Global Trade Trends and India’s Trade Policy

Source-This post on Global Trade Trends and India’s Trade Policy has been created based on the article “Global trade trends and Budget initiatives” published in “Business Standard” on 31 July 2024.

UPSC Syllabus–GS Paper-3- Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context-The 2024 Union Budget introduced positive trade policy measures-Reduction in some Customs duties Simplification of rules for utilizing free trade agreements (FTAs) Announcement of a comprehensive review of tariff rates in the next six months

The article emphasizes the importance of maintaining this momentum and reducing average applied most favoured nation (MFN) tariffs, especially on manufacturing sector inputs.

What are the Global Trade Trends?

Recent reports from UNCTAD (July 2024) and WTO (April 2024) highlight several key trends

a) Resilience of global trade– Global trade has stayed resilient despite pandemics, conflicts, and trade policies. After a decline in 2020, it rebounded in 2021, peaked in 2022, dipped in early 2023, but improved later in 2023 and early 2024. Growth is expected to continue due to lower inflation and higher demand for manufactured goods.

b) Performance of Preferential Trade Agreements (PTAs)– Trade within PTAs has been more resilient. Last year, agreements like the US-Mexico-Canada Agreement, the EU, and the Regional Comprehensive Economic Partnership fared better than trade outside these agreements.

c) Impact of geopolitical factors- Trends show more friend-shoring, trade concentration, and longer global value chains. While these trends are starting to soften, they still offer opportunities for emerging markets in Asia and Latin America.

d) Realignment of global trade interdependence US-China trade dependence has slightly decreased, while Brazil, Vietnam, and India have become more reliant on China. Russia has significantly reduced its trade dependence on the EU and increased its reliance on China.

e) Sectoral Trends in Global Trade- Traditional sectors like machinery and transport remain dynamic, while new high-tech sectors such as artificial intelligence and electric vehicles are experiencing high demand.

Read More- India’s New Foreign Trade Policy (FTP) and its significance

What should be the way forward?

1) Tariff Rates Review- India should align its manufacturing import tariffs with those of similar emerging economies like ASEAN and set a six-month timeline to do so. Lower tariffs will improve export competitiveness.

2) Predictable Trade Policy – A clear timeline for reducing tariffs will make trade more predictable, attract foreign investment, and support technology transfer.

3) Deep Trade Agreements- India should focus on including deeper provisions in its FTAs to enhance trade resilience. The strategy should address regional trade bloc tendencies and consider the implications of discriminatory trade policies like the US Inflation Reduction Act (IRA) and the EU Carbon Border Adjustment Mechanism (CBAM).

4) Regional focus- Acknowledge the challenges posed by US (IRA) and EU (CBAM) trade policies and explore opportunities with ASEAN to boost trade dynamics and integrate global value chains.

Question for practice

What are the current global trade trends? What steps should be taken next?