Explained: Why RCEP mattered for India

The common notion of international trade is that one country exports product X to the second country, and imports product Y from the second country. However, this is not how most of the trade actually happens.

Thanks to an increased level of fragmentation of the production process, product X is never fully made in the first country. Instead, the production cycle is optimised and this essentially involves half-made goods crossing and recrossing a country’s borders — sometimes as exports, and at other times as imports.

The final product may be given the last touch in the first country, but the “value chain” involves trading across several national boundaries.

According to the World Bank, “a global value chain (GVC) is the series of stages in the production of a product or service for sale to consumers. Each stage adds value, and at least two stages are in different countries. For example, a bike assembled in Finland with parts from Italy, Japan, and Malaysia and exported to the Arab Republic of Egypt is a GVC. By this definition, a country, sector, or firm participates in a GVC if it engages in (at least) one stage in a GVC”.

How important are GVCs?

The GVCs exploit hyper specialisation, and to do so they break down the production process across countries. This has resulted in firms across a variety of countries benefiting from trade.

In a new report on GVCs, World Bank states, “These gains were driven by the fragmentation of production across countries and the growth of connections between firms. Parts and components began crisscrossing the globe as firms looked for efficiencies wherever they could find them. Productivity and incomes rose in countries that became integral to GVCs—Bangladesh, China, and Vietnam, among others. The steepest declines in poverty occurred in precisely those countries”.

Also: “GVCs allow resources to flow to their most productive use, not only across countries and sectors, but also within sectors across stages of production. As a result, GVCs magnify the growth, employment, and distributional impacts of standard trade. In summary, unlike traditional international trade whose transactions involve only two countries (an exporting country multiple times. This approach to trade not only leads to the rich set of determinants and consequences of GVC participation for measuring GVC activity in the world”.

What is India’s participation in GVCs?

According to Amita Batra, a trade economist from the Jawaharlal Nehru University, India’s integration with GVCs is among the lowest in G20 countries. In a column in Business Standard on September 2, she wrote “Compared with the ASEAN group of countries, India’s GVC integration is not just far lower but it has also experienced a decline in both its backward (that is, import content of exports) and forward (domestic value added embodied in other country exports as a share of gross exports) GVC linkages”.

She also gave an example of Vietnam, another middle-income country, which has “a much higher level of GVC integration and has experienced a steady increase in its backward integration…”

Not signing the RCEP will likely result in India missing out on the regional and global value chains crisscrossing this region.

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