Dynamics of Regional Value Chain in South Asia Challenges and Opportunities

Transcription

1 Dynamics of Regional Value Chain in South Asia Challenges and Opportunities Saroj Kumar Mohanty Professor, RIS 7 th South Asia Economic Summit Research & Information System and Institutions from the Region November 5-7, 2014 New Delhi

2 About Theme Paper Serious research paper with comprehensive issues Themes 1) Brief literature review 2) Relevance of SMEs 3) Reduction of regional poverty profile 4) Financial crisis 5) Spread of GVC in Asia 6) Supply-side constrains to Value Chain integration Constrains to value chain in the region Certain Comments 1

3 Regional Value Chain and Developing Economies Trade Liberalisation Vs. Value Chain Regional trade could be substantially enhanced with Regional Value Chain Regional trade liberalisation PTAs/FTAs, Kawai and Wignaraja (2007); ADB (2009); ESCAP (2009); Mohanty (2011); Mohanty and Pohit (2007) Some studies show that the magnitude of gains could be between 2-4% of GDP Moran (2002) GVC could range between 10 to 20 times larger than the gains accruing through trade liberalisation 2

4 Source: Flow chart prepared by the author 3

5 Model Average cost structure of production fragmentation Type1= SL1+PB1+SL2=α1... (1a) Type2= SL1+PB1+SL2+PB2+SL3=α2 (1b) Type3= SL1+PB1+SL2+PB2+SL3+PB3+SL4=α3... (1c) Type4= SL1+PB1+SL2+PB2+SL3+PB3+SL4+PB4+SL5=α4.. (1d) Possibility of production fragmentation α1> α2> α3> α4 (2) Limits to this process α1> α2> α3< α4 (3a) α1> α2< α3< α4 (3b) α1< α2< α3< α4 (3c) Rising component of services (Σ SLi+1 / αi) 1 as Typei k (4) 4

6 Government Intervention Required Private initiatives may not be sufficient to drive RVC Strategies aiming at reduction of transaction cost Creation of favourable business environment required to spur MNC activities in the region Congenial policy environment to facilitate FDI flows Domestic policy restructuring to support RVC operationslabour laws, trade facilitation, business facilitating services, infrastructure, etc. Re-grouping of countries for sectoral cooperation- regional or sub-regional cooperation 5

7 Value Chain in South Asia RIS Study with ADB on RVC in South Asia South Asian countries are into National Value Chain and also part of the GVC India into the production and export activities of the GVC in textiles & apparel and auto component sectors Bangladesh and Sri Lanka are into the Global Production Network (GPN) in apparel sector Nepal and Pakistan also into other GVCs GVCs in selected competitive sectors are textiles & apparels, leather, food processing, automobiles, pharmaceuticals & traditional medicines, IT software, etc. Local firms engaging in efficiency seeking activities- from production to packaging and also to distribution channels Liberalizing sectoral policies - received attention from national governments Harmonization of trade facilitation measures to reduce trade transaction cost Trade and FDI policies are liberalized along with IPR regimes Harmonization of policy liberalization across regional economies - not properly coordinated Regional economies are set to promote their local firms to join RVC 6

8 Export of parts & components in South Asia Exports (Thousand US$) Share CAGR Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka SAARC Source: Comtrade, Online database, World Bank, Washington D.C. Note: Terminating year for Bangladesh is 2007 for estimation of share and CAGR 7

9 Simple Average Tariff of Parts & Components ASEAN Countries (in %) Repcou Indonesia Malaysia Philippines Singapore Thailand Vietnam Source: Trains-Wits, Online database, World Bank, Washington D.C. 8

10 Simple Average Tariff of Parts & Components SAARC Countries (in %) Countries Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Source: Trains-Wits, Online database, World Bank, Washington D.C. 9

11 Regional Potential in Parts & Components exports (in $ 000) Country Share 2005 Share 2009 CAGR India Pakistan Sri Lanka SAARC Note: Export potential is estimated based on trade creation 10

12 India s Export Potential in China and ASEAN Countries in GVC 11

13 India s sectoral export potential in China: Parts and Components (Mill US $) Sector Share (%) Data Source: PCTAS, 2014, ITC, Geneva. Note: The sector classification is based on Lemoine and Ünal-Kesenci (2002). Estimation is made at 6-digit HS with bilateral time series data. CAGR (%) Chemical products Fibber and Cloths Metal Products Mechanical Machinery Electrical Machinery Motor Vehicles Precision instruments Total

14 India s export more competitive than ASEAN in China: Parts and component in 2009, Million US$ Sector IDN MMR MYS PHL SGP THA VNM Chemical products Fibber and Cloths Metal Products Mechanical Machinery Electrical Machinery Precision instruments Country Total Data Source: PCTAS, 2014, ITC, Geneva. Note: The sector classification is based on Lemoine and Ünal-Kesenci (2002). Estimation is made at 6-digit HS with bilateral time series data.

