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India

How U.S-China Trade War Could Be A Chance For India To Cash In

Trump's trade war with China could be a golden opportunity for India. But first, it'll need to revisit its trade policies and regulatory framework.

Workers at a car factory in Chennai, India
Workers at a car factory in Chennai, India
Pradeep S Mehta and Surendar Singh

-Analysis-

NEW DELHI — The U.S.-China trade war is disrupting the functioning of global value chains (GVCs) that spread across East Asia, North America and West Europe, and represent nearly two-thirds of all international trade. Its potential spillover effects will likely transform the geography of GVCs, which in turn define the global trading system's geo-economic architecture.

This is forcing a large number of Asian manufacturers to shift their production lines from East Asia to low-cost economies such as Bangladesh, Cambodia and Sri Lanka, which are relatively less fragile to a global trade war. Indeed, many multinational corporations including Mitsubishi Electric, Hasbro, Micron Technology and Toshiba Machine are contemplating shifting their production centers to minimize the impact of the trade war between the United States and China.

All of this begs the question of whether the trade war offers a window of opportunity for India. The answer is probably yes. This is a unique opportunity for India to increase its exports and to capture greater space in GVCs. But the potential gains from this opportunity hinge on India's ability to align its trade, investment and infrastructure with operative principles of GVCs.

The ripple effects of this cannot be overstated.

That, in turn, raises an even bigger question: Do India's policies provide incentives for Asian manufacturers to relocate in India?

It's clear that our trade and trade-related policy-makers need to undertake specific and substantial structural reforms over the next three to five years. If this is done, we can definitely emerge as the next factory of the world. The ripple effects of this cannot be overstated — it will emerge as a sustained contributor towards creating new job opportunities for our youth.

If we fail, India will have to deal with social unrest due to high unemployment of the increasing demographic dividend.

Recipe for success

So, what needs to be done?

First, India has yet to liberalize its trade policy to make it coherent with the value chain led trade. India's average applied tariff is higher than those in most other East Asia and Pacific economies. In 2016, India's trade-weighted average tariff was 7.5%, while in East Asia & Pacific economies, it was 3.6%. Higher tariffs hindering the imports of intermediate products create an impact at the very root of value addition through forward linkages.

Even with this disparity and its concomitant impact on the ability of Indian firms to operate within GVCs, the fact of the matter is India has recently increased its import duty on a number of products including telecom equipment, steel, automobile, textile products. An increase in import tariffs generates trade policy uncertainty. Moreover, such changes in tariffs may drive India out of regional production networks, which operate on efficient movement of intermediate products across borders.

Metal worker in Allahabad, India — Photo: Prabhat Kumar Verma/ZUMA

Other than this, India's trade policy is largely conducted at the aggregate level and its overall orientation is on conventional product or sector-specific policies. Such policies often fail to capture nuances of comparative cost advantage at firm level that are vital for the participation in GVC-led trade. This is primarily happening due to the absence of trade-related firm-level data to understand the critical factors of their internationalization.

Second, free trade agreements are important instruments to facilitate regional integration and connect with regional and global value chains. In the Asia-Pacific region, India has comprehensive free trade agreements with Japan, South Korea, Association of Southeast Asian Nations (ASEAN), Singapore and Malaysia. But Indian firms are largely unable to use these FTAs to penetrate themselves into foreign markets. One of the major reasons is low utilization of these FTAs.

This is evident from a survey by Japan External Trade Organization (JETRO) in 2017. The utilization rate of India's FTAs with ASEAN and Japan is higher on imports than exports. The average utilization rate for exports is 42% for ASEAN and Japan, while on imports it is 71% and 55% respectively. The higher usage of FTAs on imports indicates that Indian importers are making greater use of these FTAs and, therefore, greater market access for ASEAN and Japanese products in the Indian market.

The lower usage of FTAs in case of exports indicates that India's FTAs do not provide incentives to importers in Japan and ASEAN to import under these FTAs. One of the reasons is wafer-thin margins between MFN (most-favored-nation) tariffs that are the same for all WTO (World Trade Organisation) members and preferential tariffs under these FTAs.

