This September 21, 2017 photo shows an employee of Essar Ports, India’s second largest private port operator, in the berthing area of the Vizag Terminal in Vishakhapatnam. (Photo by INDRANIL MUKHERJEE / AFP)

The Race for Global Value Chains: Return to RCEP, India?

Published

Both India and ASEAN are vying for places in shifting global value chains (GVC) affected by the Covid-19 pandemic. India is behind the grouping in GVC participation. One way for New Delhi to play catch-up is to rethink its withdrawal from the Regional Comprehensive Economic Partnership.

The emergence of the coronavirus pandemic this year has raised the possibility of re-configurations in global value chains (GVCs) as firms seek to reduce risks of input shortages by diversifying their supply sources. India and ASEAN vie for a place in the new configurations of GVCs as participation in GVCs can help to create jobs and facilitate economic growth. But, ASEAN has an early mover advantage as it is already ahead of India in the GVC game.

Figure 1 shows the GVC participation indices of India and ASEAN. The indices provide an estimation of how much an economy is connected to GVCs for its foreign trade. It is composed of two components reflecting the upstream (or forward participation) and downstream (or backward participation) links in international production chains.

India’s backward participation, which is measured as the ratio of foreign value added content in exports to total gross exports, is lower than that found in developing countries and Cambodia, Malaysia, the Philippines, Thailand and Vietnam. It is, however, higher than that of Brunei and Indonesia because the latter countries are natural resource exporters with less developed manufacturing sectors. Correspondingly, Brunei and Indonesia’s forward participation, which is ratio of the domestic value added in exports sent to third economies to total gross exports, is higher than their backward participation which is more dependent on trade in intermediate inputs.

GVC Participation

A key driver of GVC participation is trade liberalisation; understandably, trade barriers add to the cost of importing inputs which are needed for enhancing GVC participation. Figure 2 shows that the trade-weighted Most-Favored-Nation (MFN), or non-discriminatory, tariffs for India (11.7 per cent). This is more than three times the average for four ASEAN member states, which stands at 3.6 per cent. Malaysia, Thailand, Singapore and Vietnam are the most active in GVC participation.

Trade Weighted MFN Tarrifs

Given the importance of trade liberalisation for GVC participation, preferential trade agreements can facilitate GVC participation. Although there is an ASEAN-India Free Trade Agreement (AIFTA), whereby a Trade in Goods Agreement was signed and entered into force in 2010, the scheduled tariff liberalisation covered only about 76.4 per cent of the goods traded. The remaining 20 per cent of the goods face tariffs ranging from five to 45 per cent. There is also a long exclusion list, including 302 tariff lines in agriculture; 81 tariff lines in textiles; 32 tariff lines in machinery and auto; and 22 tariff lines in chemicals and plastics. These are subject to annual review.

In contrast, the ASEAN Trade in Goods Agreement (ATIGA) among the ASEAN-6 (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand) has eliminated 99.3 per cent of all tariffs by 2019. The corresponding figure for Cambodia, Laos, Myanmar and Vietnam is 97.7 per cent. Collectively, ASEAN has eliminated 98.6 per cent of the total number of tariff lines by 2019. The average intra-ASEAN tariffs has fallen to below one per cent in all 10 ASEAN member states.

A 2014 research study found that it is precisely this disparity in tariffs that led Nissan, the Japanese automotive giant, to lower its original targeted 80 per cent sourcing from India to 40 per cent while the remainder was sourced from ASEAN, even though the initial sourcing targets were motivated by the AIFTA.

More importantly, the top three foreign input providers for Indonesia, Malaysia, the Philippines, Singapore and Thailand are China, Japan and the United States, though not necessarily in the same order of importance. For Cambodia, it is China, Thailand and Japan while it is China, Korea, and Japan for Vietnam. A free trade agreement with ASEAN alone is not enough since the source countries for multinationals heading the GVCs are from China, Japan and the United States.

While India has bilateral trade agreements with Singapore, Korea, Japan and Malaysia, Indian firms will have to deal with different rules of origin to ascertain their eligibility to utilise the preferential tariffs in each of these agreements. This is a Herculean task which is cumbersome and costly to comply.

In retrospect, however, trade liberalisation under the RCEP can serve to propel India’s participation in the reconfiguration of GVCs by connecting India with the old and emerging new GVCs in ASEAN.

This is where the Regional Comprehensive Partnership Agreement (RCEP) can step up to the plate. The trade deal is scheduled to be signed later this year. It will be first regional free trade agreement encompassing all of ASEAN with its five Plus Partners, namely Australia, China, Japan, Korea and New Zealand. The agreement will have a single, consistent, and cohesive set of trade rules, thereby lowering considerably the compliance costs.

