India’s trade policy challenges in a changed world

Source: The post is based on an article “India’s trade policy challenges in a changed world” published in Business Standard on 20^th October 2022.

Syllabus: GS 3 – Economic Development

Relevance: measures that Indian can adopt to improve its stand in Global value Chains.

News: Global merchandise trade volume is predicted to decline sharply because of slowdown in the major economies and increase in the prices of fuel and food.

However, a slowdown in global trade is not new and the trade had slowed down in the past as well due to the restructuring of global value chains (GVCs).

What has led to the decline in the Global Value Chains (GVCs)?

The decline in GVC in the early years of the last decade was due to the natural disasters in East Asia.

It further declined due to the US China trade war at the end of that last decade.  This trade war led to “China plus one” strategy for GVC diversification.

It further declined due to the pandemic and the current Ukraine crisis is making the condition worse.

The Ukraine war has affected the GVC as both Russia and Ukraine are major suppliers of critical elements and minerals.

What steps have been taken by the countries around the world to tackle the declining GVCs?

Countries around the world have come up with various initiatives to boost trade such as the expansion of free trade agreements (FTAs) and Regional Comprehensive Economic Partnership (RCEP).

European Union Countries along with other countries have entered into these agreements in order to boost the trade.

EU has emphasised the need for increasing its FTA negotiations in the wake of the Ukraine crisis as it will benefit its economic growth and geopolitical standing.

What can be the course of action for India for improving its position in GVCs?

First, India needs to diversify its traditional markets and trade partners to achieve its target export growth.

• Further, a comprehensive policy framework that focuses on creating a good business environment and ensuring proper regulatory reforms with improvement in infrastructure and logistics is needed.
• This can contribute to making India an attractive location for export oriented Foreign Direct Investments (FDIs) and help MNCs in their GVC diversification strategy.

Second, India needs more FTA negotiation which will make GVC participation easier.

• India has already made FTA agreements with the UAE and Australia this year. However, these two agreements may not contribute to India’s enhanced GVC participation.
• Therefore, India needs to negotiate trade agreements that focus on liberalisation of almost all trade investment along with the participation in GVC.
• India should become a member of at least one regional trade agreement such as the RCEP, Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) or Indo-Pacific Economic Framework (IPEF) trade pillar.

Third, India needs to evolve its negotiated position and develop domestic policies aligned with the global policies.

• The domestic policies must be inclusive and sustainable as labour and environment standards have become an integral component of all international trade agreements.

Fourth, India needs to shift its focus from liberalisation to those services that are an integral part of manufacturing sector exports.  For this, India needs to adopt an integrated approach for goods and services negotiation in its FTA.

Fifth, India needs to reduce the Most Favoured Nation tariff in manufacturing and for inputs in sectors of GVC. It should be in line with the objective to achieve ASEAN tariff levels.

Sixth, India needs institutional changes. It has already announced to set up a separate trade body that will include relevant expertise to focus on trade issues.