India’s Trade Policy in the 21st Century

World trade over the past two decades has reached a record $28.5 trillion from less than $10 trillion and, remarkably, the share of developing countries has risen dramatically to 40%. India’s share of world trade increased from 0.5% to 1.6%, while China’s doubled from 6.7% to 12.3%. The share of East Asian and ASEAN countries, especially Vietnam, also improved significantly during this period. Economist Amita Batra explains these changes in global trade in her book India’s trade policy at 21st Century and highlights how countries’ conscious choices to participate in global value chains (GVCs) have led to their improved share in global trade.

Batra’s extensive research on GVCs provides rare insights into a highly complex network of backward and forward integration in manufacturing that has created regional “factories” of production in specific sectors in the United States, Japan and in Germany. In recent times, the aggressive participation of China and Vietnam in GVC integration has shifted value chain centers away from traditional ones. The author attributes India’s peripheral presence in GVCs to shortcomings in its trade policy, which fails to see the growing relevance of GVC integration in trade and its spillovers in terms of foreign direct investment, remittances technology, standards, etc.

The author, who teaches economics at the School of International Studies at Jawaharlal Nehru University in New Delhi, worries about high tariffs for a growing economy like India and the potential damage they cause to the economy. national industry. It assumes that the decline in India’s most-favoured-nation average tariffs in the 1990s, as part of its trade policy liberalization, should have been supported by further reform when considered in a context comparative where global average fares have fallen below, either unilaterally or through the preferred route. India’s ability to gain market access in competitive regions that trade at much lower thresholds remains challenging.

For the same reason, Batra cautions against the temptation to build entire supply chains domestically by replacing imports with mandatory local content requirements under the Product Linked Incentives (PLI) scheme. This, she says, makes manufacturing inefficient, discourages foreign investment and limits technology transfer. His findings validate the risks of import substitution leading to low value-added exports, as in the case of mobile phones. Similarly, India’s highly protected automotive sector has not evolved beyond auto parts, components and the small car segment. India’s global share in textiles also remained stagnant at 5% and failed to move towards technical textiles where the global preferences lie.

India’s motivation to enter into free trade agreements (FTAs), observes the author, is determined by geopolitical and strategic considerations rather than economic and trade logic. India’s FTAs ​​with various countries including ASEAN, Japan, Korea and more recently with Australia and the United Arab Emirates are superficial, with outdated rules of origin and heavy barriers at the entrance. India’s timid approach to FTAs ​​is reflected in its low preference utilization of less than 3% compared to developed countries’ utilization of 70-80%. Indian negotiators’ fears of having to eliminate tariffs on “virtually all trade” under FTAs ​​pose a perpetual dilemma when faced with a partner country that has virtually eliminated tariffs on all its products.

India’s trade policy must include the “WTO plus” provisions of the new FTAs, which go beyond tariff-based market access to incorporate more “behind the border” regulatory policies. simple ones such as trade facilitation, rules of origin, intellectual property, investment protection, e-commerce, competition policy, data, labour, environment, etc. In all these areas, national reform is urgently needed. According to Batra, services, India’s strength, should be an integral part of a trade agreement, rather than negotiating it on parallel tracks, since the links between trade, investment and services are inherent to GVCs. With services increasingly integrated into manufacturing, India should not view it only from the narrow lens of mode 4. FTAs ​​are designed to facilitate the integration of GVCs with long-term gains, and the trade deficit is not necessarily a worrying thing.

Batra recommends developing a strategy for India’s economic partnership with GVC’s geographically close hub in East and Southeast Asia to achieve deeper integration with Factory Asia. For the same reason, it advocates India’s membership of the Regional Comprehensive Economic Partnership. Unless that happens, she says, the larger Indian market is unlikely to be a preferred option for the “China plus one” strategy for advanced economies and multinationals. India’s discretionary pricing policy has elements of uncertainty that may force investors to rethink their options and look to more predictable countries like Vietnam, Thailand, Bangladesh, etc. Moreover, developed countries can restore production facilities at home by incorporating artificial intelligence, robotics, 3D, etc.

Batra’s advocacy for deeper integration of GVCs in India rests on a long-term visionary approach to promoting economic growth with jobs, an approach that assumes greater urgency in the post-pandemic era. The economic boom that India experienced after the economic reforms of 1991 showed that “a rising tide lifts all boats”. It is time for India’s trade policy to be reset to position rising India at 21st century.

Batra, Amita. India’s trade policy in the 21st century, Routledge (London), 2022.

Dammu Ravi is Secretary (Economic Relations) at the Ministry of External Affairs.

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