1. Introduction
Indian Economic performance during the CEPA period—a sad curve While a purely quantitative assessment is applied to Indian economic relation with Japan, there is nothing substantial on that has experienced any kind of leap forward which was expected during the CEPA talks. The trade of goods between India and Japan has been stagnant around $18.4B in 2011-12 and a bit short of $20B in 2022-23, with fluctuating behaviour without stable growth. It was envisioned that the CEPA be ‘comprehensive’, extending beyond the trade in goods to include trade in services, investment, intellectual property, the movement of natural persons, as well as chapters on Sanitary and Phytosanitary measures, Technical Barriers to Trade and Customs Cooperation. It has been over a decade since the Agreement was enforced, yet the bilateral trade volumes remain clearly below their potential, while its legal framework suffers from structural inadequacies. This paper summarizes the trade performance under India-Japan CEPA, analyze the legal regime and explain why reforms are needed to update the regime according to recent trade agreements.
2. Trade Performance under the CEPA: A Disappointing Trajectory
On a purely quantitative level, the Indian economic relation with Japan has not witnessed the desired quantum leap that was expected when CEPA was under negotiation. Merchandise trade between India and Japan has remained flat at approximately USD 18.4 billion in 2011-12 and close to USD 20 billion in 2022-23, witnessing volatile trends without sustainable increase. Japanese share in India’s global merchandise trade has hovered at approximately 2% and India’s share in Japan’s overall trade below 1% of Japan’s total trade, which are in stark contrast with rapid acceleration of trade seen under other preferential arrangements within the region.
The use of preferential margins under the India-Japan CEPA has remained low particularly on the Indian side. The Japanese exporters have been able to take full advantage of the tariff preferences under the deal particularly in the machinery, electrical equipment and chemical products sector while Indian exporters had to face a barrage of restrictions including rigid rules of origin, non-tariff barriers through the Japanese industrial standards and food regulations and lack of market information. This fact has lead to a consistent widening of the Indian trade deficit which rose from roughly USD 3.5 billion in 2011-12 to over USD 10 billion in 2022-23 and is raising critical questions regarding the substantive market access provided under the deal and the appropriateness of the design for both economies.
3. Legal Framework: Scope, Architecture and Lacunae
India-Japan CEPA was drafted as a comprehensive deal following standard free trade agreements of its era. It consists of 16 chapters and numerous annexes as well as detailed schedules of commitments, the legal provisions under which require assessment on four fronts:
3.1 Trade in goods and tariff liberalisation: Tariff elimination commitments under the deal were framed on a differential basis-India had committed to abolish tariffs on roughly 94 percent of its tariff lines over a period of ten years and Japanese tariff cuts were on approximately 95 percent of tariff lines with substantial exceptions for sensitive sectors like agriculture, leather goods, and several industrial items. Importantly, the exclusion of the major agricultural items like rice, wheat and dairy-products in which India had a strong interest, has greatly diminished the value of the trade deal for Indian exporters. Moreover, the imposition of tariff rate quotas and specific safeguards has been incorporated to allow Japan substantial flexibility in limiting import without technically contravening the deal.
3.2 Rules of Origin: Rules of origin under CEPA were product specific and largely followed a simple change in tariff classification of the product at heading level together with the regional value content requirement of up to 40%. There are bilateral rules of cumulation and no regional cumulation is allowed which prevents exporters from sourcing inputs from efficient third countries (within the region) without loss of preferential treatment. The administrative complexity and documentation involved through certificates of origin from designated agencies make it uneconomical for Indian small and medium enterprises and an exporter self-certification approach that is becoming common in other mega-regional arrangements like RCEP is conspicuous by its absence.
3.3 Services and Investment: The provisions on trade in services follow a positive list approach by detailing the sectors which can be accessed along with certain limits on market access and national treatment provisions. Japan secured valuable market access concessions in financial, telecommunication and business services whereas the Indian main offensive interests-like the cross-border supply of IT and IT enabled services, Mode 4 access for natural persons, have not been successfully protected by the lack of mutual recognition agreements and restrictive visa regime outside the CEPA’s contractual framework. Investment chapter follows the normal post-establishment national treatment clause and lacks investment state dispute settlement mechanism altogether. State-to-state consultation and arbitration are prescribed for the settlement of investor-state dispute settlement, a clause which severely impairs the overall protectiveness for foreign investors. Investment chapter should follow the standard approach adopted in other bilateral investment treaties and investment chapter in FTA in order to allow the regime to catch up to the modern standards in the absence of effective investor state dispute settlement mechanism the India-Japan investment chapter could fall short for Japanese investor in India.
