Time to re-visit India's trade policy

We need to recognise the importance of aligning with evolving regional trade formations and utilising preferential trade mechanisms

In early May, global trade tensions escalated as the United States increased its tariffs from 10 per cent to 25 per cent on $200 billion worth of Chinese goods. China retaliated on Monday, with the Chinese finance ministry announcing its plans to hike import tariffs ranging from 5 per cent to 25 per cent on a target list worth $60 billion of US goods.The renewed US-China trade war and related uncertainty is likely to have a negative impact far beyond the US-China bilateral trade on global growth. The WTO, in its revised estimates last month, has already trimmed world trade growth forecast for 2019 to 2.6 per cent from the earlier forecasted 3.7 per cent. In India, withdrawal of the generalized system of preferences (GSP) by the US, which is likely to commence in early June, end of sanction waivers for crude oil imports from Iran, and severe criticism of India's protectionist tariff regime and complex business environment over this past week by the visiting US Commerce Secretary Wilbur Ross has led to heightened tensions regarding US-India bilateral economic relations and trade diplomacy. The goods trade deficit reached a high of $176 billion in 2018-19 and at $331 billion, exports, though the highest since 2013-14, have been well below the target of the Ministry of Commerce (MoC) for the year. There is an urgency, therefore, for India to re-visit its trade policy. While an export push in traditional sectors is being appropriately worked on by a newly set up MoC working group, these challenging circumstances require a deeper understanding of global value chain (GVC)-led trade as it has evolved in recent times and the facilitating role of preferential trading agreements (PTAs) therein. In particular, India needs to recognise the importance of aligning with evolving regional trade formations and utilising PTAs in its global value chain integration strategy. 

India's exports continue to be predominantly low skill and labour intensive commodities. Gems and jewels, cotton, articles of apparel and footwear have together accounted for 25-35per cent of exports for India over a decade and half. Over the same period, the most dynamic sectors globally, with highest production fragmentation based sectoral relocation across borders, which is characteristic of GVC led trade, have been sectors like office machinery, communication equipment and textiles and apparel. Office machinery, with almost 40 per cent of exports relocating across countries, has been the most dynamic sector. However, corresponding sectors of electrical equipment and machinery account for only 4-5 per cent of India's exports, thus, reflecting India's insignificant integration in global GVCs. The only sector where India has been able to share gains of sectoral dynamism is textiles and apparel, though this has been alongside other countries such as China, Bangladesh and Vietnam. Even in this sector, over time, India's share in global exports has declined from a constant of about 5 per cent in 2000-2012 to 4 per cent in 2017. Over the same period, competing countries like Bangladesh have registered an increase in their share of global exports from 4.5 per cent to 8.1 per cent. China leads with a share of 37 per cent in global exports in textiles and apparel. Other Indian top export sectors like leather goods, chemicals, and motor vehicles have been among the less dynamic sectors with lower relocation shares. India's export basket has not, therefore, evolved in line with the pattern of dynamic GVC-led trade.    

At present, GVCs are undergoing a transformation with greater domestic content and regional consolidation, particularly in East Asia and in sectors like automotives, computers and electronics. East Asia emerged as the global manufacturing hub centered around China early on in the process of GVC-led trade. The EU and North America were the other GVC hubs. As trade and growth in the EU is yet to gain its pre-global financial crisis momentum and the US grapples with trade disputes, East Asia remains the most resilient regional manufacturing hub in the world. It becomes imperative, therefore, that India seek a trade strategy towards greater integration with East Asia. Regional comprehensive Economic Partnership (RCEP) offers India this opportunity.

Unfortunately, India's perception of the RCEP is limited by its bilateral trade deficit with the largest economy in the trade formation — China. For fear of being overwhelmed by Chinese goods under a preferential arrangement, India's stance in the RCEP negotiations has been mainly defensive in seeking differential and lower levels of preferential market access for its non-FTA partners such as China and Australia/New Zealand. However, the RCEP is not merely about trading with China, which is in any case inevitable, given that China is the largest trading partner for almost all nations in the world. Chinese goods will, therefore, find access, maybe even preferential access, to the Indian market through some or the other trading partner. The RCEP has to be seen as a mega regional trade agreement, which is a means to both trade liberalisation and integration with regional value chains or GVCs through East Asia. 

Other than unilateral opening up, most of the trade liberalisation in the past two decades has been at the regional level. As of 2017, about half of the world trade has occurred under some or the other PTA. India's trade strategy to work through multilateralism may once have been an option, but today when the WTO is struggling to remain relevant, mega regional PTAs have become dominant trade vehicles. With agreement on major trade disciplines across their large membership, mega regionals play a facilitating role in making possible efficient multiple border crossings for goods that are fundamental to GVCs. And, the RCEP is the only mega regional trade agreement in Asia-Pacific of which both India and China are members. 

Illustration: Ajay mohanty

Other RCEP member countries are either members (Malaysia, Brunei, Japan, Vietnam, Singapore, Australia, New Zealand) or have already expressed interest (Indonesia, Thailand, Korea) to join Comprehensive and Progressive Trans Pacific Partnership, CPTPP, the other mega regional trade agreement effective in the Asia -Pacific. Neither India nor China is a member of the CPTPP. Also, of the two, the RCEP is a trade light mega regional agreement, which is as yet working on liberalisation of trade in goods and services unlike the CPTPP that, with its WTO plus provisions, is far more ambitious in its coverage. It would, therefore, be in India's interest to make sure that the RCEP negotiations are concluded at the earliest. 

Furthermore, as China is caught in a trade war with the US, India using its large, alternative market advantage could work out a bilateral deal with China within the larger mega-regional trade framework. As RCEP negotiations await completion of electoral processes and government formation in some member countries, Indian trade diplomacy should set to work on a framework for such a deal. 

The writer is professor, School of International Studies, JNU