Tariffs & strategy: China can be countered by getting global value chains to shift here. But we have high trade costs

The first in-person leaders’ summit last week of the Quad grouping resulted in a promising outcome that meshes economic integration with the overarching strategic motive. India is an immediate beneficiary of this thrust. The Quad Vaccine Partnership is financing a manufacturing expansion of domestic vaccine maker Biological E. The summit’s joint statements highlighted other potential areas of collaboration. The clean hydrogen partnership, a semiconductor supply chain initiative and telecommunications are three areas where India will potentially be presented with opportunities to make a technological and economic leap.

If the Quad’s economic potential is to materialise, it will come through private sector collaboration. In economic terms, the Quad economies are the antithesis of China, private firms operating in rules-based market economies drive things forward. For sure, agreements between governments will create an enabling environment. The potential will however have to be realised by private firms. In other words, if the Indian economy is to benefit from the opportunity arising out of the realignment, private firms need enough incentive to invest here.

In practical terms it translates into India’s tighter integration into global value chains (GVCs). An important factor influencing integration is the level of trade costs in India, through both tariff and non-tariff barriers. India’s trade policy in the recent past has pushed up costs through tariff increases. WTO data shows that India’s simple average applied MFN (most favoured nation) tariff increased from 13% in 2014-15 to 15.4% in 2020-21. At a more granular level, the percentage of tariff lines in the 10-30% duty category increased from 12.1% in FY15 to 22.1% in FY21. There’s been a marked shift towards protectionism that has on average increased trade costs. It will only discourage potential GVC investments. The prevailing favourable strategic environment needs supportive trade policies that persuade GVCs to come here.

India’s FDI inflows have increased recently in absolute terms but a look at the nature of flows suggests that access to the domestic market has been an important pull factor. There will be more positive spin-offs if an increasing incidence of inflows locks the domestic firms into GVCs. It will lead to diffusion of advanced technology and raise productivity across-the-board. Therefore, the historic opportunity arising out of closer ties of the Quad grouping can be realised if India reorients its trade regime to draw in FDI that binds the Indian economy to GVCs extensively. India is a more stable and dependable alternative to China for GVCs.