Tariffs & strategy: China can be countered by getting global value chains to shift here. But we have high trade costs

Synopsis: China can be countered by getting global value chains to shift here. But we have high trade costs

Introduction

Recently, the first in-person leaders’ summit of the Quad grouping was held. It resulted in a promising outcome that fits economic integration with the overarching strategic motive. India is an immediate beneficiary of this thrust.

The clean hydrogen partnership, a semiconductor supply chain initiative and telecommunications are three areas where India will potentially be presented with opportunities to make a technological and economic leap.

There will be more positive spin-offs if an increasing incidence of inflows locks the domestic firms into global value chains (GVCs). It will lead to diffusion of advanced technology and raise productivity across-the-board.

What are the issues that can discourage potential GVC investments?

An important factor influencing integration is the level of trade costs in India, through both tariff and non-tariff barriers. However, India’s trade policy in the recent past has pushed up costs through tariff increases.

For instance, WTO data shows that India’s simple average applied MFN (most favoured nation) tariff increased from 13% in 2014-15 to 15.4% in 2020-21.

Further, there’s been a marked shift towards protectionism that has on average increased trade costs. It will only discourage potential GVC investments.

What needs to be done?

Firstly, if the Indian economy is to benefit from the opportunity arising out of the realignment, private firms need enough incentive to invest here.

Secondly, the prevailing favourable strategic environment needs supportive trade policies that persuade GVCs to come here.

Thirdly, India should reorient its trade regime to draw in FDI that binds the Indian economy to GVCs extensively.

Source: This post is based on the article “Tariffs & strategy: China can be countered by getting global value chains to shift here. But we have high trade costs” published in TOI on 27th Sep 2021.