Navigating the evolving trade landscape

In an era of shifting trade dynamics, India stands at the crossroads of opportunity, but being adaptable will be key

World trade is undergoing a profound transformation. The US and EU governments have started emphasising industrial policy over trade policy, prioritising local production and job creation over adherence to World Trade Organization (WTO) rules.

The American government is imposing WTO-non-compliant tariffs and offering significant subsidies to boost domestic production. The EU, meanwhile, is using climate concerns to justify new import barriers.  Open trade carries risks to economic stability and political dominance. That’s the new thinking, leaving trade experts, researchers, and academics puzzled.

Let us understand why these shifts are happening and how India can safeguard its interests in this evolving landscape. The US initially embraced manufacturing outsourcing to boost corporate profits, aligning with Milton Friedman’s 1970s concept that businesses should prioritise profit above all else. However, the law of unintended consequences soon took over, leading to the rise of China as the world’s manufacturing hub. China became indispensable for washing machines, laptops, telecom equipment, and toys. The Chinese monopoly extended to solar cells, lithium-ion batteries, and electronic components, fuelling its assertiveness. This was a problem.

Perceiving China as a threat to US technology and military dominance, the US embarked on efforts to counteract. President Donald Trump imposed high import duties on numerous Chinese imports, while the Biden administration targeted China’s supercomputer and artificial intelligence (AI) industry. But containing China was not the only strategy. Simultaneously, the US initiated a massive re-industrialisation programme, offering incentives for domestic production of semiconductors, critical minerals, EV batteries, and medicines. The US Inflation Reduction Act, 2022, allocated $370 billion in subsidies for clean energy and advanced manufacturing. This was a significant turnaround for the US, which had prioritised free trade over industrial policy from 1970 to 2015.

The EU, not to be left behind, in 2023 alone, has implemented five key regulations, notably the Deforestation Regulation and Carbon Border Adjustment Mechanism. These regulations are expected to adversely impact global trade in agriculture and industrial goods while potentially adding $500-800 billion annually to the EU’s wealth upon full implementation.

The pity is the EU distributes billions of dollars of subsidies to its farmers and industry while empowering itself to investigate subsidies given by other countries. The European Green Deal alone aims to raise €1 trillion in the next 10 years, with €503 billion coming from the EU budget.

India story

India, with warts and all, is poised to emerge as a critical player in a new manufacturing axis supported by the US. Apple and Micron investing in India highlight this trend. Let us understand the deeper significance of these investments.

China’s ascent as an electronics powerhouse in the early 2000s can be attributed to collaborative efforts with Western firms, such as Apple, which worked closely with Chinese companies to help them achieve global quality standards as component suppliers. This contributed to China’s dominance in the global electronics design and manufacturing ecosystem.

However, now with the US  actively seeking alternatives to China, focus has shifted to India. In October 2022, US export control rules limited support for Chinese production of chips smaller than 16 nanometers. This restriction partly prompted Apple to shift some production to India, as phones like the iPhone 15 Pro Max, which uses 3-nanometer chips, could no longer be manufactured in China. India’s smartphone exports, surpassing $12 billion in 2022-23, underscore the significant potential of this partnership. We can anticipate a similar trend in the semiconductor sector through the Micron partnership.

On its part, India must take eight actions to boost manufacturing competitiveness and facilitate trade flows. These are:

1. Eliminate arbitrage from manufacturing schemes, including special economic zones, export oriented units, and Customs bond manufacturing, which offer varying tax benefits and import duty structures. New schemes often provide better incentives but come with switching costs, leading to the closure of numerous units unable to transition.

2. Sign free trade agreements (FTAs) only if they align with India’s economic interests. Avoid joining the Indo-Pacific Economic Framework, as it entails adhering to WTO Plus standards, which may not serve India’s interests.

3. Address domestic laws on digital trade, labour, environment, agriculture, and tariffs before making international commitments.

4. Respond decisively to unjust climate taxes imposed by the EU, utilising a calibrated retaliation mechanism. We have done it before. In March 2018, when the US imposed import tariffs on India’s steel and aluminium, India responded by increasing tariffs on 29 specific US products.

5. Reduce Customs duties, particularly on products with imported inputs. Lower duties stimulate manufacturing by reducing finished goods prices and fostering exports, especially benefiting small firms. While certain products critical to the “Make in India” programme may maintain higher duties, the general trend should be towards reduced tariffs to enhance the export potential of the small-scale sector.

6. Streamline export compliance by implementing a single-window system facilitated by creating a National Trade Network (NTN). This integrated approach would eliminate the need for exporters to engage separately with Customs, Directorate General of Foreign Trade, shipping companies, ports, and banks. Simplifying the process through NTN would reduce time and costs, empowering small firms to become exporters.

7. Address energy imports, which accounted for 36.6 per cent of India’s total merchandise imports in FY2023, costing $260 billion. The projected growth suggests that the energy import bill could surpass $1 trillion by December 2026. In the 1980s, India met 85 per cent of its crude oil needs mainly from ONGC’s Bombay High offshore oil field, but now we import 85 per cent of our needs. A renewed focus on domestic oil exploration, leveraging untapped sedimentary basins, can help reduce this dependence.

8. Prioritise the removal of non-tariff barriers (NTBs) to enhance India’s export performance. NTBs often result in the rejection or increased scrutiny of Indian products like fish, food, chemicals, or machinery. To mitigate their impact, India should upgrade domestic systems, especially in cases linked to product quality, and engage in dialogues with partner countries while being prepared to retaliate if unreasonable standards or rules obstruct Indian imports.

In conclusion, the evolving landscape of global trade underscores the need for strategic actions and policy shifts. As the US and EU prioritise local production and economic stability, India stands at the cusp of a new manufacturing era. With Apple and Micron’s investments as promising examples, India’s role is poised to grow in this shifting paradigm. As India navigates these challenges and opportunities, it must remain adaptable and proactive to secure its interests in the evolving global trade landscape.

The writer is the founder of Global Trade Research Initiative,  a research group focused on trade, technology and  climate change issues