Redesigning
Integration with #global #value #chains will require a rethink of our high and uncertain #tariffs as well as bolder #trade alliances
Various aspects of #globalization are being rethought all over the world, and this includes rethinking trade policy. India is also going through this process. The ministry of commerce is working on a new trade policy to be unveiled in September. It would do well to give careful consideration to Professor Amita Batra’s just published book, India’s Trade Policy in the 21st century (Routledge, London, 2022), which has important messages for policy.
The book highlights the role played by global value chains (GVCs). These have not only driven the growth of trade, but they have also changed its nature. A successful export strategy no longer involves producing a product made largely in one country for export to consumers abroad. Instead, the multiple components of a typical export product are produced by different companies, often based in developed countries but offshoring production to locations in developing countries based on the competitiveness of that location in producing that particular component. Components are often shipped to other locations for further value addition. The final product is ultimately assembled somewhere else for final shipment to centers of consumption. The iPhone, for example, has 178 components that are sourced from 200 different suppliers across 26 countries!
This process of offshoring has led to a reduction in the share of developed countries in the export of manufactured goods and an increase in the share of developing countries that had the necessary human skills and physical infrastructure to enter the value chain. India has benefited from this new world, thanks to the 1991 reforms. Our share in world exports of goods had been declining before the reforms to reach 0.5% in 1990. It improved in the post-reforms period to touch 0.7% in 2000 and 1.8% in 2021.
However, while our performance improved over the past, it is China that drew the most benefit, increasing its share from 3.9% in 2000 to 15% in 2021. This star performance reflects the fact that it shaped its trade policy to take advantage of the GVC phenomenon.
The Prime Minister has now set an ambitious objective: integrating the country with global supply chains and indeed even making it a hub. Designing policies that will achieve this objective is the task before the commerce ministry as it prepares the new trade policy. It must start with the recognition that there is a divergence between what has been happening 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 it is not only lower than other regional economies but, more disturbingly, it has declined in recent years. In fact, it is lower than it was in the early 2000s!
One policy weakness identified by Professor Batra is the increase in import tariffs implemented over the last four years. Lowering India’s very high tariff levels was a critical element of the 1991 reforms and this process was continued by successive governments. Those who feel they were lowered too much should remember that despite the reduction, our import tariffs remained significantly higher than in East and South East Asia. Professor Batra argues that if we want better integration with global value chains, we must revert to the earlier trend of gradually reducing customs duties to levels prevailing in East Asia.
Another weakness in our policy is that our bound tariffs are much higher than applied tariffs. Our trade negotiators tend to view this as an advantage because it gives us ‘policy space’ to raise duties if we want. But as Professor Batra points out, it also adds uncertainty because investors can no longer be sure whether duties on their inputs will suddenly be raised.
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