India's trade policy challenges in a changed world

A slowdown in global trade is nothing new, but the cumulative impact of unprecedented and unforeseen events requires a new policy approach from India

Global merchandise trade volume is predicted to lose momentum sharply in 2023 because of adverse developments, such as marked slowdown in the major economies of Europe, China and the United States; food and fuel inflation-led surges in the cost of living and manufacturing; tight monetary policy conditions in most countries; and continued supply chain disruptions. So, world trade growth is projected to slump from 3.5 per cent in 2022 to barely 1 per cent in 2023 (WTO press/909, October 5, 2022).

However, a slowdown in global trade is not new. Ever since the restructuring of global value chains (GVCs), the principal driver of global trade dynamism since the early 1990s that was initiated after the global financial crisis of 2008-09, trade growth has been subdued.

So, what is different this time? In the early years of the last decade, shifts in GVCs in response to natural disasters in East Asia were limited in time and trade impact. Towards the end of the decade, the US-China trade war initiated the “China plus one” strategy for GVC diversification. The pandemic further accelerated the process of GVCs restructuring and diversification. The Ukraine crisis has dealt the final blow to the process. The prospects of the war coming to an end soon seem dim. The destruction in Ukraine is massive, and the political realignments vis-a-vis Russia are likely to be longer term. Both Russia and Ukraine have been major suppliers of critical elements and minerals in GVCs. The cumulative impact of these unprecedented and unforeseen events is likely to be a more permanent reassessment of risk and underlying volatility by large multinational corporations as well as a re-alignment of global trade partners.

Illustration: Ajay Mohanty

This does not, however, imply that GVCs will be unravelled to an extent where reshoring to home economies or a reversal of production unbundling will become dominant trends. The cost of GVC shifts and the investment capital required for this are expensive propositions. Post-pandemic circumstances do not augur well for this trend to pick up substantial momentum. Also, production fragmentation is a continuous process. Differential developmental levels across economies will ensure that the supply chain networks are continuously evolving and expanding. The difference this time, though, will be that in their search for resilience, MNCs aiming at dual/multiple input sourcing, will be looking for allies in close proximity. Nearshoring coupled with “ally-shoring” will be the likely guiding principle, implying thereby an intensification of intra-regional trade or increased trade intensity within regional trade blocs.

The principal trade mechanism furthering this trend will be the same as over the last decade, namely, mega-regional free trade agreements (FTAs). Increasingly, multilateralism is no longer at the heart of global trade, notwithstanding the 12th Ministerial Conference agreements of June 2022. FTAs continue to expand in number with the EU and East Asia leading the way. In East Asia, the Regional Comprehensive Economic Partnership (RCEP) entered into force in January 2022 and the EU signed a trade agreement with New Zealand, also an RCEP member economy, in June 2022. The EU has, in particular, emphasised the need for accelerating conclusion of its FTA negotiations in the wake of the Ukraine crisis, as a means to both, economic growth and its geopolitical standing.

So, what does India need to do in this evolving global trade context?

Firstly, circumstances necessitate that India diversify beyond its traditional markets and trade partners to achieve its target export growth. Over the past year, India’s exports have registered positive growth, but not in a sustained manner. Export growth has been more a consequence of price effect and opportunities arising out of alternating pandemic waves and trade route blockages on account of the Ukraine crisis. More sustained growth will require productivity enhancement in the manufacturing sector. Participation in GVCs is a means towards achieving that objective in a relatively shorter period. A comprehensive policy framework with emphasis on creating a conducive business environment and ensuring regulatory reform and serious improvement in infrastructure and logistics, can contribute to making India an attractive location for export-oriented foreign direct investment (FDI) and MNCs in their GVC diversification strategy.

Secondly, FTAs need to be appreciated as key instruments facilitating GVC participation. While India has signed two agreements this year, with the UAE and Australia, these may not contribute to India’s enhanced GVC participation, globally or in the region. The FTA with Australia is an interim agreement with select coverage of goods and services. A more comprehensive and substantive agreement is yet only in the pipeline. The agreement with the UAE, which is not a manufacturing or GVC hub itself, does not help in furthering India’s GVC objectives. India needs to negotiate trade agreements that emphasise liberalisation of substantially all trade, investment and development provisions with trade dynamic economies that foster its participation in GVCs. In addition, membership of at least one mega regional trade agreement—the RCEP, Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) or Indo-Pacific Economic Framework (IPEF) trade pillar must become part of India’s immediate trade policy agenda.

Third, it is necessary that India evolve its negotiating position beyond its traditional stance on trade-related issues. Domestic policies have to be developed in alignment with the global context. This is particularly relevant in respect of labour and environment standards as these have become an integral component of all international trade agreements. Post-pandemic, there is almost universal acceptance of the need to make trade more inclusive and sustainable.

Fourth, India’s negotiating position in trade agreements also needs to undergo a major rethink in the context of the services sector. India needs to shift focus from identifying mode-4 liberalisation as its sole comparative advantage to those services that are an integral part of manufacturing sector exports and adopt an integrated approach for goods and services negotiations in its FTAs (see “An alternative export strategy”, Business Standard, March 10, 2022).

Fifth, as the next foreign trade policy announcement is now postponed to April 2023, supportive policy inputs from the budget will contribute to attracting GVC investments. In particular, a phased reduction in average applied most-favoured nation tariffs in manufacturing and for inputs in sectors of GVC dynamism, in line with our longstanding objective to achieve Asean tariff levels, should be a principal component of trade policy.

Finally, the institutional changes announced earlier this year — that is, setting up of a separate trade body with domain expertise exclusively focused on trade issues — should be expedited so as to create sufficient knowledge base well ahead of the policy formulation and announcement in April.

The writer is professor, SIS, JNU and author of India’s trade policy in the 21st century. The views are personal