Are US markets opening up?

Focus on India-US mini trade pact holds out hope for India’s engineering exporters

EEPC INDIA

WITH the recent mini trade deal between the European Union (EU) and the US, the Government of India has now shifted its focus on the trade pact between India and the US that has been on the negotiating table for quite some time. As the American presidential election draws near, both the countries apparently have moved closer to finishing the negotiations of a ‘limited’ deal that could cover almost 15 percent of the bilateral shipments and complete restoration of benefits for Indian exporters under the Generalised System of Preference (GSP), which was withdrawn by the US last year.

The timeliness of the trade deal is crucial for India. The Covid19 pandemic, currently playing havoc with global health and economy systems, originated in China late last year. Its rapid spread led to the closure of key industrial areas within the country which affected China’s manufacturing capability and in turn disrupted global value chains. Analysts believed that companies across the globe who otherwise were dependent solely on China for their inputs may now look towards diversification of supply chains to other countries, and India could be one of the gainers. Additionally North America (US, Canada, and Mexico) has traditionally been one of India’s favoured export destinations with the US being India’s topmost engineering export destination. Given this scenario, the limited trade deal is of much importance for the Indian exporting community, especially since it promises to restore GSP in the US.

In this article we specifically look at North America and the US’ importance in India’s engineering exports and the ongoing challenges that remain between the two countries. We first look into India’s bilateral trade relations with the North American region in engineering. Then we move onto India’s engineering trade with the US and how the limited trade deal may enhance India’s position in the US market, especially through the restoration of GSP. Additionally, we also look at the steps that India needs to take immediately to improve its position in the North American market.

INDIA-NORTH AMERICA BILATERAL TRADE RELATIONS

Even during the pandemic, North America has continued to retain its top position as a preferred export destination for Indian engineering manufacturers. It currently constitutes 16.1 percent of India’s total engineering exports, trailing only behind ASEAN+2 (including Australia and New Zealand) and Northeast Asia as is indicated in Figure1.

Between 2015-16 and 2019-20, India’s engineering exports to North America increased at a CAGR of 13.3 percent (Table1). The table shows that the US accounts for more than 80 percent of the India’s exports to the region.

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Source: Data from DGCI&S and EEPC India analysis

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Source: Data from DGCI&S and EEPC India analysis

The main engineering products exported to the region included electrical machinery and equipment, products of iron and steel, auto components/parts, other industrial machinery, motor vehicles/cars, miscellaneous products, aluminium and products, aircraft and spacecraft equipment etc during April-March 2019-20.

We have done an analysis to match North America’s major imported engineering products to the list of engineering products in which India has comparative advantage. We have segregated Indian engineering products at HS 2-digit level and identified year-wise India’s exports to North America, compared to North America’s global imports for the respective engineering tariff lines and India’s export share for the given lines. We have also identified India’s global RCA (revealed comparative advantage) for the engineering tariff lines during 2019 with respect to world exports for the given lines during 2019.

The RCA index is defined as the ratio of two shares. The numerator is the share of a country’s total exports of the commodity of interest in its total exports. The denominator is share of world exports of the same commodity in total world exports. Measures of RCA are used to help assess a country’s export potential.

RCA = (Xji/Xwj) / (Xit/Xwt)
where
Xij = exports of products j from nation i
Xwj = total world exports of product j
Xit = total exports from nation i
Xwt = total world exports

Based on North America’s import demand, some of the top engineering tariff lines include machinery, boilers and parts, vehicles and parts, electric machinery and equipment, articles of iron and steel, medical instruments, aircrafts and spacecrafts, iron and steel, copper and products, etc. Out of these engineering products India has a fair competitive advantage (based on RCA value being greater than 1) in products such as vehicles and parts, base metals and parts, articles of iron and steel, iron and steel, ship and boats, aluminium and products, lead and products, etc. This clearly indicates that the India can emerge as a major supplier to the North American region. (The complete list is given in Table2.)

