India in the GVC diversification strategy
- The restructuring of global value chains (GVCs) and their resilience remained the dominant global concerns of 2022 apart from war and pandemic. This article compares Vietnam and India who strive to be an attractive destination for relocating MNCs from China.
- “China Plus n strategy” is now the predominant strategy of large multinational corporations (MNCs) for GVC diversification. It is a global business strategy in which companies avoid investing only in China and diversify their businesses to alternative destinations.
- Large MNCs are relocating their supply chains to countries where the risk of disruption from political chaos is low.
Vietnam – a lead beneficiary of relocating MNCs
- Among South and Southeast Asian economies, Vietnam has been in the lead in taking advantage of the opportunities arising from the regional shift in GVCs.
- Between 2010 and 2018, Vietnam registered significant gains in its share of global merchandise exports.
- From a low of 0.5 per cent in 2010, Vietnam’s share increased more than threefold to 1.6 per cent in 2020, making it the 20th largest goods exporter in the world.
- As India strives to be an attractive destination for relocating MNCs, a comparison with Vietnam may be useful.
- Open Trade Regime:
- Foremost among the factors that facilitate MNC relocation is an open trade regime. In the case of Vietnam, the number of free trade agreements (FTAs) that it has signed in the last decade, as well as the nature of partner economies and the depth and coverage of its FTAs, have been major contributory elements towards a conducive and liberal trade environment.
- Notably, Vietnam’s FTAs include mega regionals like the Regional Comprehensive Economic Partnership, the Comprehensive and Progressive Trans-Pacific Partnership and the Indo-Pacific Economic Framework trade pillar as well as bi-laterals with advanced economies like the UK and EU and, as a member economy of the ASEAN, it is party to the regional bloc’s FTAs.
- Interestingly, while India has an almost equal number of FTAs, these are not deep trade agreements and, other than Japan and Korea, India has not been party to any FTA with developed economies. India also is not a member of any mega-regional trade agreement.
- Significantly, India continues to be reluctant to include labour and environment-related issues in FTAs, both aspects, among others, are the reasons for the prolonged negotiations, most recently with the EU and UK.
- Tariff Structure:
- Vietnam’s tariff structure is another indicator of its relatively more open trade regime. Its tariff for non-agricultural goods is much lower than that imposed by India.
- In addition to this, a significantly higher number of tariff lines are included in the duty-free category.
- Good Logistics:
- Finally, good logistics help efficient movement of goods within and across borders, reduce trade costs and facilitate GVC operations.
- In the World Bank’s Logistics Performance Index (LPI) over the last decade, Vietnam has registered a significant increase in its score and rank. In 2018, it ranked at 39 among 160 countries, a major improvement relative to its consistent ranking at 53 during 2007 to 2012.
- In contrast, India was ranked at 44 in 2018, which was an improvement over its 2010 rank and score but of a much smaller magnitude.
- Additionally, Vietnam shows an increase in the score for all components of LPI from 2010 to 2018, while India shows an increase in only two sub-components: Customs clearance and arranging competitively priced shipments.
- While Vietnam seems poised to consolidate its position as the most attractive destination for MNCs diversifying away from China, India needs to undertake substantial catch-up reforms in all areas to be considered a significant contender in this process.
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