GVC restructuring: China’s zero Covid policy & India’s opportunity

News: Just after reopening the complete lockdown, Shanghai reimposed a fresh, partial Covid-19 lockdown again. This shows China’s zero-tolerance strategy toward Covid-19.

The lockdown provides another opportunity for global value chain (GVC) restructuring and relocation. India should utilise this opportunity and must attract relocating supply chains.

What are the phases of GVC restructuring?

Global financial crisis and aftermath: The process of GVC restructuring began in the wake of the global financial crisis of 2008-09 followed by a series of natural disasters like the Tohoku earthquake in Japan, the Tsunami and the Thai floods in 2011.

The earthquake impacted semiconductor production, the Thai floods disrupted the automotive value chains followed by electronics and electrical appliances.

During risk rebalancing, large corporations preferred regionalisation of GVCs or shorter-length supply chains.

During US-China trade tensions: “China plus one” emerged as the alternative strategy for MNCs to relocate their subsidiary operations.

In sectors like automobiles, machinery, transport equipment and electrical equipment, the EU, Mexico, Taiwan and Vietnam, have gained from this strategy.

Pandemic-led border closures, followed by the Ukraine war: This further added to supply chain woes by disrupting the flow of critical minerals, elements and components.

The availability of easily substitutable inputs from alternative trading partners is now being considered as a means to make GVCs more resilient.

Globally, two alternatives, localisation and regionalisation are being debated for GVC resilience. Both strategies compromise efficiency but they reduce geopolitical risks.

How does Localisation benefit GVC restructuring?

Localisation means the use of domestically produced inputs is encouraged through protectionist instruments such as tariff increases and restrictions on imported inputs.

Challenges: Building complete supply chains domestically is a more time-consuming process. Further, relying solely on domestic inputs will make localised supply chains rigid and actually less capable of adjusting to exogenous shocks.

Status of India: India’s trade policy has been more protectionist in the last few years and this is one of the reasons for India’s inability to take advantage of the earlier waves of GVC restructuring and shifts.

How does regionalisation facilitates GVC restructuring?

Over the last two decades, global trade has been increasingly dominated by GVC-led trade in intermediate goods.

Several countries directed their trade policies to facilitate the movement of intermediates across multiple borders. For example, China and ASEAN economies adopted a differential and favourable tariff structure for imports of parts and components/ intermediates, particularly in sectors like automobiles and electronics.

This has been a major contributory factor in these countries’ ability to attract export-oriented foreign direct investment (FDI) in these sectors.

India and regionalisation: India maintains much higher levels of tariffs and relatively fewer duty-free lines in GVC-intensive sectors. Further, customs compliance has been made more cumbersome in India for importers utilising free-trade agreement (FTA) preferences.

India’s trade policy was not designed in recognition of the importance of integration with GVCs for enhancing its trade participation as well as manufacturing competitiveness.

What should be done to attract GVCs to India?

Apart from low and favourable tariff structures, trade and investment agreements play a significant role in integrating with GVC/regional value chain networks. Hence, India must negotiate trade agreements with ASEAN or East Asian economies.

India should work on the early conclusion of the review processes of its existing FTAs/Comprehensive Economic Cooperation Agreement and Comprehensive Economic Partnership Agreement. with ASEAN, Korea and Japan.

India should also follow up the India-Australia early harvest scheme with necessary investment liberalisation provisions towards achieving a full-fledged comprehensive agreement.

Recognising that integration with GVCs is an important means to achieving long-sought manufacturing competitiveness in India. Hence, India should reorient its trade policy to take advantage of China’s zero-Covid strategy.

Source: The post is based on the article “China’s zero Covid policy & India’s opportunity” published in “Business Standard” on 23^rd June 2022.