the rest of the world.

But the important point is not simply that the deficits increased.

The deeper question is what happened to India’s position inside those markets.

Between 2012 and 2025, India’s share of the ASEAN import basket fell from 3.42% to 1.71%. Its share in Singapore’s import basket declined from 2.27% to 1.71%, while its share in South Korea’s fell from 1.33% to 1.02%. Japan showed a more mixed pattern.

Taken together, these figures suggest that tariff preferences alone have not been sufficient to generate a broad improvement in India’s export penetration in several major FTA markets.

That distinction is crucial.

An FTA can remove a tariff barrier without removing the deeper constraints that prevent a firm from becoming competitive. Market access is not the same thing as market penetration.

The preference exists only if exporters use it

There is another layer to the problem.

An FTA does not automatically translate into preferential trade. Exporters have to claim the preference.

That often requires meeting rules of origin, obtaining certificates, completing documentation and demonstrating that the product qualifies for the agreed tariff treatment. The Ministry of Commerce and Industry’s FTA guidance states that rules of origin are enforced through a certificate of origin and that an exporter cannot claim the FTA’s customs tariff preference without the required certificate. (commerce.gov.in)

This creates a second asymmetry.

For an exporter entering India, where the tariff preference may be substantial, claiming an FTA benefit can produce meaningful savings. For an Indian exporter entering a partner economy where the MFN tariff is already low or zero, the same administrative effort may generate a smaller additional commercial benefit.

The scale of this utilisation matters. But it also needs to be measured carefully. In a 2017 parliamentary answer, the Ministry of Commerce said that available data showed preferential imports from some key FTA partners were a relatively low share of overall imports. The same answer said FTA evaluation was a continuous process and that each agreement contained a joint review mechanism. (commerce.gov.in)

This is an important qualification because preferential-trade utilisation is not a simple number that can automatically be compared across imports and exports. The Department of Commerce had separately acknowledged that India’s export documentation did not then capture preferential export data in a way that allowed it to quantify preferential exports across FTAs. (scribd.com)

The broader point remains important: an FTA can be equally open on paper while being unequally valuable in practice.

The reported estimates illustrate the resulting asymmetry. Only around 20–30% of India’s eligible exports are estimated to use FTA preferences, while import-side utilisation by foreign exporters selling into India is estimated at 60–70%.

The precise utilisation rate varies across agreements and products, so these figures should not be treated as a universal measure of every FTA. But the mechanism is important: a preference has value only when the tariff margin is large enough to matter and the exporter has the capacity to use it.

The missing half of the equation is productive capability

Suppose an Indian manufacturer receives zero-duty access to a foreign market.

That sounds like a major advantage. But if the firm faces higher logistics costs, weaker infrastructure, limited scale, technology gaps, certification difficulties or an inability to meet the buyer’s specifications consistently, the tariff concession may not be enough to change the commercial outcome.

This is why the export problem cannot be reduced to tariff negotiations alone.

The experience of India’s Asian FTAs also shows weaker integration into some regional production networks. India’s GVC trade as a share of gross trade declined from 37.13% to 34.38%, while GVC-related trade with several FTA partners also weakened, although the pattern was not uniform across every partner.

That qualification matters.

The figures do not prove that FTAs caused weaker GVC integration. Nor do they establish that tariff asymmetry is the sole explanation for India’s export performance.

Domestic productive capability, infrastructure, logistics, non-tariff barriers and the composition of goods being traded all matter.

But the evidence points to a more fundamental distinction in trade policy:

Removing a tariff constraint can improve the terms of access without changing the underlying ability of a firm to compete.

An FTA can therefore create a commercial opportunity while leaving the productive conditions required to exploit that opportunity largely unchanged.

Imports are not one economic category

This is also why a rising import bill cannot automatically be treated as evidence that an FTA has failed.

An imported finished consumer good can put pressure on a domestic producer. An imported intermediate input can reduce the cost of Indian production. An imported capital good can expand productive capacity.

The economic meaning of an import depends on what is being imported and what happens after it enters the economy.

This distinction becomes particularly important when examining India’s trade deficits.

A deficit with an FTA partner can certainly signal a structural weakness if imports are rising while Indian exports remain stagnant and domestic productive capabilities fail to deepen.

But the deficit itself is not the verdict.

A country can run a bilateral deficit while importing machinery, components or energy products that support domestic production. Conversely, a seemingly manageable trade balance can coexist with weak competitiveness if exports are concentrated in a narrow set of products or supported by temporary conditions.

The bilateral balance is therefore better understood as a signal that demands interpretation.

The composition of trade tells us what that signal means.

Why the deficit cannot simply be blamed on FTAs

The chronology is tempting.

India signs an FTA.

Imports rise.

The bilateral deficit widens.

Therefore, the FTA caused the deficit.

But that conclusion goes beyond what the numbers establish.

Trade balances are influenced by domestic demand, economic growth, commodity prices, exchange rates, capital-goods imports, supply conditions and the competitiveness of domestic producers.