Third, participation in GVCs also hinges on the state of trade infrastructure and trade regulatory framework. Efficient export and import clearance is vital for well-lubricated value chains. India's performance on the World Bank's Trading Across Borders, 2018 has improved remarkably by taking a quantum leap from 146 to 80 out of 190 countries. Thus, it would be interesting to see how it impacts the cost and time of doing trade and facilitate the integration of Indian firms in GVCs.

Global benchmarks

However, it would be worthwhile if one analyzes the current performance of India on trade facilitation in the context of the nature of traded products. Cotton, diamonds, rice, yarn, garments, gem and jewelry, low-end engineering products, pharmaceuticals and petrochemicals make up the bulk of the India's exports. These products can be easily exported with less efficient trade infrastructure. Furthermore, more than 70% of India's global trade takes place through Nhava Sheva Mumbai, Chennai and Mundra ports.

All of them are overburdened and working at 85% of their capacity whereas globally, 70% is considered to be ideal. Therefore, reforms at the broader level might help India improve its ranking on different global benchmarks. But it's difficult to say that they would produce positive impact on business operations, where they are actually needed.

On the trade policy front, Indian policymakers should move away from a sector-specific approach to GVC-oriented policies, which measure success in terms of efficiency and reduced transaction costs. There is also an urgent need to enhance the robustness of "trade policy analysis' with a particular focus on firm level analysis. For this, special attention should be made to collect firm level trade-related data to enhance the effectiveness of trade policy.

Another necessary step is to conduct a deeper examination of the impact of trade agreements on India's firms and their integration into global value chains. A simple trade flows analysis will not lead to any substantive results.

On the trade facilitation front, India should think about the setting-up of National Trade Platform (NTP) along the lines of Singapore's NTP. This will serve as a one-stop platform for all kinds of trade information and will electronically facilitate export-import related compliances. The NTP will help our exporters and importers submit all information/documents online at one place and there will be no need to deal with customs, other regulatory bodies, banks and port authorities separately.

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Society

In Northern Kenya, Where Climate Change Is Measured In Starving Children

The worst drought in 40 years, which has deepened from the effects of climate change, is hitting the young the hardest around the Horn of Africa. A close-up look at the victims, and attempts to save lives and limit lasting effects on an already fragile region in Kenya.

Photo of five mothers holding their malnourished children

At feeding time, nurses and aides encourage mothers to socialize their children and stimulate them to eat.

Georgina Gustin

KAKUMA — The words "Stabilization Ward" are painted in uneven black letters above the entrance, but everyone in this massive refugee camp in Kakuma, Kenya, calls it ya maziwa: The place of milk.

Rescue workers and doctors, mothers and fathers, have carried hundreds of starving children through the doors of this one-room hospital wing, which is sometimes so crowded that babies and toddlers have to share beds. A pediatric unit is only a few steps away, but malnourished children don’t go there. They need special care, and even that doesn’t always save them.

In an office of the International Rescue Committee nearby, Vincent Opinya sits behind a desk with figures on dry-erase boards and a map of the camp on the walls around him. “We’ve lost 45 children this year due to malnutrition,” he says, juggling emergencies, phone calls, and texts. “We’re seeing a significant increase in malnutrition cases as a result of the drought — the worst we’ve faced in 40 years.”

From January to June, the ward experienced an 800 percent rise in admissions of children under 5 who needed treatment for malnourishment — a surge that aid groups blame mostly on a climate change-fueled drought that has turned the region into a parched barren.

Opinya, the nutrition manager for the IRC here, has had to rattle off these statistics many times, but the reality of the numbers is starting to crack his professional armor. “It’s a very sad situation,” he says, wearily. And he believes it will only get worse. A third year of drought is likely on the way.

More children may die. But millions will survive malnutrition and hunger only to live through a compromised future, researchers say. The longer-term health effects of this drought — weakened immune systems, developmental problems — will persist for a generation or more, with consequences that will cascade into communities and societies for decades.

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