Emerging Patterns of Comparative Advantage in Trade between India and Italy

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1 Emerging Patterns of Comparative Advantage in Trade between India and Italy Aditi Yadav and Daniele Langiu 3 st January 23 In this article two students, Aditi Yadav and Daniele Langiu, look for any emerging patterns of comparative advantages between India and Italy. Description is not the target of the article, rather they want to assess in which industries India has a comparative advantage relative to other emerging economies in the trade with Italy. The article should be considered as an attempt to identify, at a very aggregate level, the Indian industries which could successfully choose Italy as the country to target in their internationalization strategy. The last quarter century has witnessed a radical change in the field of international trade and investment, and especially so with respect to the size and number of countries that have entered the scene. First there were the four Asian tigers Hong Kong, Singapore, South Korea, Taiwan; then China started a process of gradual and successful integration in the world flows of trade; then a host of other countries joined the world system of trade, often following the Chinese giant. India is a case in itself, both for its size and for having entered the world trade system in a much more abrupt way than most other countries, when in 99 it shifted its growth strategy from an import-substitution oriented one to an export-promotion one. Yet, the features of India s foreign trade are not often studied, and they are seldom with an appropriate degree of rigor. In this short study we want to document the evolution of India s trade with the world, with the European Union, and with Italy, over the last twenty years. We will be looking for evidence of the emergence of any particular industry as a favored one for either imports or exports more rigorously, we shall assess whether any evidence exist of a revealed comparative advantage in trade between India and Italy. Figure reports on the dynamics of Indian exports, imports and trade balance with the rest of the world beginning in 99, the year when a degree of trade liberalization was first introduced and when the country s trade was balanced. Growth of external trade took place in a balanced way until 23, when a substantial trade deficit appeared. It then kept growing all the way to 2

2 Billions of Billions of Billions of $ included, but exports have been growing healthily, though not as fast as imports the only exception being 2. Figure : India Exports, Imports and Trade Balance with the World (99-2) $Bn Exports Imports Trade Balance Source: World Trade Organization Database, December 22 The pattern of Indian trade vis-à-vis the European Union is radically different. Over the period both flows of trade have been growing steadily and in a very balanced way (Figure 2). Figure 2:Indian Exports (left axis), Imports (left axis) and Trade Balance (right axis) with European Union ,5 -,5 - -,5-2 -2,5-3 Source: Eurostat Comext Database, December 22 Figure 3 illustrates the percentage of India s exports to EU and to the Rest of the World over time. India s exports to the European Union have been steadily declining in comparison with the Rest of the World. 2

3 Millions of Millions of Figure 3: Indian Share of Exports to EU and the Rest of the World (999-2),8,6,4, Indian Share of Exports to EU Indian Share of Exports to the Rest of the World Source: Eurostat Comext Database; WTO Database, December 22 Yet a third pattern of trade emerges between India and Italy. Data reported in Figure 4 highlight a constant prevalence of Indian export values relative to Indian imports from Italy over the entire sample period. Overall trade flows are broken down by main industry categories in Figure 5. Figure 4: Indian Exports, Imports and Trade Balance with Italy Imports Exports Trade Balance Source: Eurostat Comext Database, December 22 Figure 5: Indian Exports, Imports and Trade Balance with Italy by Sector (22) Food and Beverage Industrial Consumer Goods Capital Goods Fuel and Supplies Lubricants Exports Imports Trade Balance Transport Equipment and Parts Source: Eurostat Comext Database, December 22 3

4 Having described the data of India s trade with the world, Europe and Italy, we would like to examine India s comparative advantage in trade with Italy. For this comparison we choose the BRIC countries (Brazil, Russia, India and China). We will document the pattern of trade between the BRIC countries and Italy along with the pattern of industries in which India stands to have a comparative advantage over them in its trade with Italy. For this comparison we will use the Balassa index or Revealed Comparative Advantage (RCA). The index shows the strongest sectors in terms of export flows or the Revealed Comparative Advantage the countries export sectors have over other countries. The formula used to compute the index is as follows: where, is the Balassa Index for country in industry, are the exports from industry of country to a selected partner, in this case Italy, represents total exports of country towards Italy, are the exports from industry of a group of countries, in this case Brazil, India, China and Russia, towards Italy and are the total exports of BRIC towards Italy. Figure 6 reports the findings of the Index. India has a Revealed Comparative Advantage in trade with Italy, in the following sectors, over the BRIC countries. Food and Beverage: spikes but steady advantage over time: Industrial Supplies: steady advantage over time; Consumer Goods: advantage over time but decreasing in the last few years; Transport Equipment and Parts: there is an important growth over time. It would be interesting to find the reasons behind such a big increase year 22 onwards. The two sectors in which other BRIC countries have an advantage in export trade to Italy are Capital Goods and Fuel and Lubricants. These two sectors would be the ones India would have to try harder to compete with the other BRIC countries as they are exporting much more, alternatively they could also be an opportunity to increase export trade in these sectors. 4

5 Figure 6: Balassa Index - India's Comparative Advantage over BRIC countries with regard to Exports to Italy (99-2) 4, 3, 2,,, Food and Beverage Industrial Supplies Consumer Goods Capital Goods Fuel and Lubricants Transport Equipment and Parts Source: Eurostat Comext Database, January 23 5