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The Covid pandemic spurred the digitalisation drive and the buzz over “De-globalizing”, “re-shoring” started gaining momentum. There was even talk of “the end of globalization” with the shortening of global supply chains.
But automation may end up promoting trade rather than destroying it. For instance, automation enables firms to scale up their production, which translates into greater demand for intermediate inputs.
Therefore, advanced economies, which are the major adopters of automation technologies, will demand greater inputs from emerging economies given their cost advantage. Even though we may observe a fall in final goods trade, trade in intermediates is likely to grow, giving rise to more global value chain integration for firms from emerging economies.
In a recently published study, we also empirically highlight that automation adoption is associated with greater participation in global value chains.
India factor
Indian economy has been resilient amidst global recessions and slowdowns. To achieve higher growth, India needs to become a key GVC player.
For instance, greater integration in GVCs as supplier of key intermediate products will revitalize the inert manufacturing sector and also generate jobs.
According to WTO data, on net India consumes more intermediate goods than exports them.
However, as advanced and emerging economies adopt these technologies, it becomes important for India to produce quality intermediate products which can cater to the rising demand of intermediates across the globe.
Capturing this niche would not only transform India’s trade presence but will also have important positive technological spillovers, while at the same time accelerating the nation towards the vision of $5 trillion economy.
Increase in trade of intermediates will enable greater employment avenues for low-skilled workforce which represents the major chunk of workforce.
However, with rising import tariffs on key inputs for various industries, export of intermediates may become uncompetitive. Hence, aligning trade policy with the global trade requirement becomes important to ensure not only growth of intermediates trade, but also absorption of low-skilled workforce.
From automation adopters’ perspective, a well-known aspect is that implementation of AI and automation at customs will lead to greater trade facilitation. However, firms can also leverage digitalisation and AI to furnish information such as identifying product classification more swiftly which results in quicker trade compliance.
Hence, a simple change of digitalizing landing bills can save nearly $6.5 billion in direct costs globally, and reduced human error and faster processing of trade documents can add value of nearly $40 billion in trade. (Nearly $6.5 billion in direct costs globally, and the reduction of human error, along with faster processing of trade documents can add value of nearly $40 billion in trade.)
Production push
From producers’ perspective, automation will increase precision of production which may positively influence India’s intermediate exporting abilities. From both services and manufacturing perspective, AI could be pivotal in sharing of information amongst domestic and global firms through real-time updating and sharing of well-structured data that will not only build trust but also ensure precise decision making.
Finally, automation technology can help produce inputs that are of uniform standards allowing for an easy adoption of intermediates by firms across the globe. Hence, with advanced technology, the landscape of trade is set to change, and change for good!
Reddy is an Assistant Professor of Economics at the IIM, Raipur; Subash is Professor of Economics at the IIT, Madras
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