However, in reality this is not the case. While North America plays a major role in India’s engineering exports, India still does not rank among the top10 engineering exporters to the region, being the 15th-largest engineering exporter to the region. Therefore, there is still sufficient potential for India to grow its presence in the North American market.

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Source: Trade Map

INDIA’S ENGINEERING TRADE WITH US

India-US bilateral relations have recently upgraded into a strategic partnership amidst the focus on signing a mini-trade deal between the two nations. In terms of bilateral trade, too, the US is an important partner for India. The two countries have set a target of taking total bilateral trade to $500 billion. In the last five years India’s engineering exports to the US grew significantly at 13.3 percent CAGR. The contribution of benefits such as the US GSP in this context is undoubtable.

Mirroring the trend of India-North America engineering trade, the US also holds a key position in India’s engineering exports. It is currently the largest engineering importer for India. India in turn is the14th-largest engineering exporter to the US, lagging behind not only Northeast Asian countries and the EU, but also several ASEAN countries, which include Vietnam, Thailand, and Malaysia. Therefore, India still has large scope to expand its reach in the US market. Additionally the US being the biggest market in North America, enhancing its position in the US would automatically lead India towards consolidating its position further in the North American market. For India, the MFN and GSP routes were the two options wherein duty is nil in almost all the tariff lines either through MFN or GSP; therefore, to achieve the targeted total bilateral trade it is very important to enhance India’s exports to the US and GSP becomes significant in this context. When it was withdrawn last year, it came as a major blow for the Indian exporters.

Significance of GSP for Indian engineering exports

Out of the total number of concessions provided by the US to India under the erstwhile GSP programme, 671 lines (at 6 digits tariff line) pertained to engineering sectors and contributed to almost 50 percent of the total exports done by India under the GSP programme. This clearly indicates how important the scheme had been for engineering exporters. Hence the impact of the withdrawal was significant for the engineering sector. At present the emphasis has been on restoring the trade benefits under the Generalised System of Preferences (GSP) programme while signing the mini trade deal.

A previous EEPC analysis indicated that out of the 261 tariff lines at 8-digit which had significant exports to the US and were also covered under the GSP programme, most would undergo a low impact at 68 percent. Almost 17 percent will have medium impact and 15 percent will have high impact.

In this article we have focused on identifying India’s potential export products to the US based on Comparative Analysis.

For this analysis we consider only those products at 6-digit, which were earlier included in the GSP list and for which India’s exports to US was more than $5 million 2019 and India had substantial exports to the US in the last three years. We get 84 tariff codes at 6-digit at this level.

In the next part of the analysis we find out India’s RCA for these 84 products to see whether India has a bilateral comparative advantage with the US in any of these products. Subsequently we get 62 products for which India’s Bilateral RCA with the US is greater than 1, along with the given condition of exports made to the US being greater than $5 million during 2019 (Table 3).

From the table it is evident that India has maximum bilateral comparative advantage with the US in electrical machinery and copper and products, where RCA is greater than 5. Furthermore, India’s bilateral RCA for most of the engineering products (26 engineering tariff lines) including products of iron and steel, aluminium and products, industrial machinery products, auto components and parts, medical and scientific instruments, etc ranges from 2-4. Remaining 30 engineering tariff lines have RCA between 1 and 2.

Data also shows that in almost all the products China remains a key supplier to the US with much higher export volume compared to that of India. In fact among 1200-odd categories (HS-4 digit commodity classification) in which India exports to the US, there are 720 items where China caters to at least 10 percent of US imports. The point we want to emphasise is that the breadth of opportunity for India is huge. Due to the ongoing pandemic even if 5 percent of US imports shift from China to India in these categories, the opportunity size is expected to be immense. Restoration of the GSP benefits will also be necessary in such a scenario.

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*BRCA or bilateral RCA = (India’s export of ith comm to the US/India’s export of engg comm to the US)/(India’s export of ith commodity to world/India’s export of engineering commodity to world)
Source: Trade Map

WHAT INDIA NEEDS TO DO

While restoration of GSP would be important, India also has to take some necessary steps within its own policy. The first and foremost is increasing its participation in global value chain by enhancing its ability to export value-added output followed by incentivising exports for making it profitable for the exporters to seek new markets.