3.4 Non-tariff barriers and Regulatory cooperation: The agreement sets up committees for SPS and TBT but with only consultative power. The lack of mandatory and enforceable provisions in the CEPA for the harmonisation or mutual recognition of conformity assessment procedure allows Japanese Ministry of health, Labour and Welfare and other relevant agencies like Ministry of agriculture, forestry and fisheries to maintain stringent product standards, which has functioned as non-tariff barriers for the Indian exporters particularly in pharmaceuticals, agriculture and textiles industry, and these provisions have hardly proved effective for India so far.
4. The Need for Reform:
Towards a Modernised Economic Partnership Based on the shortcomings described above it is essential that the India-Japan CEPA is reviewed and renegotiated comprehensively: First, tariff liberalisation and market access issues in Japan’s agricultural sector need to be addressed and tariff rate quotas shall be broadened or abolished entirely. India shall have to seek faster liberalization of labour-intensive industries wherein it has comparative advantage in textiles, foot-wears and agricultural processed food.
Second, the rules of origin system need to be upgraded, with diagonally cumulation of inputs between India and other Asian Economies such as ASEAN countries. The mechanism of exporter certified self-declaration needs to be incorporated in line with EU GSP regime to enable compliance in affordable manner. Small de minimis thresholds for calculation of origin will improve utilization of the deal.
Third, substantial upgrades in the services and investment regime are necessary. The provision on trade in services shall follow the negative list approach to allow for a comprehensive coverage of services and autonomous liberalisation. A well-framed and binding ISDS mechanism should be incorporated to facilitate Japanese FDI flows to India, which has remained well below potential due to these critical lacunae, in an environment where modern bilateral investment treaties incorporate ISDS as standard.
Fourth, regulatory harmonisation needs to be moved from consultative to binding mechanism through incorporation of mutual recognition agreements in critical areas such as pharmaceuticals and medical devices. Furthermore, an effective and time-bound dispute settlement mechanism for non-tariff barriers shall be introduced as non-tariff barriers for Indian exports have been the most difficult impediment to increased bilateral trade.
Finally, to ensure dynamism and flexibility in the agreement a periodic review mechanism, an evolutionary clause missing from the original pact, shall be introduced with the establishment of a joint commission, which will have the powers to issue interpretative decision and modify schedule of commitments through simplified procedures rather than a complete renegotiation every time there is an economic shift or adaptation required.
5. Conclusion
Beyond being a symbolically important document, the CEPA has proved a disappointment on the twin counts of the scale of trade it has enabled and the legal disciplines it has established. The structure and architecture of the agreement are more characteristic of the political economy compromises of the time of its conception than the prevailing good practice within contemporary trade law. In the long term, because of the strategic convergence both countries intend to achieve on a geostrategic and economic scale, a revision of the core economic agreement appears to be inevitable. Enhanced market access, liberal rules of origin, binding investment protection arrangements and binding regulatory cooperation, characteristic of a stronger CEPA, will correct the one-sided current CEPA and will serve as a model for future broad Indian trade deals. While reform would necessitate political will, the economic loss of foregone trade, investment and strategic partnership would be much more significant.
Legal Associate | Corporate & Commercial Law*
Bharti Ahuja is a dedicated and skilled Legal Associate at LEGALLANDS LLP, with a focused practice in the field of Corporate Law. She holds an LL.M. degree with specialization in Corporate and Commercial Law from Vivekananda Global University (Batch 2024–2025).
Her professional experience includes advising and assisting clients in various corporate and commercial matters, with particular expertise in drafting and reviewing legal agreements, corporate compliance, and client management. She possesses strong analytical and drafting skills and is committed to delivering practical and legally sound solutions tailored to clients’ requirements.