15 How Liberal is China? 14

16 Tariff Liberalisation China s overall average tariff was 42.1 per cent as against 56.3 per cent in India in 1992 The simple average tariff declined to 9.6 per cent for China whereas it came down to 12.3 per cent for India in 2008 India s protection of agriculture for the livelihood security issue The agriculture and mining sectors are relatively more liberalised in China than in India The simple average tariff in the manufacturing sector in India is lower than in China since 2008 In case of simple average tariff, India performs better than China, but not in import-weighted tariff If China continues to maintain peak tariffs, provide tariff preferences to competing countries, affect India s interest 15

17 Sectoral Tariff profile China has less protection in agriculture and mining sectors than India India has a more liberalised regime than China in the manufacturing sector Average tariff rate remains lower for India than China in 12 out of 16 Mnf sectors at the HS section level Similar is the case for import-weighted tariff 16

18 Comparison of Tariff Structure: India and China B. India Sec Description Live Animals and Animal Products Vegetable Products Animal or Vegetable Fats & Oils Prepared Foodstuff, Beverages, etc Mineral Products Products of Chemicals Plastics & Articles thereof Raw Hides & Skins, Leather, etc Wood & Articles of Wood Pulp of wood or of other Fibres Textile & Textile Articles Footwear, Headgear and Umbrella Articles of Stone, Plaster, Cement Natural or cultured pearls, Jewellery Base Metals & Articles of Base Metal Machinery & Mechanical Appliances Vehicles, Aircraft and Vessels Optical, Photograph & Cinematography Arms and Ammunition Miscellaneous Manufactured Articles Works of Art Collectors' Pieces

19 Intra-Regional Trade in SAARC

20 IRT (Bn Dollar) SAARC Making Steady Progress Figure 2: South Asia's Trade Profile within the Region and the World Non-Performance has the following condition (a) Volume of IRT is not growing (b) Region s trade with the RoW rising In case of SAARC (a) Overall trade of the region rising (b) IRT maintaining same pace with overall trade World IRT Source: Author s estimation based on IMF Direction of Trade statistics 2014 IRT is maintaining constant market share Therefore, SAARC doing 19 steady progress

21 Performance of Intra-Regional Trade Rising IRT since 2003 from less than $ 5 billion in 1999 to about $ 32 billion in 2012 IRT ratio remained flat over the years Issue of regional 20 structure

22 Upsurge of RTAs Minimised the Relevance of SAARC Proliferation of RTAs in South Asia CEPA FTA PTA Total RTAs multiplied during the period of global buoyancy This process was subsided during global recession except

23 Structure of Economies and IRT Ratios EEA APEC EU TPP NAFTA RCEP ASEAN CIS CACM BSEC EAEC LAIA MERCOSUR APTA SADC Andean SIM BRICS SAARC BIMSTEC IBSA Figure 1: Variations in IRT ratios among RTAs Impact of Recession (IRT Ratio in %) Source: Author s estimation based on DOTS Online, IMF 22

24 Country s Exposure to the Regional Trade (Ratio of country s trade with the region to total, %) Repcou ITRx IRTm IRTt Afghanistan Bangladesh India Maldives Nepal Pakistan Sri Lanka SAARC Most of the small countries are having high stake with the region Difficult to say low IRT India and Pakistan have trade surplus with the region India has large trade surplus with most of the regional 23 economies

25 Can SAARC Improve its IRT Ratio with India correcting its Trade Imbalance with the region? Impact of India Adjusting its Trade Surplus with the Region Sim ITRx IRTm IRTt No adjustment Balanced Def (50 %) Poor IRT is a structural problem which cannot be captured in the IRT index Three scenarios Situation in 2012 India having no trade surplus with the region and India incurring trade deficit with the region to the extent of 50 % of its present surplus 24 IRT ratio would hovering around 10%

26 How to Improve IRT Ratio? IRT ratio reflects the extent of trade within the region IRT in SAARC suffers from structural problem Composition of country Heterogeneity in the size of external sector of regional economies in South Asia As the index is inadequate to explain the situation in South Asia, IRT ratio can increase without increase in trade within the region Low IRT is not reflection of low potential of the region IRT ratio should not be used for inter-irt ratio comparison 25

27 Improved IRT without Rise in Regional Trade Sim ITRx IRTm IRTt No adj In this simulation, IRT is kept untouched Assume that India s trade is declining wrt 2012 level Significant level of IRT ratio obtained Therefore, 5% IRT ratio is undermining the trade potential of the region 26

28 Thank you 27