The absence of a complete counterfactual—what India’s trade balance would have been with these countries without the FTAs—makes definitive attribution difficult.

The stronger argument is narrower and more useful:

FTA tariff structures can create asymmetric incentives, and those incentives can contribute to import growth when foreign exporters receive a larger preference margin than Indian exporters receive in partner markets.

That is a mechanism. It is not a claim that the mechanism explains everything.

This distinction is essential if trade policy is to be understood rather than politicised.

The Trade Deficit Is a Symptom, Not the Whole Story

It is tempting to look at a widening trade deficit and conclude that an FTA has failed. That is too simple.

A trade deficit does not tell us whether imports are productive inputs, capital goods, intermediate components or final consumer products. Nor does it tell us whether exports have generated higher-value activity elsewhere in the economy. More importantly, the direction of the trade balance alone cannot establish causality.

The more revealing question is whether the agreement has altered the competitive position of domestic producers.

That is where another feature of India’s tariff structure becomes important: inverted duty structures.

An inverted duty structure occurs when imported raw materials or intermediate inputs face higher duties than finished products. The effect can be particularly uncomfortable when finished goods from an FTA partner enter India at low or zero duty while Indian manufacturers continue to face duties on inputs sourced from outside the FTA network.

One documented example contrasts 7.5–10% MFN duties on steel and aluminium with machinery, industrial equipment and engineering products that can enter India duty-free under several FTAs. Similar distortions are reported in chemicals, plastics, rubber and textiles.

The problem is therefore not simply that foreign goods are entering. The tariff structure can make producing inside India relatively less attractive than importing the finished product.

That is a different kind of competitiveness problem.

When Market Opening Changes Where Production Happens

The deeper consequence of asymmetric tariff structures is that trade policy can influence investment decisions.

If a firm can obtain inputs more cheaply in an FTA partner country, manufacture there and then enter India at preferential tariffs, the location of production becomes part of the trade calculation. The incentive can shift from:

Make in India → export

towards:

Make elsewhere → export into India.

The evidence on firms locating production in ASEAN countries, including investments by Chinese and Indian companies in countries such as Vietnam, Thailand and Indonesia, illustrates why the distinction matters.

This does not mean FTAs inevitably relocate Indian manufacturing. It means that tariff preferences operate not only on the movement of goods but also on the economics of where those goods are produced.

An FTA can therefore reshape supply chains even when its immediate objective is simply to reduce tariffs.

A country does not become a stronger exporter merely because its domestic market becomes more open. It becomes a stronger exporter when domestic firms can use the new trading environment to expand their own production, productivity and market share.

Why the Asian Experience Cannot Simply Be Repeated Elsewhere

The Asian experience is an important warning, but it is not a universal verdict on FTAs.

India has also faced genuine tariff disadvantages in major Western markets. Labour-intensive sectors such as apparel, footwear and marine products have encountered tariffs that could materially affect their competitiveness. Newer agreements can therefore create export opportunities that were not previously available.

In some markets, an FTA may genuinely remove a substantial external barrier confronting Indian exporters. In others, the partner may already be relatively open while India is undertaking the larger tariff reduction.

The same policy instrument can therefore produce very different economic effects depending on the starting conditions. Comparing FTAs only by the number of tariff lines liberalised can consequently be misleading.

The more important question is: How much commercially meaningful access did each side actually gain?

The real test is not whether trade increased

This brings the argument back to the original puzzle.

The success of an FTA cannot be measured simply by asking:

Did trade increase?

Trade will often increase when barriers fall.

The harder questions are:

• Did Indian exports gain meaningful market share?
• Are Indian firms actually using the preferences?
• What kinds of products are being imported?
• Are imports strengthening domestic productive capacity or merely displacing domestic production?
• Are Indian firms entering regional supply chains?
• Are tariff concessions translating into sustained export competitiveness?
• Are the gains concentrated in a few sectors or spreading across the economy?

These questions shift the evaluation from trade volume to trade structure.

That is a much more demanding standard.

And it changes how India’s FTA strategy should be understood.

The Deeper Lesson

The most important lesson from India’s older Asian FTAs is therefore not that free trade agreements are inherently good or bad. It is that market opening and export competitiveness are two different processes.

An FTA changes the rules under which firms compete. It does not guarantee that firms on both sides enter the new environment with equal capabilities, equal tariff advantages or equal ability to use the preferences available to them.

Where the tariff margin is large, a foreign producer can gain substantially from preferential access. Where the tariff margin is already small, the corresponding export benefit may be negligible. Where domestic production is constrained, imports can respond faster than exports. And where firms cannot or do not use preferences, the market access written into the agreement may remain largely theoretical.

This is why a rising trade deficit should neither be celebrated nor treated as proof of policy failure. It is a signal that demands a deeper examination of what kind of market opening has occurred, who is able to exploit it, and where the resulting production is taking place.

The real economic question behind an FTA is whether the two countries have opened their markets on terms that allow their domestic productive systems to compete.

An FTA can remove a barrier at the border. It cannot, by itself, remove the asymmetry between two economies standing behind that border.