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India’s Trade Policy: Looking To The Future

The short point is that one cannot look at trade policy in isolation but to recognise that it has three elements: trade in commodities (imports and exports), trade in services and FDI.

Photo Credit : Reuters

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One fact indicates why special attention would be given to trade policy in the years to come:  the government policy to propel India towards a $5 trillion economy by 2024-25.

This has automatic implications for the trade policy.  At present, the total value of trade (imports plus exports) is roughly around $700 billion which is about 40% of GDP.  If this 40% ratio is to be maintained then the implication is that total trade  will have to increase to about $2 trillion, of which, at least one trillion dollars would have come from exports.  This would require a substantial change from the current thinking on trade policy.

The main change necessary is to think of trade policy as not merely export promotion but looking together at the issues of exports, imports and FDI.  There are a number of reasons for this.  For one, today exports cannot be isolated from imports since almost 80% of world trade is intra-industry trade (IIT).  This needs a little explanation.  In mid 20th century, it was easy to classified products as exports or imports and further as agriculture, manufacturing or services exports/imports.  However, since 1980 or so, the growth of intra-industry trade implies that countries simultaneously export and import items belonging to the same industry group.  What countries now do is to import an item, add value to it and export a related item.  To take an example, a principal trading product today is Gems and Jewellery and precious stones where India imports both diamonds and gold, adds value in the form of jewellery and exports to the world.  This kind of simultaneous export-import is characteristic of almost of traded items.  Hence trade policy must look at both issues, that is import and exports, and not only at exports.  This requires a dramatic change in the trade policy.  To take one implication, the issue is not of simply exporting $1 trillion worth but of trading $2 trillion in the world market. 

Second it is also becoming extremely difficult to separate services export from commodity exports.  To take an example, India is a leading player in the world market in products which are very intensive in the use of IT services.  Electronic items are probably the best example of this. 

In 2015-16, these electronic items constituted about 3% of exports and 6% of imports so that India today is a net importer of electronic items which have a substantial IT component.  So the issue here is how can the export of information technology enabled services (ITES) in domestic electronic manufacturing be enhanced so as to export more value added electronic products.  As is obvious, this implies that looking at exports in isolation would be inappropriate.  

Third, today trading countries are trying to move up the export ladder by moving from low cost labour intensive to higher value added technology intensive products.  Countries like China (in recent times) and South Korea and Japan have done this successfully.  The link to trade policy here is that technology is acquired slowly through learning by doing from technology leaders.  Presently many of these technology leaders are transnational corporations whose presence in an economy is reflected in FDI.  Another aspect of moving up the technological ladder is to establish a country’s position in international value chains often called global value chains (GVC).

An aspect of these GVC’s is that products are linked vertically through the medium of global firms and Indian firms are no exception to this.  It is often not recognised that not all transnational firms (TNCs) are global giants.  Example comes from the exporting firms from Taiwan, Japan, South Korea etc. 

TNCs investments (often called FDI) leads to dominance of intra firm trade at the global level and this constitutes the GVCs.  Today, FDI is a mix of technology, commodity and services.  In other words, FDI is just another way of doing trade.  This is clear from the fact that there is almost a one to one co-relation between a country’s exports/imports and inflows/outflows of FDI.  So a third element of trade policy is to recognise these inter linkages by associating trade policy with FDI policy.  Currently, in India two separate government departments define trade policy and FDI policy and this is not very efficient. 

The short point is that one cannot look at trade policy in isolation but to recognise that it has three elements: trade in commodities (imports and exports), trade in services and FDI.  What I have tried to argue is we need to look not only at trade policy but also the link between trade policy and FDI as trade and FDI are literally two sides of the same coin.  To this, if we add the fact that commodity trade and service trade are increasingly inter-related, it is clear that trade policy and the one trillion export economy needs a more holistic approach to trade policy.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Manoj Gupta

Manoj Gupta is founder of Craftsvilla, an ecommerce retail platform and luxury brand in handcrafted and greencrafted products. Prior to this he has served as a board observer at Snapdeal.

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