Global Trade Trends and Fiscal Initiatives | Expert Views

First, global trade has proven resilient despite the multiple shocks stemming from the pandemic, the ongoing wars between Russia and Ukraine and Israel and Hamas, politically motivated trade instruments such as the Inflation Reduction Act (IRA) and the Carbon Border Adjustment Mechanism (CBAM), and US-China tariff and technology competition. While these events have undoubtedly led to swings in the growth rate, the declines have been short-lived. The recovery in 2021 after the sharp decline in 2020 immediately following Covid was swift and sustained, leading to record high trade growth in 2022. Rising geopolitical tensions marked another decline in early 2023, but trade growth picked up in the final quarter, albeit with differences across regions and countries. Trends in the first quarter of 2024 have been positive for both goods and services trade, continuing the modest increase seen in the second half of 2023. The upward trend is expected to continue in the coming year, given the moderation in global inflation trends and the resulting increase in real incomes and demand for manufactured goods. However, a plateau in the growth of trade in services is indicated.

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Second, trade within deep preferential trade agreements (PTAs) has been observed to be more resilient than trade outside PTAs. During last year’s trade downturn, intra-PTA trade in the US-Mexico-Canada agreement, the European Union (EU) and to some extent the Regional Comprehensive Economic Partnership performed relatively better. Previous studies have shown similar trends during the pandemic. Higher-order economic integration, lower trade costs and the convergence of regulatory and investment regimes (see my “Prioritise Deep Trade Agreements”, Business Standard, June 27, 2024) promote dense production networks that provide the necessary mechanism for recovery and resilience during periods of trade volatility.

Third, with regard to the impact of geopolitical factors on global trade, friend-shoring, trade concentration and increased lengths of global value chains (GVCs) that have been visible since 2022 and 2023. There are also some signs of moderation in this trend. Nevertheless, the restructuring of GVCs creates opportunities for GVC integration for emerging market economies (EMEs) in Asia and Latin America.

Global trade dependency is also being recalibrated by political proximity, but the shifts are not yet dramatic. Bilateral aggregate trade trends show that US trade dependency on China and China on the US have declined, but only by a small percentage. Countries that have experienced increased trade dependency on China include Brazil, Vietnam, and India. The most significant reflection of geopolitics is the decline in Russia’s trade dependency on the EU, which is understandable given the energy dynamics between the two and the sanctions following the war in Ukraine. Russia’s sharply increased dependency on China is a result of the same context.

Fourth, sectoral trends show that traditional sectors such as machinery and transportation have maintained their GVC and trade momentum. New age and high-tech sectors such as artificial intelligence, green transition and semiconductors have seen high demand, although these have also been targeted by trade and industrial interventions. Among these sectors, electric vehicles and solar panels show an opportunity for EMEs, as the clear redistribution of trade and distribution across more suppliers in these sectors indicates a more competitive market. However, battery production remains concentrated among a few suppliers. These sectoral developments are still ongoing and are likely to evolve further given the ongoing geopolitical uncertainty and the growing weakness of the multilateral rules-based trading order.

In this context, the following trade policy measures will help India take advantage of the emerging opportunities.

Firstly, the tariff review should be done with the ultimate objective of aligning India’s import tariffs in the manufacturing sector with the benchmark set of EMEs like ASEAN. A timeline for achieving this objective should be set in the next six months. Lower import tariffs will help improve export competitiveness, which is the ultimate test of manufacturing competitiveness.

Secondly, a pre-specified timeline for tariff reduction will also lend an element of predictability to India’s trade policy and help attract export-oriented foreign direct investment (FDI), which seeks efficiency. The priority should be to attract FDI from GVC-leading companies, which are mainly located in advanced economies. Their design and innovation capabilities will support technological transfer and diffusion, which in turn will help improve manufacturing productivity.

Third, since trade in deep trade agreements is relatively more robust in times of crisis, India should prioritize the inclusion of deeper provisions in its FTAs. However, the design of the FTA and the negotiating strategy should be context-appropriate. This is necessary given the growing tendency of regional trading blocs in North America and the EU to secure intra-regional trade by employing discriminatory trade instruments/measures vis-à-vis the rest of the world.

In North America, the US-regulated IRA is an explicitly exclusive trade policy instrument, motivated to enhance intra-regional trade and GVCs, as well as trade with its FTA partners. India does not have an FTA with the US and the current political dispensation and the ongoing presidential election debate have given no indication of a change in its trade policy stance. The EU has implemented the CBAM, which is projected as a virtuous trade instrument that creates a “global common good” but has the potential to increase intra-EU trade while imposing compliance costs on developing countries like India. CBAM is also likely to be adopted by other countries, including the UK. ASEAN, on the other hand, offers opportunities for enhanced trade dynamics and GVC integration, while following the multilateral rules-based trading order.

Therefore, the move towards a more open trade policy in India’s Budget 2024 should be broadened and deepened in the coming year.

The writer is Senior Fellow, CSEP, Professor, SIS, JNU (on leave) and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views expressed are personal.