By Amitendu Palit
For India – the world’s 5th largest economy and aspiring to integrate deeper in global supply chains – enhancing competitiveness is non-negotiable. This makes trade facilitation a major policy objective for India. What is trade facilitation? The conventional understanding is it includes efforts to minimize obstacles to the cross-border movement of goods. The bigger these obstacles, the more are costs incurred by exporters and importers, reducing their financial margins, and affecting competitiveness. For India, border costs have adversely impacted prospects of exports, even when many of them enjoy production advantages of using cheap natural resources and skilled labour.
Border costs are ‘regulatory cholesterol’ choking supply chains. Lengthy, cumbersome procedures at entry and exit check points are typical examples. But regulatory cholesterol is much more than on-border procedures. They extend to ‘behind border’ domestic standards unaligned with those in major global markets leading to quality mismatches and higher costs for certification. Regulatory misalignments impose high costs for trade that are rarely understood. India – a signatory of the WTO’s multilateral Trade Facilitation Agreement (TFA) – has been working on cutting border red-tape and associated costs. But trade facilitation must go much further. Sustaining long-term comparative advantages requires taking a dynamic view of trade facilitation. This calls for a TFA+ approach. The salience of adopting a TFA+ approach has become more evident after the COVID-19 pandemic. Disruptions inflicted by the pandemic on supply chains were unprecedented. As businesses grappled to restore functional normalcy, they realized the importance of being operationally flexible and agile. Governments also realized the importance of being nimble and expansive in approaching trade facilitation.
Global trade has become intensely digital in character after the pandemic. Cutting procedural flab at borders and shifting to online practices is now an accepted necessity for countries. Large-scale digital shifts, such as in invoicing and certification, need to be accompanied by deeper structural changes. These include implementing mechanisms like recognizing digital signatures and identities among cross-border jurisdictions. India is actively engaging in ambitious bilateral FTAs (e.g., UAE, Australia, EU, UK, Canada) for obtaining new preferential market access for its businesses. For making these accesses come good, it must push trade facilitation to a space where it can align its digital cross-border trade system with those of the markets it is negotiating FTAs with. The challenge is substantial. Initial efficiency gains obtained from paperless processes and e-invoicing need to be augmented by establishing processes for recognizing digital identities and cross-border e-payments. This requires trade facilitation to extend to ‘behind border’ regulations in the digital economy.
India is on the right path. The interoperability of digital payment systems – UPI and PayNow – between India and Singapore – is a laudable move. The next, and more difficult step is enabling trusted cross-border data flows. This is where data protection and privacy rules must be crafted internally in a manner that facilitate seamless cross-border digital trade. The idea of trade facilitation must be expanded by appreciating that a large amount of physical trade between countries is now conducted digitally. The explosive growth of online retail and digital delivery of physical goods marks the shift. This is an inevitable outcome of the COVID-19 pandemic that led to international borders being shut for several months. Trade and supply chains therefore have had to reorganize in ways that minimize future disruptions even if borders close.
From the perspective of major economies like India, trade cannot stop, and supply chains must continue to function. The costs of supply chain disruptions are too large to bear repeatedly. Chain resiliencies, therefore, should be such so as to survive disruptions. Digital transformation and adaptability are greatly important in this regard. Trade facilitation required for achieving the above objective must have a vision broader in scope than the TFA. It must combine reforms to reduce the regulatory cholesterol at the border with the development of domestic regulations that enable effective integration in global supply chains. A TFA+ plus approach to trade facilitation for India will benefit from its engagement in plurilateral and regional rule-making coalitions. The Indo-Pacific Economic Framework for Prosperity (IPEF) is noteworthy in this regard. India’s proactive engagement in the IPEF on trade facilitation, digital economy and good regulatory practices will bring wholesome benefits. So will engaging in comprehensive FTAs that address a broad range of trade standards, such as with the EU and the UK. Trade facilitation cannot, and should not, be taken as an exercise for obtaining select efficiency gains. With India’s external strategic engagement expanding rapidly, it must use trade facilitation for maximizing the benefits of its engagement in global efforts to build resilient supply chains and developing modern 21st century trade standards.
(Amitendu Palit is Senior Research Fellow and Research Lead (trade and economics) in the Institute of South Asian Studies in the National University of Singapore.)