Complementarity sans capability: Limits of India's trade strategy

India's trade pacts with developed economies highlight a gap: without stronger domestic capabilities, complementarity alone cannot deliver balanced gains

Last Monday, the three-day visit of the President of South Korea to India concluded with numerous agreements and memoranda of understanding in several areas, including trade, shipbuilding, ports, energy, sustainability, science, technology, digital security, supply chains, steel, culture, sports and so on. Both countries aimed to double bilateral trade from the current $27 billion to $54 billion by 2030. Such agreements signal intent but translate into outcomes only when supported by firm-level decisions and domestic regulatory alignment.   

South Korea is a developed country with a per capita GDP of $36,000, a little more than Japan’s $34,000. Populations in both countries are ageing with the attendant problem of falling domestic consumption. Both countries have strong outward orientation with total trade accounting for 70-75 percent of South Korea’s GDP and 45-47 per cent of Japan’s GDP. Outward investments of both countries are around 45-50 per cent of their GDP. Both are technologically advanced with high R&D (research and development) intensity, patent output, industrial capability, and expertise in strategic technology domains. India’s engagement with Japanese and Korean firms has yielded technology transfer, managerial practices, and ecosystem development, particularly in automobiles, consumer durables and electronics. Therefore, it makes a lot of sense for India to engage and co-operate with both countries in hi-tech areas of interest. 

India has had trade agreements with South Korea since 2009 and with Japan since 2011. With both countries, India reduced tariffs on over 85 per cent of tariff lines, with phased elimination bringing many industrial goods to 0-5 per cent duty levels. South Korea and Japan have reciprocated with similar liberalisation, eliminating duties on approximately 90-95 per cent of goods over time. The total trade with both countries is similar with India running a trade deficit of $12-13 billion with Japan and $14-15 billion with South Korea. Thus, India could not take better advantage of the improved market access due to its own problems of uneven product quality, scale, logistics efficiency, compliance with technical standards, and integration into global value chains. Japan and South Korea gained due to strong manufacturing ecosystems, advanced technology, branding, and supply-chain efficiency. 

This reality challenges a key narrative advanced by our government that the newer trade agreements are qualitatively superior because they are being signed with developed economies offering complementary strengths, as opposed to earlier agreements with developing countries that allegedly led to import surges. Firstly, the idea of trade agreements with developing countries in Asia was to move towards greater integration with the global supply chains, which has not happened due to internal constraints. Second, while the logic of complementarity is sound in theory, the India-South Korea and India-Japan trade figures demonstrate that complementarity alone does not automatically translate into favourable or even balanced outcomes. 

The developed economies are interested in India’s large and growing market. More importantly, the developed-country partners often have stronger firms, better technology, and much better access to capital that help them take advantage of improved market access. The same, however, cannot be said about our producers, especially in terms of scale. 

The trade figures with South Korea and Japan implicitly highlight that trade agreements are necessary but not sufficient. Without parallel improvements in domestic capability — manufacturing depth, export orientation, global scale of production, lower logistics costs and regulatory efficiency — India risks repeating the same pattern of limited gains across future agreements.

Email: tncrajagopalan@gmail.com