Sunday, Apr 02, 2023

Going Vocal For Local: The Case of Localized Regional Supply Chains in South Asia

Going Vocal For Local: The Case of Localized Regional Supply Chains in South Asia

With a population of 1.8 billion, South Asia, naturally has the domestic demand but needs value chains intact to keep supplies from drying.

Image for representational purpose only AP Photo

Countries around the world are witnessing the rapid spread of the novel Coronavirus (Covid-19). As reported by the World Trade Organization (WTO), trade of the ‘new essentials’—products described as critical and in severe shortage in Covid-19 crisis—totaled about USD 597 billion, 1.7 per cent of total world trade in 2019.

On one side, the companies used this opportunity to boost production and exports (For example, in case of India, the production of Personal Protective Equipment kits skyrocketed from zero to 2 lakh daily). On the other side, it led to a vicious cycle where consumers kept buying and retailers kept procuring – creating a sense of scarcity. The Indian government has already put hand sanitizers and masks (2 layered and 3 layered surgical masks, N-95 masks) under Essential Commodities Act, 1955, empowering state governments to regulate production, distribution and prices of these items and also crackdown on hoarding and black marketing.

The Covid-19 cases continue to surge and the demand for essentials continues to rise. With the WTO rules allowing for temporary export restrictions "applied to prevent or relieve critical shortages" in the exporting country, countries across the world have put export restrictions, limiting trade of key supplies, and leading to supply disruptions. In the recessionary aftermath of 2008 global financial crisis, countries did not resort to widespread protectionism. In fact, global economic leaders jointly committed to refrain from new trade and investment restrictions for a year. This helped limit, to some extent, deepening of trade restrictions and the ‘beggar-thy-neighbor’ policies – where countries address their economic woes worsening it for other countries - that became widely popular during the Great Depression of the 1930s.

As countries closed borders and resorted to protectionist measures, we also saw India’s announcement of creation of USD 10 million SAARC Emergency Fund, reviving the notion of SAARC that was dying a slow death. Under the SAARC emergency fund, medical supplies have already been directed to various South Asian countries, for example, surgical masks, gloves and sodium hydrochloride solution (disinfectant) to Afghanistan. As SAARC revives as an institution, more regional initiatives could help create public goods for the region that can last beyond the pandemic.

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In the wake of a militant attack in the Pulwama district of Jammu and Kashmir in February 2019, and enactment of the Jammu and Kashmir Reorganization Bill in August that year, tensions escalated between India and Pakistan, leading to withdrawal of Most Favored Nation status by India and imposition of 200% duty on Pakistani imports, and later complete suspension of trade by Pakistan. Amidst other trade, this also disrupted the supply of Indian sanitizers in Pakistani markets and Pakistan’s ethanol – a major raw material for sanitizers – in Indian market, increasing India’s dependence for ethanol on the USA. Though Pakistan opened direct trade with India for life saving drugs, its times like these which lay bare the significance of localized/regional supply chains.

The restrictions in the trade environment between India and Pakistan caused traders to find alternate routes to trade. This is where intermediaries or third countries become relatively more important to reach markets which are difficult to penetrate otherwise. Despite more circuitous routes and higher shipment cost, in crisis like the one ongoing, the increasing demand for new essentials was met via indirect trade.

For example, in case of organic surface active agents (HS Code 3402) including liquid hand sanitizers, China was Pakistan’s major supplier followed by India. Pakistan’s imports from China started deteriorating after November 2019 when China was first hit by the virus (the share of imports from China decreased from 44 percent in November 2019 to 26 percent in January 2020). In parallel, post suspension of India Pakistan trade in August 2019, India’s exports to the UAE increased by 51 percent from September 2019 to January 2020 and Pakistan’s imports from the UAE increased by nearly 2000% in the same period – implying trade of the ‘new essentials’ from India to Pakistan via the UAE.

 Source: Ministry of Trade and Commerce, India and UN Comtrade

Facilitating exports of critical medical supplies – even if via indirect routes - translates into saving lives and livelihoods. The International Monetary Fund has called on governments to refrain from intensifying export and other trade restrictions and to work to promptly remove those put in place since the start of the year. “History has taught us that keeping markets open helps everyone”. In situations where these restrictions are absolutely necessary, the measures should be temporary.

Cumulative resilience, realistically open trade policies and being ‘vocal for local’ as mentioned in the Prime Minister’s address Tuesday, can together help towards managing the pandemic, restoring jobs, and ensuring that the markets are well supplied, stocks healthy and prices stable. Michael Larner, principal analyst at ABI Research, says it's not enough for one supplier to be up and running — the supplier's supplier also needs to do well: “A lot of the supply chain network is based on trust, if one supplier has a failure, the ramifications down the line are huge."

With a population of 1.8 billion, South Asia, naturally has the domestic demand but needs value chains intact to keep supplies from drying. The new world order post Covid-19 will demand overlooking bilateral tensions and building on existing cross-border production and distribution networks – regionally as well as bilaterally between neighbors. The response to the Indian government’s initiative to revive SAARC and the vision laid out by the Prime Minister speak for the regional supply chains in South Asia that are imploring to get resurrected.

As India gears up to enter a much eased Lockdown 4.0, scrambling for an economic revival, it may well be an opportunity to reshape South Asia Free Trade Area (SAFTA) agreement, at least for the ‘new essentials’ of 2020.

(Nikita Singla is Associate Director and Priya Arora is Senior Research Associate at Bureau of Research on Industry and Economic Fundamentals (BRIEF), New Delhi. Views expressed are personal.)