Need for value addition

While India’s participation in global value chains has been established, India majorly produces low-value-added products, which reflect in its value of exports when compared to countries such as China. It is evident from Table4 where it indicates that while India’s forward integration (value-added contribution to exports) and backward integration (value-added content from other countries in exports) is almost similar to that of China for the engineering sectors, the observations become interesting when we look at the basic and fabricated metals sector. In this sector, while most of China’s contribution in is forward linkage (that is domestic value addition to exports), India’s contribution is lesser showing that the major value-added products come from other countries and India’s contribution in its own exports is low. This reinstates India’s position as a supplier of raw materials rather than value-added products globally

This is further established by looking at the upstreamness index of India compared to its major competitors including China, Vietnam and Malaysia. Upstreamness index reflects the number of production stages that the output of that industry has to go through before it reaches the final consumers. Upstream industries contribute more value-added to other countries/sectors than others contribute to them, or in other words, their value-added trickles down and travel down to other sectors before reaching the final consumers. Figure2 captures the upstreamness index of Indian manufacturers compared to that of the above-mentioned three countries and it is found that India has the lowest upstreamness index among the four.

Therefore the government and the industry should come forward to enhance India’s value addition with respect to export production.

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Source: EEPC calculation from ADB Trade in Value-added Database

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Source: From ADB Trade In Value-added Database

Need for export incentives

In the Foreign Trade Policy 2015-20, under Chapter 3, to provide a level playing field to exporters with the objective to offset infrastructural inefficiencies and associated costs, MEIS was launched for merchandise exports of goods. The MEIS scheme provided a benefit of anything between 2-3 percent (at current rates) of FOB value of exports to engineering exporters and the rates varied according to countries and tariff lines. The MEIS benefit is not a cash outgo but a Duty Credit Scrip which can be used for various purposes such as paying Customs duties if one is importing or this can be sold to importers at the market rate.

In 2018, the US and some other countries complained challenged at WTO against India that the MEIS scheme along with other schemes is not WTO compatible as it has no linkage to production and taxes and is a direct benefit to exporters only, which is a prohibited subsidy under WTO parlance.

During this time the government announced that they will replace the MEIS scheme with a Rebate on Duties and Taxes for Export Promotion (RoDTEP) based on data to be submitted by exporters showing the actual percentage of non-rebated taxes in the production chain (such as electricity duty, VAT on POL products, Coal cess, etc).

In March 2020, after the Covid19 pandemic began and while extending the Foreign Trade Policy till March 2021, the MEIS was extended till 31 December 2020 and it was stated that RoDTEP would be announced to be effective from 1 January 2021. On 23 July 2020, all of a sudden the DGFT website stopped taking MEIS applications and blocked the uploading of shipping bills and that came as a shock to the exporting community. It was fairly well known how the MEIS annual pay-out is and suddenly to cap it at Rs9000 crore is grossly unfair and clearly does not contribute to the ease of doing business in India, something the government is very keen to do. Even now the exporters do not know the fate of the MEIS scheme and this should be clarified by the government at the earliest.

On the other hand, the government of India has asked for a resubmission of RoDTEP data based on a longer export time period. In the present format the data provided should be complete for exports made during the time period between 01.10.2019 and 31.03.2020. This instability with respect to export incentives is creating uncertainty for India’s engineering exports and needs to be addressed fast to enhance the countries position not only in North America but also in global exports.

Conclusion

The India-US mini trade deal holds significance with respect to India since it can enhance India’s exports to North America significantly and at the same time bring India among the top 10 exporters to the US. However, Indian manufacturers and government have to work consciously towards upgrading India’s value addition in domestic production and exports. At the same time there should be proper export incentives in place which would encourage exporters to seek for new opportunities. Only with these concerted efforts will India be able to augment itself in North America’s engineering import basket.

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