The trade policy India needs

Source: The post is based on an article “The trade policy India needs” published in the Live Mint on 20^th July 2022.

Syllabus: GS 2 – Government policies for various sectors

Relevance: New Trade Policy

News: The ministry of commerce is working on a new trade policy. In this context, Professor Amita Batra has published a book, India’s Trade Policy in the 21st century, which has important messages for policy.

Role of Global Value Chains (GVCs)

Now, a successful export strategy doesn’t involve producing a product made largely in one country for export. Instead, it is based on the global value chains (GVCs) which have driven the growth of trade.

Now, the multiple components of a typical export product are produced by different companies, based on the competitiveness of that location in producing that particular component. Thereafter, components are shipped to other locations for further value addition. The final product is ultimately assembled somewhere else for final shipment to centers of consumption.

The backward integration with GVCs is an important indicator of integration with global supply chains.

For example, the iPhone has 178 components that are sourced from 200 different suppliers across 26 countries!

The benefit of the Global Value Chains (GVCs)

The share of developed countries in the export of manufactured goods has reduced as they offshore the production process. And the share of developing countries has increased which had the necessary human skills and physical infrastructure to enter the value chain.

Which developing countries benefitted from the GVCs?

India: India’s share in world exports of goods had been declining before the 1991 reforms. It reached to 0.5% in 1990. However, India benefited from GVCs since the 1991 reforms. It improved in the post-reforms period to touch 0.7% in 2000 and 1.8% in 2021.

China: China drew the most benefit. Its share increased from 3.9% in 2000 to 15% in 2021. It shaped its trade policy to take advantage of the GVC phenomenon.

Therefore, the Prime Minister of India has now set an ambitious objective: integrating the country with global supply chains and indeed even making it a hub.

Some reforms are required while designing the new trade policy of India

One of India’s trade policy weaknesses is the increase in import tariffs implemented over the last four years. There is a need to lower tariff levels to integrate with global value chains. For example, customs duties can be reduced to levels that are prevailing in East Asia.

Second, India’s bound tariffs are much higher than applied tariffs.

Third, India should integrate as closely as possible with East and South East Asia. Because the countries in these areas have the greatest potential for expanding trade and hosting GVCs.

Fourth, India’s decision to opt-out of the Regional Comprehensive Economic Partnership (RCEP), was a missed opportunity. However, the Indo-Pacific Economic Framework (IPEF) agreement which we have joined offers a new opportunity for integration with GVC. The Indian government should work to push the IPEF towards a trade agreement.

Fifth, India has traditionally opposed ‘extraneous issues’ in trade agreements like labour, the environment, intellectual property rights (IPR), and even investment protection. However, such issues are bound to become part of future trade agreements. Therefore, India should be open to them in order to attract investments for greater integration with GVCs.

Sixth, India should not hold itself back from joining the Comprehensive and Progressive Agreement for Transpacific Partnership. Other developing countries are willing to join such agreements because China has already applied to join them. It includes many provisions for deeper integration.

Seventh, India should remain open to digital trade, e-commerce, and digital payments as these are new areas for global integration in the years ahead. India has substantial strengths in this area.

Eighth, trade policy needs to be supported by other policies which are outside the realm of the commerce ministry. For example, the production-linked incentives (PLI) scheme is a new initiative in building a competitive domestic industry.