Global Value Chain and Effects of Trade Policy Instruments—A Case of India

Abstract

GVCs have led to greater integration among economies of the world with each economy often specializing in specific activities and stages of value chains, rather than in the entire production process. Asia, as a region, has been a major participant in GVCs. India, one of fastest growing countries of the region, has, however, had a very dismal participation in the GVCs. One of the major reasons that explains this non-participation is India’s trade-related policies and procedures. Against this backdrop, the present paper analyses the direct and indirect effects of trade policy instruments, particularly non-tariff measures (NTMs) on the country’s manufacturing sector. Using imports of processed food from China into India as a representative case, the results show that import restriction on a sector leads to both direct and indirect impacts along the value chains. The results further show that NTMs on a sector magnify these direct and indirect impacts. Further, if NTMs are measured including the trade costs at borders, then the direct and indirect trade restrictiveness indices due to import restriction on a sector are reported to be much higher. This is a very important finding of the paper as it indicates that to assess the impact of NTMs on an economy, trade costs should not be ignored. For countries like India, which have elaborated procedural and documentation requirement laid down by different regulatory bodies, ignoring such trade costs at borders may lead to substantial underestimation of the impact of a trade policy restriction.