The Potential Impact of Tariff Liberalisation on India’s Automobile Industry Global Value Chain Trade: Evidence From an Economy-Wide Model
| Published date | 01 February 2025 |
| DOI | http://doi.org/10.1177/00157325231161931 |
| Author | Badri Narayanan G.,Rahul Sen,Sadhana Srivastava |
| Date | 01 February 2025 |
The Potential Impact
of Tariff Liberalisation
on India’s Automobile
Industry Global Value
Chain Trade: Evidence
From an Economy-Wide
Model
Badri Narayanan G.1,2 , Rahul Sen2,3 and
Sadhana Srivastava3
Abstract
The impact of tariff barriers affecting participation in global value chain (GVC)
trade has received attention in recent literature. However, the empirical evi-
dence in the context of mega-regional trade agreements, such as the Regional
Comprehensive Economic Partnership (RCEP), from which India opted out
recently, remains non-existent. Our study contributes to the empirical literature
by undertaking an economy-wide modelling exercise, augmenting it to the auto-
mobile sector trade in GVC goods in the Indian context. We conduct two pol-
icy simulations with an aim to analyse how India’s auto-industry and auto-parts
trade, involving forward and backward linkages in GVCs, have been affected by
its decision to opt out of RCEP compared to a hypothetical scenario of not doing
so. Our results suggest that a potential RCEP membership would have created
net trade in both the finished automobile and intermediate auto-parts sectors,
although imports would exceed exports. Further, we infer that both backward
linkages and forward linkages in this industry will be adversely affected by opt-
ing out of RCEP, as there is export diversion in the auto-parts sectors globally,
Original Article
1
National Institution for Transforming India (NITI) Aayog, Delhi, India
2
Infinite-Sum Modelling (ISM), Inc., Seattle, United States of America
3
School of Economics, Faculty of Business Economics and Law, AUT Business School, Auckland,
New Zealand
Corresponding author:
Rahul Sen, School of Economics, Faculty of Business Economics and Law, AUT Business School,
Auckland 1023, New Zealand.
E-mail: rahul.sen@aut.ac.nz
Foreign Trade Review
60(1) 7–32, 2025
© 2023 Indian Institute of
Foreign Trade
Article reuse guidelines:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/00157325231161931
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8 Foreign Trade Review 60(1)
with India facing terms of trade losses due to higher import prices. This informs
policymakers that developing domestic resilience and improving productivity are
critical for India to improve its long-run export competitiveness while contem-
plating future trade agreements, including those with RCEP members.
JEL Codes: F15, F61, O53
Keywords
India, RCEP, GVC trade, policy simulations, automobiles, auto-parts, global eco-
nomic model
Introduction
The impact of tariff barriers affecting participation in global value chain (GVC)-
based trade has been analysed in recent literature, such as Antràs (2020). Simola
(2021) notes in the post-COVID context that protectionist pressures have indeed
slowed down the growth of GVC-led trade, with even a small tariff having a cas-
cading effect for countries that involve more backward participation or foreign
value added (FVA) in gross exports.
Empirical evidence of the above phenomenon in the context of member-
ship in mega-regional trade agreements has been largely non-existent. These
include the case of the Regional Comprehensive Economic Partnership (RCEP),
from which India opted out in 2019 and which came into force in 2022. Gilbert
et al. (2018), Narayanan and Sharma (2016) and Lee and Itakura (2018) have
utilised computable general equilibrium (CGE) simulations that examine the
impact of mega-regional trade agreements, including RCEP, but not in the GVC
context of sub-sectoral tariffs or not just the final goods but also their parts and
components.
India’s trade linkages with RCEP members have been an important part of its
Act East Policy over the years. As of 2016, India exported goods worth a total of
$46 billion to RCEP member countries, constituting a share of 17.6% of its total
merchandise exports (United Nations, 2018). Apart from China, Singapore and
Vietnam were the other RCEP members among India’s top 10 export destinations
during this period.1 These countries, along with Malaysia, constituted more than
half of India’s total exports to RCEP members during the same period.
In contrast, India imported goods worth $130 billion from RCEP members, con-
stituting a share of 36% of India’s total merchandise imports during 2016. China,
India’s largest source of RCEP merchandise imports, accounted for $60 billion,
or nearly half of the total, followed by the Republic of Korea and Indonesia.2
India, experiencing a significant trade deficit concerning RCEP members, was
therefore likely to be extremely cautious against committing to substantial tariff
liberalisation under a formal RCEP trade agreement. The caution is based on the
premise that cheaper imports through RCEP will be bad for India’s domestic
import-competing producers and generate job losses. However, from the Indian
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