Global trade trends and Budget initiatives

The Budget signals a move towards a more open trade policy, but further broadening and deepening are essential

The Budget announcement last week of a reduction in some Customs duties and the simplification of rules for the utilisation of free trade agreements (FTAs) are positive trade policy measures. It is important that this momentum be maintained and the promised review of tariff rates in the next six months lead to an overall reduction of the average applied most favoured nation (MFN) tariffs, especially on manufacturing sector inputs. This would be useful in navigating a global trade context that is becoming increasingly nuanced. Recent updates from the UN Trade and Development or UNCTAD (July 2024) and the World Trade Organization (April 2024) highlight the emerging global trade trends with the following standing out. 

First and foremost, global trade has been resilient despite the many shocks emanating from the pandemic, the ongoing Russia-Ukraine and Israel-Hamas wars, politically motivated trade instruments such as the Inflation Reduction Act (IRA) and Carbon Border Adjustment Mechanism (CBAM), and the US-China tariff and technology competition. While undoubtedly these events have led to fluctuations in the rate of growth, the dips have been short-lived. The rebound in 2021 following the sharp fall in 2020 in the immediate aftermath of Covid was quick and sustained, leading to a record high level of trade growth in 2022. Rising geopolitical tensions marked a decline again in early 2023, but trade growth picked up in the final quarter, though with variations across regions and countries. The first-quarter trends of 2024 have been positive for both trade in goods and services, continuing the modest increase of the second half of 2023.  The upward trend is expected to be sustained over the next year, given the moderation in global inflationary trends and the consequent rise in real incomes and demand for manufactured goods. However, a plateauing of the growth in trade in services is indicated.

Secondly, trade within deep preferential trade agreements (PTAs) has been observed to be more resilient than trade outside PTAs. In the trade downturn last year, the intra-PTA trade in the US-Mexico-Canada Agreement, the European Union (EU) and to some extent the Regional Comprehensive Economic Partnership performed relatively better. Earlier studies have shown similar trends during the pandemic. Higher order economic integration, lower trade costs, and the convergence of regulatory and investment regimes (see my “Prioritise Deep Trade Agreements”, Business Standard, June 27, 2024) foster dense production networks that provide the necessary mechanism for recovery and resilience during periods of trade volatility.

Thirdly, regarding the impact of geopolitical factors on global trade, friend-shoring, trade concentration, and increased lengths of global value chains (GVCs) have been evident since 2022 and 2023. Some signs of softening of this trend are also evident. Notwithstanding this, as the restructuring of GVCs evolves, it is creating opportunities for GVC integration for emerging market economies (EMEs) in Asia and Latin America.

Global trade interdependence is also getting realigned in line with political proximities, but the shifts are not yet dramatic. Bilateral total trade trends show that US trade dependence on China and that of China on the US has declined, but only by a small percentage. Countries that have experienced increased trade dependence on China include Brazil, Vietnam and India. The most significant reflection of geopolitics is the reduction in Russia’s trade dependence on the EU, which is understandable given the energy dynamics between these two and the sanctions following the war in Ukraine. The markedly increased dependence of Russia on China is an outcome of the same context.

Fourthly, sector-wise trends show that traditional sectors like machinery and transport have retained their GVC and trade dynamism. New age and high-tech sectors like artificial intelligence, green transition and semiconductors have seen high demand, though these have also been the target of trade and industrial interventions. Among these, electric vehicles and solar panels reveal an opportunity for EMEs, as the evident trade reallocation and distribution across more suppliers in these sectors indicate a more competitive market. Battery production, however, continues to be concentrated among a few suppliers. These sectoral developments are still in process and will likely evolve further given the continued geopolitical uncertainty and the growing weakness of the multilateral rules-based trade order.

In this context, the following trade policy measures will assist India in taking advantage of the emerging opportunities.

First, the tariff rates review should be undertaken with the final objective of aligning India’s import tariffs in the manufacturing sector with the comparator set of EMEs, such as Asean. A time schedule for achieving this goal should be laid out over the next six months. Lower import tariffs will help enhance export competitiveness, which is the ultimate test of manufacturing competitiveness.

Second, a pre-specified timeline for reducing tariffs will also lend an element of predictability to India’s trade policy and help attract export-oriented foreign direct investment (FDI), which is efficiency-seeking. The priority should be to attract FDI from GVC lead firms, which continue to be mainly in advanced economies. Their design and innovation capabilities will assist technological transfer and diffusion, which, in turn, will contribute to enhancing manufacturing productivity.

Third, given that trade in deep trade agreements is relatively more robust in times of crisis, India needs to prioritise the inclusion of deeper provisions in its FTAs. The FTA design and negotiating strategy, however, needs to be context-appropriate. This is necessitated by the growing tendency of regional trade blocs in North America and the EU to secure trade within the region by adopting discriminatory trade instruments/ measures vis-a-vis the rest of the world.

In North America, the US legislated IRA is an explicitly exclusionist trade policy instrument, motivated to enhance intra-regional trade and GVCs as also trade with its FTA partners. India does not have an FTA with the US and the current political dispensation as well as the ongoing Presidential election discourse has given no indication of a change in their trade policy stance. The EU has implemented the CBAM, which is projected as a virtuous trade instrument creating a “global common good” but will potentially increase intra-EU trade while imposing compliance costs on developing economies like India. CBAM is also likely to be adopted by other countries, including the UK.  The Asean, in comparison, offers opportunities for enhanced trade dynamism and GVC integration while following the multilateral rules-based trade order. 

Therefore, the move towards a more open trade policy in India’s Budget 2024 needs to be broadened and deepened in the coming year.

The writer is senior fellow, CSEP, professor, SIS, JNU (on leave) and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views are personal