Although India was part of the protracted negotiations from 2013 to 2019, it decided to withdraw from the agreement at the last minute due in part to fears that it will be flooded with imports due to its higher initial tariffs. In retrospect, however, trade liberalisation under the RCEP can serve to propel India’s participation in the reconfiguration of GVCs by connecting India with the old and emerging new GVCs in ASEAN. Given the importance of trade liberalisation in GVC participation, India needs to reconsider its exit from the RCEP especially while the door to rejoin is still open. Otherwise, ASEAN will continue forging ahead in GVC participation while India struggles to catch up. Time for a rethink, perchance?

Figure 1 shows the GVC participation indices of India and ASEAN. The indices provide an estimation of how much an economy is connected to GVCs for its foreign trade. It is composed of two components reflecting the upstream (or forward participation) and downstream (or backward participation) links in international production chains.

India’s backward participation, which is measured as the ratio of foreign value added content in exports to total gross exports, is lower than that found in developing countries and Cambodia, Malaysia, the Philippines, Thailand and Vietnam. It is, however, higher than that of Brunei and Indonesia because the latter countries are natural resource exporters with less developed manufacturing sectors. Correspondingly, Brunei and Indonesia’s forward participation, which is ratio of the domestic value added in exports sent to third economies to total gross exports, is higher than their backward participation which is more dependent on trade in intermediate inputs.

A key driver of GVC participation is trade liberalisation; understandably, trade barriers add to the cost of importing inputs which are needed for enhancing GVC participation. Figure 2 shows that the trade-weighted Most-Favored-Nation (MFN), or non-discriminatory, tariffs for India (11.7 per cent). This is more than three times the average for four ASEAN member states, which stands at 3.6 per cent. Malaysia, Thailand, Singapore and Vietnam are the most active in GVC participation.

Given the importance of trade liberalisation for GVC participation, preferential trade agreements can facilitate GVC participation. Although there is an ASEAN-India Free Trade Agreement (AIFTA), whereby a Trade in Goods Agreement was signed and entered into force in 2010, the scheduled tariff liberalisation covered only about 76.4 per cent of the goods traded. The remaining 20 per cent of the goods face tariffs ranging from five to 45 per cent. There is also a long exclusion list, including 302 tariff lines in agriculture; 81 tariff lines in textiles; 32 tariff lines in machinery and auto; and 22 tariff lines in chemicals and plastics. These are subject to annual review.

In contrast, the ASEAN Trade in Goods Agreement (ATIGA) among the ASEAN-6 (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand) has eliminated 99.3 per cent of all tariffs by 2019. The corresponding figure for Cambodia, Laos, Myanmar and Vietnam is 97.7 per cent. Collectively, ASEAN has eliminated 98.6 per cent of the total number of tariff lines by 2019. The average intra-ASEAN tariffs has fallen to below one per cent in all 10 ASEAN member states.

A 2014 research study found that it is precisely this disparity in tariffs that led Nissan, the Japanese automotive giant, to lower its original targeted 80 per cent sourcing from India to 40 per cent while the remainder was sourced from ASEAN, even though the initial sourcing targets were motivated by the AIFTA.

More importantly, the top three foreign input providers for Indonesia, Malaysia, the Philippines, Singapore and Thailand are China, Japan and the United States, though not necessarily in the same order of importance. For Cambodia, it is China, Thailand and Japan while it is China, Korea, and Japan for Vietnam. A free trade agreement with ASEAN alone is not enough since the source countries for multinationals heading the GVCs are from China, Japan and the United States.

While India has bilateral trade agreements with Singapore, Korea, Japan and Malaysia, Indian firms will have to deal with different rules of origin to ascertain their eligibility to utilise the preferential tariffs in each of these agreements. This is a Herculean task which is cumbersome and costly to comply.

This is where the Regional Comprehensive Partnership Agreement (RCEP) can step up to the plate. The trade deal is scheduled to be signed later this year. It will be first regional free trade agreement encompassing all of ASEAN with its five Plus Partners, namely Australia, China, Japan, Korea and New Zealand. The agreement will have a single, consistent, and cohesive set of trade rules, thereby lowering considerably the compliance costs.

Although India was part of the protracted negotiations from 2013 to 2019, it decided to withdraw from the agreement at the last minute due in part to fears that it will be flooded with imports due to its higher initial tariffs. In retrospect, however, trade liberalisation under the RCEP can serve to propel India’s participation in the reconfiguration of GVCs by connecting India with the old and emerging new GVCs in ASEAN. Given the importance of trade liberalisation in GVC participation, India needs to reconsider its exit from the RCEP especially while the door to rejoin is still open. Otherwise, ASEAN will continue forging ahead in GVC participation while India struggles to catch up. Time for a rethink, perchance?

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