Global value chains, the missing link in India’s trade strategy

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Global value chain-led trade has been the most significant feature of global trade in the 21st century. While the spectacular increase in trade in the first decade was largely attributed to the increasing complexity of global value chains, the slowdown since 2012 has been associated with a consolidation and restructuring of global value chains.

Supply chain disruptions following the COVID-19 pandemic, aggravated by Russia’s invasion of Ukraine, have been the defining factor in global trade in recent years.

India’s participation in global trade has remained marginal over the past two decades, with a share of global merchandise exports lower than 2 per cent. India’s weak linkages into global value chains in the manufacturing sector are not just lower relative to other major regional emerging market economies but they have also consistently declined since 2013. This is true in the case of electronics and automotives, two of the most value chain-intensive sectors globally. India’s gains from the restructuring of value chains and trade diversification in the wake of US–China trade tensions have been marginal, limited mainly to the machinery sector.

India’s trade policy over the two decades of this century has not just been more protectionist compared to other developing economies but has eschewed the objective of integration into global value chains. Trade policy measures and instruments have not been designed or negotiated with sufficient consideration of the linkages between trade, investment and services that are integral to global value chains.

Even though India initiated trade policy reforms in the early 1990s, the focus was essentially on the removal of constraints imposed by the inward-looking autarkic growth model India followed since independence. While peak tariff rates in India were brought down in the 1990s and early 2000s, average applied most favoured nation tariffs for manufactured goods remain higher than in comparable emerging market economies. Since 2015, an element of increased protectionism has found its way back into India’s tariff structure.

The proportion of India’s tariff lines in the higher tariff range (more than 15 per cent) has risen and there are fewer duty-free tariff lines in 2021 compared with 2010 even though the overall range of applied tariffs continues to be 0-150 per cent. India is a hesitant participant in free trade agreements (FTAs), which aim at tariff elimination on ‘substantially all trade’ among member economies. This is striking as an increasing share of global trade has been generated through FTAs in recent years.

The FTAs India has concluded over the past two decades reveal that policymakers and negotiators have little understanding of the role of trade agreements in facilitating integration into global value chains. FTAs around the world are aimed at deeper integration and incorporate WTO plus provisions. But India persists with shallow agreements, limited and phased liberalisation and temporary safeguard measures against import surges that continue to inhibit its integration with global value chains. This combined with India considering that ‘Mode-4’ services trade, which enables movement of professionals, is its sole comparative advantage in services liberalisation has meant prolonged negotiations and limited gains from its FTA agreements.

In contrast to other emerging market economies that have viewed, designed and utilised FTAs to undertake domestic policy reforms, India has allowed its protectionist trade policy to guide its trade negotiations at the expense of membership in potentially beneficial FTAs.

India needs to undertake trade policy reforms for it to be viewed as an attractive alternative location by multinational corporations in their ‘China Plus One’ strategy and to enhance its participation and share in global trade.

India should not interpret the objective of ‘self-reliance’ as building entire supply chains domestically. Enhancing manufacturing sector specialisation and competitiveness through participation in global value chains needs to be the underlying objective of Indian trade policy.  It needs an open and more liberal trade regime with tariffs at par with comparable emerging market economies for the manufacturing sector as a whole and especially in sectors with potential for integration into global value chains.

India needs to upgrade its FTA agenda, accepting that FTAs should be designed to facilitate global value chain trade and investments. India’s FTAs must be aimed at deeper integration and broader trade coverage with an appropriate choice of partner economies. Integration with the neighbouring value chain hub of East and Southeast Asia needs to be top of India’s FTA agenda. Indian manufacturing will benefit from the knowledge and technology spillovers of ‘Factory Asia’, particularly in sectors such as computers and electronics where global value chains have pivoted away from traditional centres like the United Kingdom and Japan to Asian emerging market economies.

While India’s immediate trade policy agenda should include reconsideration of its decision not to join RCEP, an early conclusion of reviews of the India-ASEAN FTA and Comprehensive Economic Cooperation Agreements with Korea and Japan too should be a priority. India’s service sector negotiations in its trade deals need to be formulated recognising the global trend of many services getting embodied and embedded in manufactured goods exports. Finally, as inclusive and sustainable trade become almost universally accepted norms in shaping global trade agreements, India must align its policy framework accordingly.

Source : East Asia Forum