Direction of trade and trade agreements

Detail

1. What "direction of trade" means

• Direction of trade: the countries and regions a country buys from (imports) and sells to (exports). It answers "trade with whom?", not "trade in what?".

• "Trade in what?" is a different idea. It is called the composition of trade.

• Balance of trade: the value of exports minus the value of imports.

• When imports are larger than exports, the country has a trade deficit.

• A bilateral deficit is a deficit with one partner country.

• India trades with almost every country and trading bloc in the world. A trading bloc is a group of countries that trade with each other on special terms, for example ASEAN or the EU.

2. How the direction changed over time

Phase	Main partners	Pattern
Colonial trade (before 1947)	Britain and its empire	India sold raw materials (cotton, indigo, jute, tea). It bought finished factory goods from Britain.
Planned era (1950s–1980s)	USA, UK, the USSR and the East European bloc	The USSR and East European trade was mostly rupee trade: trade settled in rupees or by barter, not in dollars.
Post-1991 liberalisation	East Asia, ASEAN, West Asia and the USA	Tariffs (taxes on imports) came down and controls were lifted. Trade grew fast and its direction moved east, towards Asia.
Present day	USA, China, UAE, Saudi Arabia, Russia and the EU	Imports come mainly from Asia and West Asia. Exports go mainly to the USA, the EU and the UAE.

• India set itself the target of doubling its share of world trade (NCERT).

3. Imports by region, 2021-22 (NCERT Table 8.6)

Rank	Region	Imports, 2021-22 (₹ lakh crore)
1	Asia and ASEAN	29.2 (by far the largest)
2	Europe	6.4
3	North America	3.8
4	Africa	3.7
5	Latin America	1.6

• Asia's imports are more than four times Europe's. Three reasons:
• Crude oil and LPG come from the West Asian Gulf (Saudi Arabia, Iraq, UAE).
• Electronics and machinery come from China.

• ASEAN (Association of Southeast Asian Nations: a 10-member bloc of Southeast Asia) supplies palm oil, coal and electronics.

• Trap: North America (3.8) and Africa (3.7) are almost level. Africa's figure is mostly crude oil (Nigeria, Angola), gold and coal (South Africa).

4. How goods move: sea, air and land

• Most trade goes by sea. Bulky goods such as crude oil, coal, ores and containers travel this way.
• Air carries high-value, light goods such as gems, medicines and electronics.
• A small share goes by land to Nepal, Bhutan, Bangladesh and Pakistan.
• This land trade passes through land ports and Integrated Check Posts (ICPs). An ICP is a border post where customs, immigration, warehousing and cargo checks all happen in one place.

ICP	Indian state	Neighbour and its town across the border
Attari	Punjab (Amritsar district)	Pakistan (Wagah)
Petrapole	West Bengal (North 24 Parganas)	Bangladesh (Benapole)
Raxaul	Bihar (East Champaran)	Nepal (Birgunj)

• Nepal and Bhutan are landlocked (they have no coastline). They depend on Indian land routes and on Kolkata and Haldia ports for their overseas trade.

5. Leading partners today (verify current)

• USA: India's largest export market.
• China: India's largest import source. India's biggest bilateral trade deficit is with China.
• India buys electronics, machinery, solar modules and active pharmaceutical ingredients (APIs: the raw chemicals used to make medicines) from China.

• India sells much less to China.

• UAE: a top partner for both oil and re-exports. It is also India's gateway to West Asia and Africa.

• Saudi Arabia: a large supplier of crude oil and LPG.
• Russia: became a top crude oil supplier after 2022.

• The Russia–Ukraine war (2022) → Western sanctions on Russia → Russian crude was sold at a discount → India's imports from Russia rose sharply.

• Netherlands and Singapore: re-export hubs. A re-export hub is a port country that receives goods and sends them on to other markets.

• Rotterdam (Netherlands) is the gateway to Europe. Refined petroleum products from India move through it.

• Singapore, on the Strait of Malacca, is the gateway to East Asia.

• The overall pattern:

• Imports have tilted towards Asia and West Asia, mainly for oil and gold.
• Exports have tilted towards the USA, the EU and the UAE.

6. Types of trade agreement (definitions)

• FTA (Free Trade Agreement): two or more countries cut or remove tariffs on most goods traded between them.
• CEPA / CECPA / CETA / TEPA: "comprehensive" agreements. They cover goods, services, investment and often government purchases, intellectual property (IPR) and the movement of professionals.
• ECTA (Economic Cooperation and Trade Agreement): an early-harvest deal. The two sides sign the easier parts first, and a fuller CEPA follows later.
• Preferential Trade Agreement: tariffs are cut on only a limited list of goods.

