Is trade fragmentation a cause for concern? | The Financial Express

Is trade fragmentation a cause for concern?

The nature of the economy, its present stature, competitiveness and geo-political positioning are crucial determinants of trade fragmentation.

Is trade fragmentation a cause for concern?
Trade fragmentation may not have that much of an impact on India due to its competitiveness in the service sector, but it could affect other small Asian economies. (Pic: Pexels)

The International Monetary Fund in its Regional Economic Outlook released recently has predicted trade fragmentation as a serious challenge that may have a huge implication on global trade, especially for emerging economies. Trade uncertainty has been witnessed over the last few years since the US-China trade restriction episode started in 2018. The Ukraine war has further exacerbated the situation with uncertainty over trade relations between countries, which may in turn change the trade episodes globally. The possible implications highlighted especially for Asian economies are sluggish investment, and an increase in unemployment affecting the labour market seriously.

Possible tools of trade fragmentation

The traditional trade policy tools may find their space again among trade relations in a different form, targeting those trade partners who are in an unfavourable group. This includes tariff, where the Government collects revenues from imported goods, export subsidies, where the payment to a firm or individual that ships goods abroad by origin country, import quotas, where only certain firms are allowed to import a certain amount of goods, export credit subsidies, which provide subsidised loans to aid exports, national procurement where the government or strongly regulated firms purchase domestically produced goods even if they are more expensive than imports and finally red-tape barriers which twist inter alia normal health, safety, and customs procedures to raise obstacles in trade. These tools may be reintroduced as “old wine in a new bottle”. 

An analysis of possible implications

Economic theory validates the fact that free trade improves social welfare, makes exports cheaper, provides easier entry into export markets, ensures business stability and utilises a country’s comparative advantage through specialisation. Any distortion in the free trade scenario may have an effect on social welfare. At the same time, the price elasticity of demand and supply of goods and services may also have a key role in the context of trade fragmentation. The centrality and strategic importance of the particular industry from which goods are exported is indeed another key component. The key aspect is how intensive is a trade-related industry connected with other industries and what is the contribution of such an industry to domestic economic growth. The small and big economies’ impact due to trade fragmentation is another major area for investigation. The key aspect thus to be considered is would policy affects goods’ price, which feeds back onto the trade scenario. It indeed is interdependent on bargaining power in a trade agreement and what could a jurisdiction offer to foreign countries to lower your cost of trade with them. However, if there is a negative impact due to trade fragmentation, the social welfare and inequality aspect comes into the picture raising fiscal and public debt concerns.

Also read: India, China trade deficit at USD 51.5 billion during April-October this fiscal

How is India placed?

India has comprehensively embraced the strategy of Atmanirbhar Bharat with a key focus on improved productivity with leading firms across the world producing goods in India. India is also placed in a good geopolitical environment wherein it is open to all its trade partners in a favourable trade environment. The size of the Indian economy especially the economies of scale it enjoys in key items which are exported adds to its advantages. This is evident from India’s exports of merchandise and services performing robustly, overcoming to a great extent its widening trade deficit and an increase in net investment income payments over the last few years.

The latest trend of exports from India specifically in August 2022 are mostly to the United States ($6.72 billion), United Arab Emirates ($2.82 billion), Netherlands ($1.34 billion), Brazil ($1.12 billion), and Turkey ($914 million). India imported mostly from China ($9.42 billion), United States ($4.74 billion), Saudi Arabia ($4.34 billion), Russia ($4.32 billion), and United Arab Emirates ($3.91 billion) according to OEC.world. 

Also read: Bid to help exporters maintain trade edge: Tax offset scheme for exporters to see 10% hike in outlay

The products exported were mostly petroleum products followed by pearl, precious and semiprecious stones, drug formulations, biologicals, gold and other precious metal jewellery, and iron and steel, in which India has a comparative advantage over other countries in processing and manufacturing of these commodities. The automotive sector which witnessed high growth over the years shall continue its economies of scale in its operation which may add to India securing comparative advantage over other economies in its export sector and so is its textile sector. 

The recent phenomena of trade emerging in the form of ‘value chain trade’, which significantly differs from conventional cloth-for-win trade; may have a vital role to play in future global trade strategy. India is slowly emerging as a key destination of this value chain strategy that cannot be undermined. The proposed trade fragmentation may have an insignificant impact on global value chain (GVC) strategy as India’s contribution is necessarily required for manufacturing competitive products.  India’s competitiveness in its service sectors adds to its advantage. However, the impact of trade fragmentation on small Asian economies needs detailed examination for a plausible conclusion on the same. 

Another noteworthy fact is that pursuant to Covid 19 and Ukraine war, the fiscal scene of jurisdictions across the world has worsened due to expansionary fiscal policies coupled with high inflation due to the rise in oil prices. The trade fragmentation practices may further fuel this scenario to rise in prices of goods due to a shortage of competitive goods. Thus, the jurisdictions may necessarily have a second thoughts before devising fragmentation policies and the need of the hour should essentially be to enhance international competitiveness, expand market access and protect investment security across jurisdictions. The World Trade Organisation and other joint platforms like the G20 forum have thus a key role to play to address divergence of issues if any, among nations.

(The author serves as a civil servant at the Indian Ministry of Finance. Views are personal and not necessarily that of his organisation or financialexpress.com)

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First published on: 19-12-2022 at 12:34 IST