Navigating the evolving trade landscape

Source: The post is based on the article “Navigating the evolving trade landscape” published in Business Standard on 21^st September 2023.

Syllabus: GS 3 – Indian Economy – Industrial Policy

Relevance: About changing Industrial policy

News: World trade is changing significantly, with the US and EU governments shifting their focus from traditional trade policies to industrial policies.

How are the US and EU governments shifting their focus?

US: The US initially embraced manufacturing outsourcing for profit but it unintentionally boosted China as a global manufacturing hub.

Hence, to counter China, the US imposed high import tariffs on Chinese goods during the Trump administration and targeted China’s supercomputer and AI industries under the Biden administration.

Additionally, the US launched a major re-industrialization initiative promoting domestic production of semiconductors, critical minerals, electric vehicle batteries, and medicines. Hence, the US shifted from prioritizing free trade to embracing industrial policy.

EU: In 2023, the EU introduced significant regulations like the Deforestation Regulation and Carbon Border Adjustment Mechanism, impacting global trade in agriculture and industrial goods.

The EU provides subsidies to its own industries while it also scrutinizes subsidies given by other nations.  This reflects the EU’s aim to safeguard its economy and environment, potentially making it more challenging for other countries to compete.

Read More: Perspectives on industrial policy

What is the situation of India?

China’s global dominance in electronics design and manufacturing increased due to the collaborations with Western firms like Apple. However, with the US seeking alternatives to China, India has emerged as a focus.

In October 2022, US limited support for Chinese chip production below 16 nanometers. Consequently, Apple shifted some of its production to India.

This shift has resulted in India’s smartphone exports, exceeding $12 billion in 2022-23. A similar trend is anticipated in the semiconductor sector, particularly through partnerships with Micron.

However, India must take more actions to boost manufacturing competitiveness and facilitate trade flows.

What more actions can be taken by India?

1.Remove arbitrage from manufacturing schemes like special economic zones, export-oriented units, and Customs bond manufacturing, which offer different tax benefits and import duty structures.

2.Sign only those FTAs that align with India’s economic interests and avoid involvement in the Indo-Pacific Economic Framework, as it requires adherence to WTO Plus standards that might not be advantageous for India.

3.Prioritize the domestic laws related to digital trade, labor, environmental standards, agriculture, and tariffs before entering international commitments.

4.Take prompt and determined action against unfair climate taxes imposed by the EU by employing a carefully measured retaliation mechanism.

5.Reduce Customs duties, especially on imported goods, to stimulate manufacturing and exports. While certain items crucial for the “Make in India” initiative may maintain higher tariffs, the overall trend should be toward lower duties to enhance the export potential of the small-scale sector.

6. Streamline export processes using a single-window system through the National Trade Network (NTN).

This integrated approach eliminates the need for exporters to engage separately with different departments, resulting in time and cost savings and empowering small businesses to participate in the export market.

7. There is a need to address the issue of energy imports, which constituted 36.6% of India’s total merchandise imports in FY2023 at a cost of $260 billion. Projections indicate this bill could exceed $1 trillion by December 2026.
8. Prioritize the removal of non-tariff barriers (NTBs) to boost India’s exports. NTBs often lead to increased scrutiny or rejection of Indian products.

Hence, to address this, India should upgrade domestic systems, engage in dialogues with partner countries, and be prepared to retaliate against unreasonable rules that obstruct Indian products.