7. India's main trade agreements

Agreement	Partner(s) and where they are	Year
SAFTA (South Asian Free Trade Area)	The 8 SAARC countries: India, Pakistan, Bangladesh, Nepal, Bhutan, Sri Lanka, Maldives, Afghanistan	2006
India-ASEAN FTA (trade in goods)	The 10 ASEAN countries of Southeast Asia	2010
India-Mauritius CECPA	Mauritius, an island in the Indian Ocean; India's first such deal with an African country	2021
India-UAE CEPA	UAE, on the Persian Gulf	2022
India-Australia ECTA	Australia	2022
India-EFTA TEPA	EFTA (European Free Trade Association): Switzerland, Norway, Iceland, Liechtenstein. These countries are not in the EU	Signed 2024; in force 2025
India-UK CETA	United Kingdom	Signed 24 July 2025 [2][3]; came into force 15 July 2026 [5][6]
India-EU FTA	27 EU member countries	Talks concluded and announced 27 January 2026 (verify current) [7]

• What the India-UK CETA gives India:
• Textiles and clothing: the UK duty falls from about 12% to zero [2][3].
• Gems and jewellery: the duty falls from about 4% to zero [2][3].
• Shrimp and seafood: the UK duty on Indian shrimp was 4.2–8.5% and is removed. Seafood exports to the UK are expected to grow by about 70% [4].
• These gains matter most for coastal states such as Andhra Pradesh (the main state for farmed shrimp), and for Gujarat and Kerala.

• An Agreement on Social Security Contributions came into force with the CETA. Indian workers posted to the UK for short periods no longer pay social security in both countries [5].

• RCEP (Regional Comprehensive Economic Partnership): a mega trade deal of the 10 ASEAN countries plus China, Japan, South Korea, Australia and New Zealand.

• India left the RCEP talks in 2019. It feared a flood of cheap Chinese goods. It also feared harm to its dairy and farm sectors and a wider trade deficit.

• Tariff shocks from the USA (2025, verify current):

• The US raised tariffs on Indian goods in 2025.
• Labour-intensive export clusters were hit hardest:
  • Textiles and garments: Tiruppur (Tamil Nadu)
  • Gems and jewellery: Surat (Gujarat) and Mumbai
  • Shrimp: Andhra Pradesh

• India's response is to diversify its markets, which means spreading exports across more countries. The new FTAs with the UK, EFTA and the EU help with this.

• Trade policy as economics (tariffs, FTA costs and gains, trade remedies) belongs to the economy subject.

Prelims Hooks

• NCERT Table 8.6, imports by region, 2021-22, highest to lowest: Asia & ASEAN (₹29.2 lakh crore) > Europe (₹6.4) > North America (₹3.8) > Africa (₹3.7) > Latin America (₹1.6).
• ICP and neighbour pairs: Attari (Punjab) → Pakistan; Petrapole (West Bengal) → Bangladesh; Raxaul (Bihar) → Nepal.
• EFTA has 4 members: Switzerland, Norway, Iceland and Liechtenstein. Trap: EFTA is not the EU.
• India-Mauritius CECPA (2021) was India's first trade agreement of this kind with an African country.
• Trade agreements in time order: SAFTA (2006) → India-ASEAN FTA (2010) → Mauritius CECPA (2021) → UAE CEPA (2022) → Australia ECTA (2022) → EFTA TEPA (signed 2024) → UK CETA (signed 2025) → EU FTA (concluded 2026) [2][7].
• India-UK CETA: signed 24 July 2025, in force 15 July 2026 [2][5]. Textile duty falls from about 12% to zero [3].
• India left RCEP in 2019. RCEP = ASEAN + China, Japan, South Korea, Australia and New Zealand.
• Largest export market: USA. Largest import source and biggest bilateral deficit: China (verify current).
• Re-export hubs: the Netherlands (Rotterdam) and Singapore. Their trade figures are high partly because goods pass through them on the way to other markets.

Mains Points

• Asia dominates India's imports, and this follows geography (GS-I):
• India is short of energy and gold → it buys crude oil and LPG from the West Asian Gulf and gold from the UAE and Switzerland.
• Its manufacturing is shallow → it buys electronics and machinery from China and East Asia.

• The result is a large and growing deficit with China. This drives the push for import substitution and Production-Linked Incentive (PLI) schemes.

• Little trade with neighbours:

• Land trade is a small share of India's total trade.
• The causes are border politics (for example, closures at Attari), traffic jams at ICPs and weak road and rail links.

• So South Asia's potential under SAFTA is largely unused. ICPs such as Petrapole and transit routes for landlocked Nepal and Bhutan are the remedy.

• The new generation of FTAs (UAE, Australia, EFTA, UK, EU) is a policy of market diversification:

• It reduces dependence on one market, such as the USA. The 2025 US tariff shock showed this risk.

• It protects export clusters that employ many workers: Tiruppur (textiles), Surat (gems and jewellery) and the Andhra Pradesh coast (shrimp) [3][4].

• The direction of trade has shifted over time:

• from Britain (colonial era),
• to the USSR through rupee trade (planned era),
• to East and West Asia (after 1991).
• Each shift reflects changes in the world's economic centres of power and in India's energy needs.