By Douglas P Zuvich & Manasvi Srivastava
The first two decades of the millennium saw increasing participation in global trade by new entrants to the worldwide trading system helmed by the WTO. In the same period, some plurilateral agreements like the Information Technology Agreement and many regional trade agreements led to the recalibration of costs of manufacturing in particular geographies.
Concurrently, manufacturing in various industries relocated to certain regions/countries. For example, electronics got concentrated in East Asia (including Southeast Asia), while semiconductors’ manufacturing also moved partly to East Asia with decreasing concentration in North America and Europe. Such shifts, enabled by lower tariffs and lesser non-tariff barriers, were further aided by lower costs of manpower, infrastructure, and compliance with health, safety and environmental regulations in the new locations of manufacturing.
The relocation of manufacturing across countries also meant a change in jobs availability in the countries that lost manufacturing investment vis-à-vis countries that gained such investment. Additionally, the movement of intellectual property and R&D activities led to value chains, in addition to supply chains, getting dispersed across geographies.
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However, in the past few years, an interesting development post the tariff reductions has been the rise in technical barriers to trade (TBTs). Technical barriers in the form of products’ safety or quality standards have seen a pace of growth not seen earlier. As per the TBT agreement, such barriers need to be notified by member countries to the WTO before being put into effect. The accompanying graphic shows the unprecedented growth of TBT notifications, especially in the last few years.
To the brew of trade agreements and technical barriers have been added recent geo-political tensions, coming immediately after the pandemic. A substantial rethink on global value chains and trade is hence imperative. Recently, businesses and governments seem to have realised that in the process of adopting globalised and lean supply chains, resilience has been compromised. The shortages of medical goods during the pandemic, the semiconductor chips’ shortage, etc, are leading to the reconfiguration of both supply and value chains. While businesses are responding to the evolving situation and future scenarios, international trade governance is undergoing a change too.
As economically dominant countries factor geopolitics, standards of governance in other countries, and their own strategic needs into their trade policy, they would mainly act on two fronts. On one, they would strengthen the domestic industry for the manufacture of critical goods, and on the other, they would strengthen their own network of trading nations. The rejuvenated trend of providing financial support to chosen sectors of the domestic industry, as exemplified by the Chips and Science Act in the US, is already creating counter-actions by some other countries. We also see the emergence of ecosystems of preferred trading partner countries as countries form groups through regional trade agreements that, besides conferring tariff advantages, also establish trading preferences through labour, environmental and technical standards. Many such standards could translate into new Technical Barriers to Trade or non-tariff measures. Keeping these developments in mind, businesses would need to anticipate the dynamics of trade relations between countries to minimise costs and risk as well as maximise opportunities.
India, Australia, the UAE, and the UK have been signing new preferential trade agreements in the conventional mode, for some time now. Meanwhile, negotiations on a new kind of trade agreement—the Indo-Pacific Economic Framework for Prosperity—were initiated by the US in May 2022, with 13 other countries, including Japan and India. IPEF does not have the reduction of tariffs on its agenda. Interestingly, in September 2022, India opted out of signing the declaration on IPEF’s trade pillar even as others were on board. The trade pillar seeks to connect free and fair trade with technology policy, inclusive growth, and the interests of workers as well as consumers. Regulatory implementation of these connections could be perceived as technical or non-tariff barriers to trade by those excluded from such groupings as well as by some of those within such groups. However, if the trend of such economic agreements spreads, businesses would need to respond to the trade policy environment and build multiple options for sourcing and distribution in their supply chains. New models will have to be adopted for the resilience and cost efficiency of the value chain.
The various new elements of international trade governance will need to be incorporated into value chain design. Considerations of logistics and tariff costs alone will not suffice. Geopolitical risk, trade diplomacy amongst nations, labour standards, and environmental standards will need to be considered along with costs of material, labour, overheads, intangibles, and tariffs in quantitative models underpinning supply chain design.
The authors are respectively, global head, trade and customs, KPMG International, and partner, trade and customs, KPMG India