How Far Has India Integrated with East Asian Economies? Evidence from International Trade Data.

AuthorAndo, Mitsuyo
  1. Evolution of the International Division of Labour

    In the mid-1980s, the Association of Southeast Asian Nations (ASEAN) started getting involved in international production networks (IPNs) (Ando and Kimura 2005) or the "second unbundling" (Baldwin 2016). IPNs are characterized by the task-by-task division of labour, rather than industry-by-industry, which allows not only goods but also ideas--including capital, technology and managerial know-how--to move between remotely located production blocs. Baldwin (2016) claims that the second unbundling makes the use of developed countries' technologies and less developed countries' labour possible and ends up with "the Great Convergence" of income levels between the North and the South. Machinery manufacturing is a typical industry that applies this type of international division of labour. Together with the fragmentation of production, East Asia (including Northeast and Southeast Asia) has stepped forward to form industrial agglomerations in the open-trade setting in which local firms can participate in IPNs and enjoy technology transfer and spillovers. Fragmentation and agglomeration have accelerated poverty alleviation in the region, since IPNs not only generate jobs for relatively poor individuals but also encourage people to accumulate human capital, which is different from the case of purely labour-intensive industries such as traditional garment and footwear industries.

    The application of this type of international division of labour, however, is uneven. Among newly developed and developing countries, only some East Asian countries, a handful of Eastern European countries, and Mexico have so far been successful in participating in IPNs. Other developing countries are, by and large, stuck in the traditional industry-by-industry division of labour or the first unbundling. Furthermore, only certain East Asian economies have formed industrial agglomerations for efficient production networks with both short-distance and long-distance transactions (ERIA 2010, 2015). To take advantage of IPNs, policymakers require an updated mindset that is different from the traditional thought of the "infant industry protection" argument or import-substitution development strategies. It must be noted that policies generate a sharp contrast between countries that can participate in IPNs and those that cannot.

    After gaining independence, India focused on forming a strong foundation of industrialization, which was much sturdier than that of ASEAN member states at the beginning. Even today, its engineering industry displays good potential with indigenous innovation. However, the country has not yet fully participated in IPNs. In fact, its manufacturing value-added share of GDP decreased from 17.2 per cent in 1990 to 13.6 per cent in 2018 (APO 2020). Moreover, job creation by the manufacturing sector has not been large enough to eradicate poverty quickly. Most multinational enterprises often come to India to target the Indian market only, and not to form global production bases, except for some automobile and smart phone operations. Thus, they may not bring the best technology and managerial know-how to compete in the global market. In other words, there remain huge untapped opportunities for India to engage in IPNs or the second unbundling.

    In the 2010s, a new type of international division of labour--the third unbundling--emerged. This novel dimension of labour division fragments a task among remotely located individuals. Since India's strength lies in information and communication technology (ICT) services, the nation has a great chance to engage in the third unbundling. However, we are not sure yet whether ICT services can directly generate a massive number of jobs for relatively poor individuals. This means that we may still need manufacturing and other industries to eradicate poverty. Although factory automation with artificial intelligence and the introduction of 3D printers may proceed steadily, labour will likely continue to remain flexible and costsaving inputs for manufacturing at least in the coming decade. Furthermore, ICT appears to be starting to upgrade traditional industries including manufacturing. In fact, IPNs have even overcome the COVID-19 shocks by enhancing the use of communications technology. In Shenzhen, China, for instance, we observe the emergence of ICT services combined with small-quantity high-variety manufacturing such as drones. India, too, may want to consider the possibility of expanding the interface between ICT services and manufacturing.

    This paper illustrates India's current position in machinery IPNs by using standard international trade data. The next section presents a global comparison of the importance of machinery exports and imports in parts and components, as well as final products, to show the country's current position in the IPNs. The third section focuses on global value chain (GVC) participation indices based on international input-output tables. The subsequent section includes a gravity equation exercise to show the potential of machinery exports and imports in comparison with actual trade figures, whereas the fifth section looks at services exports and imports to confirm India's competitiveness in ICT services. All these segments indicate the presence of large, untapped opportunities for India to participate in IPNs in connection with East Asia. The final section discusses the necessary policies to be incorporated in India's industrialization strategies.

  2. Proportion of Machinery Exports and Imports in Total Merchandise Trade

    IPNs, or the second unbundling, are centred on machinery industries because these industries typically consist of multi-layered production processes with different technologies and diversified materials-taken care of by many players, both domestic and cross-border. Compared with the first unbundling or the traditional industry-by-industry international division of labour, IPNs require not only low-cost but also time-sensitive connectivity, which has so far been achieved by a limited number of less developed countries. Machinery IPNs are at the core of Factory Asia extended in Northeast and Southeast Asia.

    Thus, we first investigate the significance of machinery exports and imports in each country. Figures 1 and 2 present each country's machinery share in total exports and imports for major countries in the world in 2010 and 2019, respectively, with a distinction between machinery parts and components and machinery final products. (1) Machinery sectors (Harmonized System (HS) 84-92) here include general machinery, electric machinery, transport equipment and precision machinery. To focus on participation in IPNs, these figures arrange countries with higher export shares of machinery parts and components from left to right.

    Figures 1 and 2 offer several interesting findings for Asian economies. First, most East Asian countries are actively involved in machinery IPNs. For several East Asian countries, shares of parts and components for both exports and imports are high. This suggests the existence of back-and-forth transactions of parts and components. In addition, relatively high shares of exports in machinery parts and components indicate export-oriented operations in these countries. Apparently, this is the opposite of the typical pattern in Latin America, excluding Mexico--for most Latin American nations, shares of machinery parts are low for exports and high for imports, implying import-substituting operations. (2) Trade deficit due to insufficient international competitiveness is often a serious concern held by policymakers, including in India, in the industry-by-industry international division of labour, or the first unbundling, where the trade pattern tends to be one-way trade. In contrast, the task-by-task international division of labour, or the second unbundling, is likely to be more flexible as it provides more room for intra-industry trade or trade in both directions. Imports are often essential for gaining export competitiveness in the second unbundling.

    In the early 1990s, most of the countries with higher shares of exports in machinery parts and components were developed states. (3) By 2000, in line with the expansion of the second unbundling, machinery parts and components trade became more active, and the shares of machinery trade rose in many countries. Reflecting the rapid development of machinery IPNs in East Asia since the 1990s, however, many East Asian developing countries moved to the left, with higher shares of exports (in both absolute and relative terms) in parts and components by then, and have maintained such shares. Now, most countries on the left side are these East Asian countries, which participate actively in machinery IPNs, in addition to some countries in other regions, such as Mexico and specific Central and Eastern European countries, which are actively involved in IPNs in North America and Europe. In particular, Vietnam was located on the right side in 2010, but soon moved further to the left and became one of the countries with higher shares of exports in parts and components. (4) This indicates that Vietnam has been rapidly involved in machinery IPNs during the last decade.

    Second, some Asian and Asia-Pacific countries--such as India, Indonesia, Cambodia, Australia, New Zealand, Brunei, the Lao People's Democratic Republic (Lao PDR) and Myanmar--still have lower shares of exports in machinery parts and components. While the low shares could be partially due to exports of their abundant natural resources, they are not heavily involved in machinery IPNs. India, for instance, does not participate in machinery IPNs that have developed amongst East Asian countries. Interestingly, Cambodia moved to the left from the lowest share amongst the countries in 2010 and even exceeded Australia and New Zealand, suggesting drastic development in Cambodia, although its...

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