Why global value chains matter?

TPCI_global value chain

One of the most important impediments for developing countries is trade costs. Non-tariff trade costs in today’s world like freight, insurance, and other cross-border related fees which tend to be much larger than any remaining import tariffs as products travel through the various stages of production. Those trade costs have a monetary dimension (for example, transportation, insurance, and other fees), but also a more intangible dimension: information costs, nonmonetary barriers (regulation, licensing, and so on), market intelligence platforms and weak trade governance leading to uncertainty.

The role of GVCs in boosting a country’s export competitiveness is a widely debated topic in economics. Organisations such as the WTO, OECD (Organisation for Economic Co-operation and Development) and the World Bank have been arguing that GVCs can support a country to boost its manufacturing exports, provided right kinds of reforms accompany them. Such policy prescriptions have focused more on labour market reforms and improvement in ease of business rankings, and remained critical of attempts to force domestic content requirements on players involved in GVCs. On the other hand, many developing countries have lamented the fact that thanks to GVCs, they have become stuck at low value addition activities without much income generation.

GVC has become all the more necessary because selling products that are labour intensive are becoming difficult for many developing countries and they are facing falling returns unless the producers are able to upgrade the quality of products through higher value addition. This problem is particularly relevant to SMEs of developing countries which generally have limited pricing power and limited capabilities and options for upgrading their products. The way they can export is to link up with international production networks but then they have to meet a wide range of increasingly stringent global standards with respect to quality, price, timely delivery and flexibility. Only some countries have been successful in integrating themselves in the GVC and China is on the forefront. Almost all big retail chains of the world get their products made in China even though shifts to other locations can be seen in recent times.

India has been able to participate in GVC in gems and jewellery, automotive parts and services. But why is it that India is not able to integrate into GVC in more items? The reasons could be many ranging from lower wages like in the garment industry of Bangladesh to reasons such as logistics, infrastructure and ability to deliver consignments on time due to lesser regulations.  Instead of entering the GVC, India could easily enter a Regional Value Chain (RVC) in garments and in many other items with neighbouring countries, especially when there is a Free Trade Agreement with the countries within the region in place.

For Regional Value Chain to take off, India will have to improve its cross-border infrastructure, remove tariff and non-tariff barriers, speed up the implementation of rules for harmonisation of regulations and technical standards which could make the trade between countries of the region more fluid.

Ironically, 70 per cent of India’s export earnings come from the small basket products. India has a high share of world exports in the following such products: small diamonds (19.8 per cent), jewellery (12.7 per cent), rice (39.1 per cent), buffalo meat (19.1 per cent), shrimps (17.7 per cent). Other major products are petroleum, cotton, yarn, ladies’ suits, medicines, auto components. The small size of the global basket limits the potential for future growth. Also, most products face intense competition from low-cost countries such as Bangladesh and Vietnam.

India has a weak global export share in these commodities such as mobile phones (0.19 per cent), integrated circuits (0.01 per cent), computers (0.04 per cent), solar-powered diodes, transistors (0.14 per cent), LCDs (0.04 per cent). Compare these shares with India’s 1.7 per cent share of global merchandise exports. India has an insignificant presence in large basket products that have become important in world trade. Most large basket products are infra critical products whose parts are manufactured in several countries.

The facts given above show that although increasing integration to the global economy has brought gains to a section of Indian manufacturing, India has ended up importing more from the rest of the world rather than exporting to it. India is not the only economy which is facing such problems. Unless India undertakes holistic reforms which equip its manufacturing sector to fully exploit the advantages of integration to the global economy, it is unlikely to realize the dreams of the becoming the next global factory.

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