The Trade Policy India Needs

The book highlights the role played by global value chains (GVCs). These not only stimulated the growth of trade, they also changed its nature. A successful export strategy no longer consists of producing a product that is largely manufactured in one country and exporting it to consumers abroad. Instead, the multiple components of a typical export product are produced by different companies, often based in developed countries but relocating production to sites in developing countries depending on the competitiveness of that site in the production of that particular component. Components are often shipped to other sites for additional added value. The final product is finally assembled elsewhere for shipment to consumer centers. The iPhone, for example, has 178 components from 200 different suppliers in 26 countries!

This process of offshoring led to a reduction in the share of developed countries in manufactured exports and an increase in the share of developing countries that had the human skills and physical infrastructure to enter the value chain. India benefited from this new world, thanks to the 1991 reforms. Our share in world exports of goods had fallen before the reforms to reach 0.5% in 1990. It improved in the post-reform period to reach 0.7% in 2000 and 1.8% in 2021.

However, while our performance has improved in the past, China has benefited the most, increasing its share from 3.9% in 2000 to 15% in 2021. This remarkable performance reflects the fact that it has shaped its commercial policy to take advantage of the GVC Phenomenon.

The Prime Minister has now set himself an ambitious goal: to integrate the country into global supply chains and even make it a hub. Designing policies that will achieve this goal is the task facing the Ministry of Commerce as it prepares the new trade policy. It must start with the recognition that there is a discrepancy between what has happened and the new goals.

Commenting on India’s backward integration with GVCs for manufactured exports – an important indicator of integration with global supply chains – Professor Batra finds that it is not only lower than India’s other regional economies, but, more worryingly, that it has declined in recent years. In fact, it’s lower than it was in the early 2000s!

One policy weakness identified by Professor Batra is the increase in import tariffs implemented over the past four years. The lowering of India’s very high tariff levels was a key element of the 1991 reforms and this process has been continued by successive governments. Those who feel they have been lowered too much should remember that despite the reduction, our import tariffs have remained significantly higher than in East and Southeast Asia. Professor Batra argues that if we want better integration with global value chains, we need to return to the earlier trend of gradually reducing tariffs to East Asian levels.

Another weakness of our policy is that our bound tariffs are much higher than the applied tariffs. Our trade negotiators tend to see this as an advantage because it gives us “wiggle room” to increase duties if we want to. But as Professor Batra points out, it also adds uncertainty because investors can no longer be sure that duties on their inputs will suddenly be increased.

Looking ahead, East and Southeast Asia clearly present the greatest potential for expanding trade and hosting GVCs. It makes sense for us to try to fit in as closely as possible with this area. This is also an area where geopolitical developments are likely to lead to a diversification of existing global value chains towards a “China plus one” policy, from which we can benefit. In this context, Professor Batra notes that our decision to withdraw from the Regional Comprehensive Economic Partnership (RCEP), after several years of negotiation, was a missed opportunity.

We cannot undo the past, but perhaps the Indo-Pacific Economic Framework Agreement (IPEF) we have signed up to offers a new opportunity. The Trade Pillar of IPEF does not currently address market access. However, it could move in this direction in the future and if it does, it has the advantage of including the United States, Japan and Korea, while excluding China, which is the pet peeve of our producers for fear of unfair competition. We must work to push IPEF towards a trade agreement.

More generally, we must recognize that trade liberalization agreements in the future will require further integration “behind the borders” of standards relating to labour, the environment, intellectual property rights and even investment protection. . We have traditionally opposed the inclusion of these “foreign issues” in trade agreements, but we need to rethink our position. Agreeing to such alignment can be essential if we are to attract investment aimed at greater integration with GVCs.

It should be noted that China has applied to join the Comprehensive and Progressive Agreement for a Trans-Pacific Partnership, which is the new incarnation of the old Trans-Pacific Partnership that was trashed by former US President Donald Trump. It includes many provisions for further integration. If other developing countries wish to join such agreements, we have no reason to hold back. We can always negotiate longer periods to comply.

Digital commerce, e-commerce and digital payments are new areas that will play a major role in global integration in the years to come. We have substantial assets in this area, but we seem to be ambivalent about opening negotiations on this subject. We must get rid of this hesitation and become actively involved in the development of global rules acceptable to all.

Indian industry needs to be more closely involved in discussions on policy options. Industry groups do not speak with one voice and often do not voice their concerns transparently. But there is no substitute for a fuller articulation of pros and cons as perceived by industry, while also involving civil society groups and think tanks in the process.

Finally, trade policy needs to be supported by other policies outside the Ministry of Trade. Providing better infrastructure and simplified procedures is a matter of course. The government’s Production Linked Incentives (PLI) program is a new initiative aimed at creating a competitive domestic industry. Since the scale of this aid will inevitably be limited by the available fiscal space, it should be limited to new areas with high potential. Equally important, it should be provided with the understanding that the recipient must compete with imports subject to reasonable tariffs. The need to keep India’s access to imports open is particularly important in areas where technology is changing rapidly (such as in green energy). New, more efficient technologies could emerge and prevent these products from entering by raising import barriers would only make the national economy less competitive. LIP beneficiaries should not be allowed to lobby for an increase in import duties beyond the level initially in place.

Montek Singh Ahluwalia is a former Deputy Chairman of the Planning Commission and currently a Distinguished Fellow of the Center for Social and Economic Progress

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