Opportunities galore in the east

A deeper integration with east Asian economies could be integral to India's economic recovery in the pandemic

Even while the uncertainties of the pandemic continue, global trade has shown healthy signs of recovery since the last quarter of 2020 (Global Trade Update, UNCTAD, February 2021). In the first quarter of 2021, the rebound strengthened, with a 10 per cent year-over-year and 4 per cent quarter-on-quarter growth, with trade volumes having exceeded pre-pandemic levels. Goods trade has been in the lead in both quarters. Services trade has lagged behind. 

The WTO goods trade Barometer, a composite leading indicator for world trade, with a value of 109.6 in May 2021, relative to an index value of 103.9 in the fourth quarter of 2020, is similarly indicative of a pick-up in global merchandise trade. Further, all of the Barometer’s component indices in the month of May were above trend level and rising. The Barometer clearly forecasts robust trade volume performances for the first and second quarters of 2021. This sustained recovery in global trade can contribute significantly to softening the adverse impact of the pandemic on global and individual economies. India needs to take advantage of this positive trend.

Global trade recovery has shown some distinct regional and sectoral patterns. Developing country trade has been in the lead, outpacing trade growth in developed economies. Trade performance has been the strongest for east (including southeast) Asian economies. Following early and effective pandemic containment measures, these economies have been at the core of the global trade resurgence during the past year. Trade growth among these countries is expected to remain strong relative to their trade with other nations. While China leads in export growth performance, other east Asian economies too, have gained market share during the pandemic period. Vietnam stands out with an impressive gain in market share. Sector-wise, while pandemic-related sectors such as communications and office equipment, pharmaceuticals and agri-food products have seen strong expansion, other sectors like electronics, motor vehicles, textiles and apparel have also shown positive growth on a quarterly basis (Global Trade Update, UNCTAD, February and May, 2021). Countries with strong and growing trade engagement with the east Asian economies in the expanding sectors are bound to enjoy spillover benefits of these global trade developments.

In order for India to achieve its objective of self-reliance with greater global engagement, a strong focus on enhancing its trade integration with the east Asian region would be a desirable strategy. India’s recently announced production-linked incentive (PLI) scheme, to boost manufacturing and export capabilities in 13 priority sectors, makes this even more relevant. Among these priority sectors, electronics, communications and office equipment, motor vehicles, pharma, textiles and apparel overlap with sectors leading global trade growth trends, and east Asian economies have been among the lead gainers in terms of export performance in these sectors during the pandemic period. Notably, in some sectors, like office machinery, communications equipment and textiles, Vietnam, Thailand, Korea and Taiwan have registered gains, while China has lost market share and competitiveness during the pandemic (Global trade update, February 2021). 

Illustration: Binay Sinha

As large, multinational corporations further accelerate their pace of near-shoring to diversify their value chains away from China in the immediate post-pandemic period, India would stand to gain, if it were to increase its trade integration with East Asian economies. Value chain integration in sectors such as textiles and apparel and motor vehicles, that have the maximum potential for labour-intensive backward linkages, will be an advantage for India, when unemployment numbers are at their peak on account of the pandemic. India must work to seize this opportunity. Well-designed PLI schemes alongside other policy measures such as rationalisation of sector-specific import duty structures in motor vehicles, electronics and textiles, and facilitating imports of latest machinery and technological upgrades in textiles and apparel, will help strengthen India’s position as an alternative investment location, despite being a non-member of the Regional Comprehensive Economic Partnership (RCEP).

It is evident from the Asean Comprehensive Recovery Framework (ACRF) and its implementation plan, that the regional economies, are looking at RCEP as an anchor of their recovery from the pandemic. The fact that the RCEP negotiations were concluded and the agreement signed by all 15 members in the midst of the pandemic, is further proof of its significance to the participating regional economies. But, the ACRF and its components also show that Asean, given the pandemic-induced weaknesses in regional supply chains and continued uncertainty in US-China trade and bilateral relations, views diversification and broader regional integration as a means to achieving greater supply chain resilience. Therefore, India’s trade policy, that is also now strategically oriented to reducing single source dependence for its imports, aligns well with the Asean’s post-pandemic recovery plan of diversification and broader regional integration. This alignment should be fully utilised by Indian trade policy to ride the global wave of trade and economic recovery.

Further, the review process, under way for India’s free trade agreement (FTA) with Asean can be used to assist this process as Asean’s broader regional integration approach is based on deepening and upgrading its FTAs with regional trade partners. While undoubtedly, India’s applied most-favoured nation tariffs in manufacturing as a whole need to be reviewed and aligned better with global and comparator developing countries, it may be useful as an immediate measure to rationalising the tariff structure in sectors of interest under the FTA review process. A prior analysis of trade-investment linkages in these sectors to facilitate negotiations may be worth consideration. Providing preferential access to imports and markets will help attract foreign investment in these sectors. Additionally, a constant refrain of the Indian business community with respect to the India-Asean FTA has been the large number of non-tariff barriers (NTBs) imposed by Asean as protective measures. Invariably, this has been cited as a cause for India’s limited exports to Asean and the increasing bilateral deficit with the region. So, it would be most useful to create a database of specific NTBs, in sectors of interest, with clarity on the distinction between non-tariff measures (NTMs) and NTMs that are used as NTBs. Prior to setting reasonable expectations on this front, it may be useful to note that, reciprocity in this regard would be expected as a natural course of negotiations and India should be prepared for that.

Integrating with east Asia with a well-designed PLI scheme in sectors that are leading global trade recovery and a careful upgrade of its FTA with Asean could be integral to India’s economic recovery in the pandemic.

The writer is professor, School of International Studies, JNU. Views are personal